Date: Fri, 23 Nov 2007 15:04:32 -0600
From: wyu@talisys.com
Newsgroups: misc.invest.financial-plan
Subject: Re: Annuity with lifetime withdrawal and Guaranteed Benefit?
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On Nov 23, 9:36 am, Hector Herrera wrote:
> Thanks for the excellent analysis. I have about $350k salted away in
> anticipation of retirement, mostly in 'safe' stuff - T-bills and CDs. That,
> plus the Social Security payments to the wife and me will bring in some
> $40k per year, resulting in a very small income tax bill and a relatively
> comfortable life style. The house is paid for also, so we have little in
> expenses beyond the day-to-day. The pension rollover can grow on its own,
> not being needed right now, but again, I would prefer investment choices
> that are safer than (say) a volatile stock market ride.
After taxes and inflation, CDs/T-Bills/Money Market return about
nothing. That means every dime you take out is a decrease in the
principal giving you less and less purchasing power every year. 10 of
the past 35 years have seen negative real returns for this investment
category and another 10 so close to nothing, it's not worth talking
about. The returns are stable -- continually clustering around -3% to
3% but in this case, stable is a bad word. All it says is you're
guaranteed to get reamed by inflation and taxes.
Sometimes adding really risky stuff to really safe stuff produces even
safer stuff. Let's add some pretty risky investments -- 5% emerging
markets, 5% gold & commodities, 5% long-term government bonds -- and
see what happens. If you had used this as your retirement portfolio
the past 35 years, the number of negative real return years dropped to
5 with the worse year still in the -3% range (7% nominal, -3.5% real
in the early 70s). And in exchange for taking less inflation risk, you
gained an extra 1.1% per year (2.5% real).
Now 2.5% per year is still not enough to overcome the typical 4%
drawdown. The only choices are to accept the ocassional -10% real,
decrease retirement spending, get some more retirement income or
annuitize.
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