tag:blogger.com,1999:blog-5621914599310831423.post7519407735291667032..comments2024-03-28T09:15:32.976-07:00Comments on The Retirement Café: Unraveling Retirement Strategies: Floor-and-Upside (An Update)Dirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger23125tag:blogger.com,1999:blog-5621914599310831423.post-88300838407312354232018-11-17T08:12:53.304-08:002018-11-17T08:12:53.304-08:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-14480816556673686462018-09-17T16:29:49.432-07:002018-09-17T16:29:49.432-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-36491413794372047512018-09-16T18:41:50.324-07:002018-09-16T18:41:50.324-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-40784323726306524972018-04-28T13:46:40.235-07:002018-04-28T13:46:40.235-07:00I could not resist commenting. Very well written!I could not resist commenting. Very well written!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-83893808579082723372018-02-12T15:34:37.642-08:002018-02-12T15:34:37.642-08:00Quite readable, too. I keep a copy by my desk. Tha...Quite readable, too. I keep a copy by my desk. Thanks for the contribution!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-38038691581667932192018-02-12T04:17:59.854-08:002018-02-12T04:17:59.854-08:00Zvi Bodie, an MIT economist, was perhaps the first...Zvi Bodie, an MIT economist, was perhaps the first person to articulate this approach, focusing on the use of Treasury I bonds/TIPS. His books are well worth reading, including "Risk Less and Prosper".TVCnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-66654692542588174192018-02-10T08:35:16.694-08:002018-02-10T08:35:16.694-08:00Thanks for the update. Maximize true liquidity. Lo...Thanks for the update. Maximize true liquidity. Love it!Anonymoushttps://www.blogger.com/profile/18253824689095328001noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-55826706478010933122018-02-05T10:01:43.979-08:002018-02-05T10:01:43.979-08:00That is indeed my target audience and that's t...That is indeed my target audience and that's the way floor-and-upside is supposed to work.<br /><br />Thanks for sharing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-86904492163989156402018-02-05T08:45:39.608-08:002018-02-05T08:45:39.608-08:00As a 70-yr old single who has been actually living...As a 70-yr old single who has been actually living the floor-and- upside life for 4 years, I'd like to assure other unwealthies (that's your audience, right?) that it can give peace of mind and a comfortable life if you get the mix right. <br /><br />My floor is Social Security (2/3) and simple fixed SPIA (1/3); upside is a 50/50 stock/bond portfolio ~ 280,000. I CAN live perfectly well on the floor, although just now I am spending some extra for charities and modest travel. If in 20 years my floor is worth half what it is now due to 3-4% inflation, I'll cut back on those two items and have a lot of my nut covered, still, by the floor. At 90, will I still be hiking the Grand Canyon? Unlikely. And I'll be my own charity by then.<br /><br />Absent the big bad health care bogey (and I do have an LTC policy), my upside should be able to supplement my floor, at least enough to cover inflation. I think this is the best I can do, and I don't worry.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-27460797452590638272018-02-05T07:12:08.279-08:002018-02-05T07:12:08.279-08:00David J, I disagree.
There is an important differ...David J, I disagree.<br /><br />There is an important difference between an "income portfolio" and a "floor portfolio" and one that seems lost on many. An income portfolio is designed to provide income. A floor portfolio is intended to provide <i>near-certain income in the event that the upside portfolio fails.</i> Huge difference.<br /><br />The simple question to ask to determine whether an asset is an appropriate floor asset is whether poor market returns (<i>any</i> market) could significantly impact income. In your case, we're talking about the real estate market and the Great Recession provides recent proof that real estate income is market-dependent and, therefore, not near-certain. (I personally know at least one large rental income business that was bankrupted. I doubt it was the only one.)<br /><br />Managing rental properties is a business, a sole-proprietorship for most retirees, and its success is not near-certain.<br /><br />There are good reasons to diversify into real estate, though most retirees won't have enough capital to adequately diversify into individual properties and nearly all tend to hold all of their portfolio locally. But real estate is risky, as you yourself point out. Real estate is fine in an income portfolio, but real estate belongs in the risky upside portfolio (in an income sub-portfolio if you prefer to organize it that way), not in a floor portfolio of near-certain lifetime income.<br /><br />Thanks for adding to the discussion.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-28944416653224665862018-02-05T06:48:54.909-08:002018-02-05T06:48:54.909-08:00Another way to establish a floor is income produci...Another way to establish a floor is income producing real estate. Not publicly traded reit, but rather private syndicated investments open to accredited persons. There is debt available paying decent returns with some risk but not huge risks if one is careful and diversified. This can pay out much better than tips or annuities. If one wants inflation adjusted income they can put some of this money in real estate equity rather than debt with increased risk but also an inflation hedge. OffSiteLocationhttps://www.blogger.com/profile/07222392159271750698noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-75809659303739243212018-02-03T07:53:50.984-08:002018-02-03T07:53:50.984-08:00Dear helium, this is a question that gets asked a ...Dear helium, this is a question that gets asked a lot but one that probably can't be answered too often. I'm going to make a few comments and then turn it over to an expert.