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Hi all -

(Warning - long post)

My Dad is about to retire at the tender age of 70. He's been a civilian employee of the Navy for 45+ years, and they take good care of their retirees. Between his and Mom's pensions and Social Security, they'll have more income every year (inflation indexed!) than their Quicken model tells them they spend. All is well.

However, Dad also has a 401-K equivalent (they call it a "TSP") that's a big pot of money. He is planning to take all that money and buy an annuity that will pay him a fixed amount over the rest of his life. When he dies, the money is gone. However, the annuity is only 6.8% or thereabouts. This seems awfully un-Foolish to me. It's not that my siblings or I need the money, but I think he could get almost the same amount of money out each year, and yet actually *grow* his pot of money, using a fixed percentage withdrawal method - check out the Retirement articles that TMFPixy has done.

Here's my mini-analysis: without being too specific, Dad's TSP contains somewhere between $100K and $500K. Pretending for the moment that it's exactly $100K, he would get $6800 per year from this annuity. The amount would be indexed to inflation but *capped* at 3% per year growth. I wrote a program to compute the compounded growth of the Consumer Price Index (CPI) over 30-year periods (yes, Dad's planning to live to 100) starting with 1914. The CPI data, by the way, came from the Bureau of Labor Statistics -

Not surprisingly, the 3% cap on the growth of his annuity eats deeply into the buying power of his income. For 30-year periods beginning in 1950, the buying power of his annuity never ended up greater than 60% of the compounded inflation rate (i.e. his buying power dropped by 40%). I do not like the annuity at *all*, Sam I am.

One of TMFPixy's wonderful articles shows that for 30-year periods, if you invested your money in the Foolish Four, then you could withdraw 6% of the money each year (adjusted by inflation!) and still be able
to take out your payment in the 30th year. Furthermore, you were likely to end up with a humongous amount of money (Pixy kept talking about estate attorneys - I keep thinking about a child-care center with Dad's name on it).

Now, this means that in each year, Dad can only take 6%, rather than the 6.8% that the annuity would pay him. And he's got a non-zero probability of having to reduce that payment, rather than guaranteed sorta-inflation-indexed payment from the annuity.

But on the whole, this looks like a huge win. There's a huge chance that he'll end up taking out *more* money each year than his annuity would have paid. Am I missing something?

Thanks for reading this far. If you're still interested, please help me with the following questions:

1. TMFPixy, presumably, has data showing how much you get to withdraw from your theoretical $100K pot each year. But I can't find it anywhere. Did you publish those tables?

2. I'm still a little confused about what the "fixed percentage with inflation adjustment" means. If your portfolio goes down in a given year, do you adjust *last* year's payment by inflation and take that? You mentioned the difference between what the algorithm did and what would be prudent, which made sense, but I couldn't tell exactly what the algorithm did. *My* prudent approach would be withdraw the minimum of (a) your fixed percentage amount and (b) last year's payment, adjusted for inflation.

3. Ann Coleman has me sufficiently nervous about the Foolish Four that I'm hesitant to recommend it to Dad, and yet it's one of the few mechanical strategies for which we have semi-long-term data. I'm in the situation that I have a strategy that has numbers I can use to sell Dad on my plan, but I'm not at all sure it's the strategy that I think is best for him. Any suggestions? :-)

If you're still reading this far, I really appreciate it.

Regards, Lee
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