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No. of Recommendations: 0
I think annuities are something for retirees to consider. There are two retirement plans. A probability based plan, and a safety first plan. A mix of stock and bonds is a probability based plan. You are trusting that you will not have sequence of return risk, poor market returns, or that you will live too long. With an annuity, you pay money up front and are guaranteed the same amount each month. Another way to do it, is to pay the money now, and start to collect say at age 85.

Usually, the annuity will be for you and your spouse.

People will say, what if the insurance company goes out of business. First, if you pick a mutual company where the policy holders own the company, that will help you. You can also get one that has been around for a long time, and most importantly, check its AM Best financial stability rating. States also guarantee annuity payments, or at least a big part of them. Insurance companies going bankrupt and people losing their annuity payments are extremely rare.

There is something called the mortality credit, where if someone dies, their share of income goes to you. For that reason an annuity can pay you more than bonds can.

Finally, as we get older, we get less sharp. I am being blunt. We may no longer have the skills to manage our money.

There are only two types worth looking at. Single Premium Immediate Annuities, and Deferred Immediate Annuities.
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No. of Recommendations: 18
FWIW, There have been some interesting discussions of annuities over the the Berkshire board.

My own feeling is that annuities make a huge amount of sense...or would, if they had "actuarily fair" returns.
The ones you can actually buy are *stupendously* bad deals.

This thread has some info
https://boards.fool.com/the-kicker-for-298k-this-annuity-wou...
Starts of as a case for some particular long-dated preferred shares, with side discussions on annuities, buy-write, and tontines.
A "mutual inheritance fund" is the ideal solution, but there aren't any at the moment.
This annoys me so much that I have seriously considered starting one.

Another thread
https://boards.fool.com/about-eight-years-ago-i-purchased-a-...
One example I checked had a breakeven at age 103, the point at which you make it all the way up to zero real return on your money from inception.
And of course if you don't live to 103, you lost money. You'd have been better off sitting in cash and doing periodic withdrawals yourself.
Other than the issue that you'd be risking being broke at age 104+.

My main suggestion for living from a portfolio in retirement is a two part strategy:
* Devise a simple plan to run down your portfolio to zero over (say) 20 or 25 years. (a few years past your current life expectancy).
* Buy "longevity insurance" in case you live past that: buy a VERY much deferred annuity that kicks in when your portfolio runs out.
Because the payments are so deferred, the cost is quite low. It might take 10% of your money, probably not more than 20%.
There are interesting discussions about whether to buy the deferred annuity right away,
or to invest that money for some number of years before buying it.
I prefer the latter, since it gets you much more longevity insurance for your initial dollar, skips many years of counterparty risk, and (for that period) gives you a larger estate.
But it does require the discipline not to touch that money.

Jim
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Jim, I like your message on annuities.
Couple 80, in fairly good health, would you we buy longevity annuity for age 90,or do other?
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No. of Recommendations: 21
Jim, I like your message on annuities.
Couple 80, in fairly good health, would you we buy longevity annuity for age 90,or do other?


It's probably not one of those things for a public forum, as (to put it bluntly) it depends on how rich you are.
Which I would prefer not to ask, and not be told.

If you're so rich the dividends from SPY will keep you comfortably for the rest of your life, why work harder? It will last forever.
That's Mr Buffett's advice for Mrs Buffett, but we are not all in that situation.
If you're so poor that even brilliant planning isn't going to make up for not having enough savings, then the discussion is not time well spent either.
It also depends on whether you have heirs and what you think about the size of estate you want to leave them.

But generally, I still favour the "two prong" approach.
Deal with most of the retirement years with portfolio withdrawals, and deal with the unusual longevity outcomes with something like a very deferred annuity.

This is the reasoning:
Only a few people, by definition, live to unusually old age.
If you draw down your portfolio slowly enough that it lasts that long just in case you are one such person, you almost certainly will never get the use of that money.
So, the best solution is always a pooled risk group. Only a few people need the income into great old age,
so each person in the pool need only contribute a small amount, and nobody outlives their income.
The pooled approaches include various longevity risk products: annuities, tontines, mutual inheritance funds, etc.
In most places, your only choice is an annuity.

But...
Relying solely on an annuity is like setting most of your savings on fire, because they are so overpriced.
So, use most of your portfolio to cover the "normal" retirement target years, and buy an annuity
as insurance for very old age, if any, past that.