<br /><br />First, a general comment: consider the source. If the articles were written by someone with something to gain from selling alternative products, consider the opinion alongside others who disagree. Ken Fisher clearly hates annuities but then he essentially sells stocks. Someone from the insurance industry might be biased toward annuities. I don't know which you read, but I wouldn't have total confidence in either.<br /><br />Second, no retirement funding method is perfect. TIPs are safe in the sense that the Treasury probably isn't going out of business but risky in the sense that they don't hedge longevity risk.<br /><br />Annuities are risky in the sense that not receiving the income you expect isn't inconceivable and inflation protection is expensive, but they are less expensive than TIPS in terms of the cost of a future dollar of income and they hedge longevity risk.<br /><br />After the financial services meltdown of the Great Recession, I will never have total faith in any of them. Giant financial services corporations can fail.<br /><br />Consequently, it's better to diversify into multiple assets to ensure that failure of a single strategy isn't catastrophic. You can even diversify among multiple annuity providers for the portion of your resources that you allocate to annuities. I wouldn't recommend betting all your savings on annuities (or anything else) because nothing is risk-free.<br /><br />The best resource I know on insurance topics is financial writer Joe Tomlinson. I think <a href="https://www.advisorperspectives.com/articles/2012/08/14/how-safe-are-annuities" rel="nofollow"> this column by Joe </a> in Advisor Perspective covers your question in an informed and unbiased way. I think it's fair to summarize that, historically, few annuity owners have not received their due.<br /><br />One final point. Not everyone needs an annuity. As Steve Vernon and Joe Tomlinson recently pointed out, households that are able to maximize Social Security benefits by delaying claiming may have a substantial amount of income that is already annuitized and may not benefit much from more. Households with pensions might be in this situation, as well.<br /><br />Full Disclosure: No one is completely unbiased -- Joe is an actuary, but he doesn't sell insurance. Also, I own a small life annuity and have recently recommended them to friends and former clients.<br /><br />Thanks for asking!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-20023782036027685372018-02-03T07:21:57.708-08:002018-02-03T07:21:57.708-08:00This comment has been removed by the author.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-48682530185512448032018-02-02T17:38:03.383-08:002018-02-02T17:38:03.383-08:00I've read some recent articles expressing conc...I've read some recent articles expressing concern over the viability of annuity underwriters and their state-mandated back-up organizations. I am not well enough read to judge the merit of these opinions and would value your opinion.heliumhttps://www.blogger.com/profile/01060001595074328763noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-43570868891891926622018-01-31T10:25:36.219-08:002018-01-31T10:25:36.219-08:00Glad to help!
It's OK to hope and have a plan...Glad to help!<br /><br />It's OK to hope <i>and</i> have a plan. I do!<br /><br />I think I need to write a post on floors soon. Your sounds fine. A couple of points, though.<br /><br />Floors are very expensive right now because historically low interest rates increase the prices of annuities, TIPS ladders and the like. Not everyone can afford all the floor they would like to have and when you can't, you just need to build the best floor you can.<br /><br />The second point is that the rest of your plan should be designed such that living off the floor is a small possibility. Set up your upside portfolio with a reasonable probability of ruin, buy LTC insurance if you can, etc. The more risk you take, the greater the probability that you will need that floor.<br /><br />If there is a very low risk of having to live off floor income you can build a lower floor. It's a safety net you hope you don't need.<br /><br />Thanks for writing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-87846550300364434792018-01-31T09:45:18.714-08:002018-01-31T09:45:18.714-08:00Dirk, Thank you for another clear article and than...Dirk, Thank you for another clear article and thanks for the direct response you shared with me earlier this week (last? - time passes quickly). I guess without the nomenclature, I've developed a floor-and-upside portfolio w/SS, pensions, a deferred fixed annuity, a bit of income derived from dividends, and a portion dedicated toward growth and income w/Fidelity. My floor is a bit less than our anticipated retirement expenses so I'll hope (i know - hope is not a plan) SS and dividend income grows to offset inflation in essential expenses and we can continue to enjoy life with the growth and income portion as long as we can and hopefully (there I go again) pass anything left down to the kids.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-20256974031655012772018-01-30T16:34:51.131-08:002018-01-30T16:34:51.131-08:00A follow-up on CPI-adjusted annuities. I often hea...A follow-up on CPI-adjusted annuities. I often hear people say they don't exist but that simply isn't true. Tonight, I got a quote from <a href="immediateannuities.com" rel="nofollow">immediateannuities.com</a> (which Wade Pfau uses at his Dashboard) from Principal LIC, rated A+ by A. M. Best, for a 65-year old couple living in Indiana with a payout rate of 3.48%. I see similar quotes all the time.<br /><br />There are never more than a few compared to nominal annuities or annuities that pay 2% or 3% a year inflation adjustment, but I rarely "get skunked", as we say in fly fishing.<br /><br />They are always expensive and may or may not be right for a specific retirement but the notion that they do not exist is incorrect.<br /><br />Several studies have shown that all inflation-protected annuities are probably overpriced. I would assume they would be since insurance companies don't want inflation risk, either, so why sell them at a bargain?<br /><br />I would also note that if your retirement lasts a long time with a lot of inflation, you will have been better off paying the high price.