tag:blogger.com,1999:blog-5621914599310831423.post8661778406107469591..comments2024-03-28T18:17:18.688-07:00Comments on The Retirement Café: Investing and Insuring Are Not the Same ThingDirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5621914599310831423.post-18186983830527606122015-10-05T14:51:54.749-07:002015-10-05T14:51:54.749-07:00That sounds about right.
It's quite unfair t...That sounds about right. <br /><br />It's quite unfair to Social Security in the analysis to exclude spousal and survivors benefits where applicable, which would make it an even better deal in your case.<br /><br />A commenter above mentioned that spousal and survival benefits aren't as important now because there are more two-earner families. That is true in the broad sense that there are now more spouses whose own benefits are greater than their spousal and survivors benefits would be, but that is irrelevant to millions of Americans who still claim spousal and survivors benefits. For those households, it can be a very big deal.<br /><br />Let me once more point out that, although I'm happy to talk about any retirement finance issue any time, my original post was not an analysis of Social Security benefits, but an argument that we should not compare insurance and investments on the basis of rate of return. Social Security retirement benefits and other annuities will guarantee income for no matter how long you live. Investments only offer a possibility of doing that.<br /><br />Thanks for sharing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-25972731672640263382015-10-05T10:31:54.779-07:002015-10-05T10:31:54.779-07:00A better - and simpler - analysis of SS RIB is to ...A better - and simpler - analysis of SS RIB is to look at the payments just to OASI and the benefits just for RIB (and SIB in the case of married couples). <br />I actually set up a spread sheet, input the OASI tax rates, the salary index data, my income history, and veterans benefit. I (and my employer) paid a total of 87,000 dollars between 1968 and 2000 (when I determined that I had just worked enough). Even adjusted for inflation (using the salary index as a proxy for CPI inflation) my total contribution in current dollars is just 174K. <br /><br />My AIME is $4000 and PIA is 1740. <br /><br />If 1740/mo indexed for inflation is worth (using a 4% rule) 520K, I would need to have had a return of 7.08%. If I use a 5% initial indexed payout my return was 6.2%. If I bought an annuity today (not inflation indexed) with $175,000 I would probably begin receiving less than 1000/month. <br /><br />SS has been verr good to me. And this analysis does not include survivor benefits for my wife. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-85915946170198410802015-10-04T07:23:08.802-07:002015-10-04T07:23:08.802-07:00John, I think there are no good choices at present...John, I think there are no good choices at present for many households and that this is a "lesser of two evils" decision. I have a client whose premiums just went up significantly, but can continue to pay them – painfully – at present.<br /><br />A friend in the insurance industry is convinced that this insurance doesn't work for insurers or their clients and that it will eventually not be offered.<br /><br />David Blanchett published some research on retirement spending in which he found that households that don't under-spend or over-spend tend to see their expenses decline 1% to 2% annually throughout retirement in real dollars. More relevant to your question, he found that even for households with high end-of-life costs, those costs are lower in real dollars than early-retirement spending.<br /><br />Still, catastrophic health care spending is a possibility and we should have a plan for it. (Only a small percentage of these costs are catastrophic. Many stays are brief and can be paid out of pocket. See <a href="http://www.theretirementcafe.com/2012/09/long-term-care-insurance.html" rel="nofollow">Long Term Care Insurance</a>, a post I did some years back.)<br /><br />I think there are three tiers of households. Many simply can't afford the premiums. Wealthy households (I hear numbers like savings of $2M per spouse) can probably self-insure. Those households in between are the ones who need to make a decision and face the risks you mention plus the risk that their insurer will get out of the business.<br /><br />Joe Tomlinson is the retirement expert whom I most trust on insurance issues and he has stated that those in the middle tier, and perhaps the wealthy tier, are probably better off buying the insurance despite all the known issues with LTC insurance. Probably because it is the lesser of two evils.<br /><br />I wish I had a better answer for you. Unfortunately, I don't think there is one.<br /><br />Thanks for writing, John.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-82307854091415083942015-10-03T22:34:08.583-07:002015-10-03T22:34:08.583-07:00Dirk, what are your thoughts on buying Long Term c...Dirk, what are your thoughts on buying Long Term care insurance considering the history of adverse selection, insurance companies increasing premiums and difficulties in obtaining payments when needed?Anonymoushttps://www.blogger.com/profile/09355285956223392744noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-45965335840306267612015-10-03T19:38:49.578-07:002015-10-03T19:38:49.578-07:00Ah, I'm not sure the spreadsheets are publicly...Ah, I'm not sure the spreadsheets are publicly available. I assume they're intended for financial advisers with the RMA designation. Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-30332269047880958032015-10-03T14:59:51.130-07:002015-10-03T14:59:51.130-07:00No, it only gave an overview page, with no link to...No, it only gave an overview page, with no link to what is presumably a spreadsheet one can fill in.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-47248680298121045782015-10-03T11:20:10.588-07:002015-10-03T11:20:10.588-07:00Jack, a couple of points.