Try this exercise:
Estimate what annual income you'd like to have in future.
Gross that up by (say) 3%/year inflation for the next several years.
Find out what it would cost today to buy a deferred annuity with that size first payment in 10 years.
(if you are at age 80, staring at year 10 might be OK, but I'd also look at 13 or 15).
If that annuity purchase cost is a modest percentage of your current portfolio, then it's worth considering.
Let's say your deferred annuity will cost X% of your portfolio, deferred by N years.
Ideally you'd want to balance it so a "straight line" consumption of the other (100%-X%) of your
portfolio over N years gives you about the same real annual income as the annuity does.
This isn't complicated once you have quotes for the annuity for different deferral periods.
Bear in mind that the things that old folks spend their money on tend to rise in price faster than CPI. Services, rather than goods.
Inflation protected annuities exist, but they're rare. It might be simpler just to buy that much more of a non-inflation-protected one.


As mentioned, though, the problem is this:
A deferred annuity for longevity risk is a fantastic idea in principle, but the rates of return are absolutely horrible.
The insurer invests all the money in long bonds which pay nothing, then the regulator requires
them to gross this up to allow a cushion for losses, so they need a ton of capital, earning very low returns, to back up the promise.

The closest you can get to a "fair" annuity, as far as I know, is the TIAA-CREF "traditional annuity".
They guarantee only a low return, but they almost always pay more than they guarantee, based on the returns of their underlying portfolio.
The only unfortunate thing is that I believe they invest only in bonds, so the portfolio return is always low, especially now.
If you're in the US, I'd check into that if I were you.

For the 15% (or 10% or 20%) of your money you will use for the longevity insurance:
I would also look into whether it makes sense to hold that money as a conservative investment for the next 5 years, THEN buy the annuity.
So, instead of buying a 12-year-deferred annuity today, wait five years then buy a 7-year-deferred annuity.
Anything you're really darned sure will have a positive return is likely a good choice.
(most of my money is in Berkshire Hathaway, which is unusually cheap at the moment, but there are other choices)
You can choose when to liquidate that and switch to the deferred annuity, so you probably don't have to sell it during a year the market is unusually low.
As you get older, the cost of the annuity will fall (in absolute terms) but rise (because it's less deferred).
In net terms, it will get cheaper to generate a given amount of income in 2032.
You might find this strategy more stressful, and not like the idea of having to make a financial decision five years from now.
Again, it frankly depends on your financial situation.

I haven't really looked into it, but it might make sense to do this with the TIAA-CREF.
In terms of your relationship with them, set it up as if you're going to retire in several years.
Keep your current portfolio. Calculate what you can withdraw for living and have it run out in 10-15 years.
In addition to your regular living expense withdrawals from your portfolio for that next decade,
make periodic withdrawals from it as contributions to your TIAA-CREF traditional annuity as if you were approaching retirement.
Then, at some point in future, you "retire". Stop putting money into their product and start taking it out.
If all works out perfectly, this date is when the rest of your portfolio is largely gone, AND the
income from that retirement product is high enough to just match what you've been withdrawing to date.
Why all the bother? It then lasts as long as you live.
And, you get to pick your investments for the next 10 years.
It might be just an equity index fund, but it will almost certainly do better than an annuity insurer's liability-matched bond portfolio.

Jim
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My whole idea was related to a book I read years ago-Die Broke.
It seems now the simplest and easiest idea is to buy an immediate annuity for both me and wife with a very high percentage of our funds.

I had been looking for something else, for years, but this seems like the best alternative.

Jim, I looked at TIAA-Cref online, which you had suggested in the past.
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The idea of the Die Broke book is that you run out of money just when you die.
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My whole idea was related to a book I read years ago-Die Broke.
It seems now the simplest and easiest idea is to buy an immediate annuity for both me and wife with a very high percentage of our funds.


It's absolutely a great idea, despite the fact that almost nobody does it.
The main argument against them is that they are generally not priced reasonably, or even close.
Have you received quotes yet?

Remember, the money you get each month is not a return on your investment.
Rather, the money you put up is a one time sunk cost as an insurance premium, and you then start digging yourself out of that massive hole with each month's payment.
Calculate what age you have to live to, allowing for some inflation, to reach break even.
If that in a wildly implausible old age, you may want to allocate less money to an annuity.
(as mentioned, I advocate a mix of a deferred annuity and running down a portfolio until then)

But if you get a decent annuity quote from a financially sound source, and the income is good enough for you, why not?

Just be sure to figure in something for inflation.
Buying premium growth or inflation protection as an option on the contract is sometimes not the best deal, because it's expensive for the insurers to hedge inflation properly.
It costs them a lot, so they charge you even more.