<br /><br />Regarding period certain, the insurer knows more about the health of people <i>like</i> you. If I had great confidence that I wouldn't live a long time -- and for me that means a bad prognosis -- I wouldn't buy an annuity, at all. <br /><br />Many very unhealthy people end up living long lives so I wouldn't bet my retirement on a short lifespan without pretty strong evidence. Funding a short retirement and living a long time is an ugly outcome.<br /><br />On the other hand, I recently worked with a friend to purchase a SPIA and the 10-year period certain was nearly the same price as straight life. I wouldn't buy the option, but I'd take it for free.<br /><br />Thanks for the discussion!<br /><br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-75979871927653478182018-01-30T16:12:49.020-08:002018-01-30T16:12:49.020-08:00I like your logic and hope you're right.I like your logic and hope you're right. Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-70003192699120092932018-01-30T16:09:47.864-08:002018-01-30T16:09:47.864-08:00One comment about healthcare inflation. Healthcare...One comment about healthcare inflation. Healthcare has been creeping up to near 20% of the US economy. At some point soon, it will simply be unable to advance further without crushing the economy. So looking out 30+ years, I don't see healthcare inflation going up at rates substantially higher than inflation over that entire period. The rest of the developed world is able to deliver quality healthcare at a fraction of American healthcare costs. http://www.visualcapitalist.com/u-s-spends-public-money-healthcare-sweden-canada/<br /><br />I have been waiting a decade or more for American employers awaken to the fact that healthcare is the last major cost that they have not seriously attempted to cut. I think today's news about Amazon-Buffet-JP Morgan teaming up on healthcare is an indication that corporate America might finally be getting serious about controlling healthcare costs. I think it will be a bumpy ride over the next decade, but ultimately I think we will see our healthcare costs come back to the upper range of the rest of the developed world. If increasing efficiency and quality gets serious, then we may see zero inflation at times. A good example of what is possible is cars, where the crappy stuff sold to us in the 1970s has now morphed into much safer and reliable vehicles at a similar cost as back then.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-70531352568199128492018-01-27T13:12:31.826-08:002018-01-27T13:12:31.826-08:00That's a fair summary. There are other reasons...That's a fair summary. There are other reasons. A TIPS ladder is quite difficult to purchase and bonds and STRIPS are not available for every required maturity date. (Wade Pfau provides an example <a href="https://retirementresearcher.com/building-retirement-income-tips-ladder/" rel="nofollow">here</a>.)<br /><br />The most important consideration is that you can outlive a TIPS ladder but not an annuity. TIPS ladders don't hedge longevity. You could build a really long ladder but it would also be really expensive.<br /><br />Thanks for writing and good luck with your retirement!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-51212075116599896412018-01-27T12:52:22.069-08:002018-01-27T12:52:22.069-08:00Hi Dirk
As a pending retiree planning to use this ...Hi Dirk<br />As a pending retiree planning to use this strategy with TIPs, I'm very interested in this post and specifically that you now like annuities more and TIPs less. The reasons I see in the post and your response to a reader's comments include annuities provide more income and include mortality credits while TIPs' liquidity is "illusory" and are more expensive. Does that (reasonably accurately) summarize the entirety of the reasons for the evolution in your thinking, or is there a bit more to the story? Robnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-20251976503817078042018-01-27T11:43:53.717-08:002018-01-27T11:43:53.717-08:00I agree and I'll add two points. First, I have...I agree and I'll add two points. First, I have always been able to find inflation-protected annuities, even CPI-adjusted. They are expensive. Nonetheless, if your retirement experiences high inflation, they will have been worth the cost.<br /><br />Second, with today's low interest rates all flooring is expensive, but TIPS bonds are quite a bit more expensive than annuities because they lack mortality credits.<br /><br />Appreciate the comments!<br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-92197100338920688222018-01-27T09:32:51.075-08:002018-01-27T09:32:51.075-08:00problem 1 - the inflation offset by tips is not th...problem 1 - the inflation offset by tips is not the inflation you will experience. most particularly healthcare expenses are gravely undercounted in the cpi-u, and even more so for an older population. this same criticism applies to social security [ignoring social security's long term funding problems].<br /><br />attempted solution- recognize tips limitations in constructing your portfolio.<br /><br /><br />problem 2 - inflation indexed annuities don't exist for the most part, and annuities which escalate by fixed percentages are way overpriced.<br /><br />attempted solution- buy fixed spia's with the "upside" portfolio especially oriented to offsetting inflation.<br /><br /><br />problem 3- whether it is "ill advised" to purchase an annuity with a "period certain" which guarantees payments for a number of years even if the annuitant[s] has died.<br /><br />analysis- for certain special situations a period certain may make actuarial sense. annuities are priced to acknowledge an information assymetry- the purchaser knows more about his/her health than the insurer. it is assumed that only the relatively healthy will purchase a lifetime annuity. if, however, the annuitant has reason to believe he has a shorter life expectancy than the median, a period certain which extends beyond that median may make sense.jeffryhttps://www.blogger.com/profile/09444215127916586232noreply@blogger.com