First, my post is not ...Jack, a couple of points. <br /><br />First, my post is not an analysis of Social Security benefits. It is an argument that insurance (Social Security, life insurance, disability insurance, life annuities) shouldn't be compared with investments using the criteria of return on investment. They are two different transactions. Hence, the title of the post. I don't believe I "ignored" anything in my analysis, because I didn't do an analysis. <br /><br />Second, while I agree with you that comparing purchasing investments to paying FICA taxes is legally pointless, comparing investments to the other forms of insurance is not a legal issue, but a financial one. And that's what my post says.<br /><br />Thanks for writing!<br /><br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-45194152117285074242015-10-03T10:57:47.194-07:002015-10-03T10:57:47.194-07:00Thanks. I agree that such comparisons are very di...Thanks. I agree that such comparisons are very difficult. However, I would have also focused on a few other major considerations to address in such a comparison:<br />First, higher income Americans would not purchase such "insurance" where the benefit formula is so regressive as to income. You make a comparable point when you discuss the purchase of annuities when individuals consider their life expectancy. People complain all the time that FICA taxes (the 6.2% for OASDI) are regressive as to wage incomes because of the cap on FICA wages (and that FICA taxes only apply to wages). However, the reality is that the benefits provided under OASDI are much, much, much more regressive to income compared to the taxes used to fund those payments. That results from the bend points in the benefit formula. So, there is a wide variance in the results based on earnings over the 35 year averaging period.<br />Second, you ignore the legacy benefit for the substantial number of Americans who are not married when they die, or who do not have an unemployed surviving spouse > age 60 or minor age dependents when they die. You claim such survivor benefits are huge, but, given the dramatic increase in two-earner households, the difference between an individual's own benefit and the surviving spouse benefit is likely to be less than decades ago when we had many more nuclear families. <br />Third, you ignore the wide disparity in life expectancy among different races, ethnicities, genders, and even within those categories - as studies show the nature of work, the household income level and other factors have a significant impact on longevity. <br />Fourth, you mention being born at an opportune time. Agreed. The greatest generation achieved a favorable return on their FICA taxes, the boomers generally will have a very low to negative return on their FICA taxes, while Millenials will probably end up losing big time. See: http://www.ssa.gov/OACT/NOTES/ran5/index.html. I believe the rates of return under the increased payroll tax and reduced benefits scenarios are significantly understated (because the status quo cannot be maintained once trust funds are exhausted). Another way of saying this is that to maintain the benefits, you likely shift more debt to future generations - just like actions taken in the past). And, of course, the Social Security estimates don't include the impact of taxes on those benefit payouts.<br /><br />I certainly agree that comparing a lifetime of saving with social security benefits is a very difficult comparison. However, I would have simply referred the individual to the SSA calculations and noted that because Social Security is mandatory, any such estimate is an exercise in futility. I think the calculation is certainly different for any individual as a review of what happened (after retirement, or after death once benefits cease) - versus calculations that incorporate projections. However, we will soon get significant experience in the perils of projections once the DOL issues regulations requiring plan sponsors project income streams for individual account retirement savings plans. My experience is that unless you use purchase rates for actual, immediate annuities, such projections are more likely to mislead than to inform. However, the damage is likely to be minimal, as few read mandatory disclosures anyway. Jack Towarnickyhttps://www.blogger.com/profile/08875925574586454646noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-62260259602068437032015-10-03T10:47:15.277-07:002015-10-03T10:47:15.277-07:00Clicking the "download PDF" link in the ...Clicking the "download PDF" link in the post doesn't work for you?Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-76523281013442096422015-10-03T09:16:48.299-07:002015-10-03T09:16:48.299-07:00Is the Total Household Balance Sheet available as ...Is the Total Household Balance Sheet available as a download? The overview provides excellant information.PoppiPoodlehttps://www.blogger.com/profile/03198649486085263601noreply@blogger.com