You can try to do an inflation adjustment yourself, which may be cheaper. Do the math both ways.
e.g., you can put (say) 90% of the money into a plain immediate annuity, and maybe 6% into a 4 year deferred, and 4% into an 8 year deferred, or something like that. Maybe a couple of percent deferred 12 years.
Your payments will step up quite a lot on each of those dates, because the monthly payouts on deferred annuities are much higher per dollar up front, especially at old ages.
That might be enough to take the sting out of inflation for the next 10-20 years, at a modest hit to the first month's income.

Jim
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It's absolutely a great idea, despite the fact that almost nobody does it.
The main argument against them is that they are generally not priced reasonably, or even close.
Have you received quotes yet?
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TIAA CREF
My wife and me both 80
Immediate Annuity -paid monthly--Looks like 7.5% per year
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TIAA CREF
My wife and me both 80
Immediate Annuity -paid monthly--Looks like 7.5% per year

Is there any advantage in waiting to buy for surviving spouse when one passes?
I know one will get more than 2, but it worth waiting?
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Is there any advantage in waiting to buy for surviving spouse when one passes?

That's a really good question, and frankly I don't know the answer.
The main issue I can see is that you'd have to have the capital at that time to buy it.
The annuity might be cheap, but life insurance to fund it might be expensive, if that's what you need.

Probably very much easier to fund, and manage, a joint one.

Jim
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No. of Recommendations: 6
TIAA CREF
My wife and me both 80
Immediate Annuity -paid monthly--Looks like 7.5% per year


If I did the math right and, ignored inflation, the first 13 years and 4 months you are getting your own money back. The insurance company doesn't start digging into their own pocket until you are 93.

I ran a quick scenario at https://www.calcxml.com/calculators/how-long-will-my-money-l...
Plugged in $100,000, $625 monthly draw ($7500/yr), 2.54% yield (which is the current yield of AGG & BND). And it said your money lasts about 16 years. Or to age 96.

Now you need to ask how confident you are that you will make it to 93 or 96.

According to a mortality table, the life expectancy of an 80 year old is 9 years.
And only 24% of 80 year olds make it to 93.
And only 12% of 80 year olds make it to 96.
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No. of Recommendations: 1
Relying solely on an annuity is like setting most of your savings on fire, because they are so overpriced.
So, use most of your portfolio to cover the "normal" retirement target years, and buy an annuity
as insurance for very old age, if any, past that.


I don't sell annuities just to get that out there. I disagree however, that they are overpriced. I am talking about spia's and Dia's only. Because of the mortality credit, someone dies early and you get there money, they pay more than bonds.
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Annuities are insurance products, not investments (so no SEC oversight). This
discussion has been mostly about insuring against outliving savings, but other
common problems of growing older are we grow ill and lose energy or interest in money management, become mentally impaired and can't do it or a surviving spouse needs a high priced adviser to help manage these things. My wife's parents both became a bit
'confused' as they became older (mid 80's), so she really wanted an annuity in case that
fate is ours. It is nice to have a reputable company put a bit in your bank account each month,
with no stock/bond/allocation decisions.

rrjjgg
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No. of Recommendations: 7
I am talking about spia's and Dia's only. Because of the mortality credit, someone dies early and you get there money, they pay more than bonds.

Just to clarify, "plain" single premium annuities do not have a mortality credit. (guaranteed minimum return in case of early death)
It's an option you can purchase from many providers by paying more for a slightly more complicated product.
I'm not saying it's rare, or that it's not an alternative worth considering, but readers should be aware that it's not a feature of the "standard" simple product.

The most important thing in selecting an annuity is true inflation protection. CPI or similar, not fixed percentage rise each year.
(a separate issue is that CPI monetary inflation is unlikely to be as high as the average price rises in the things you're likely to consume in old age, but I digress)
That CPI adjusted product is the only sane choice, and the only benchmark against which any comparison should be made.
If you're after a risk free fixed income, you want a fixed real income.
Anything else is making the decision to spend money to wager on future inflation.
As the folks at Advisors Perspectives have pointed out, getting anything other than a CPI-adjusted
annuity it's about as sensible as getting your annuity in a currency other than where you live.
https://www.advisorperspectives.com/articles/2019/05/27/hedg...
It might work out well, and it might be about a wash, but it might work out badly.
If you're in the market for an annuity, you probably are trying to eliminate the "work out badly" scenarios.
You're not "paying extra" for the inflation protection.
The inflation protected version is the only "risk free rate" product.
To go with anything else is almost precisely like selling risky options every year for a current fixed premium. You're ahead, most of the time...until you aren't.
Picking up pennies in front of a steamroller is not usually something you want to do in a long retirement.
The risk of large inflation in the US in the next 20 years is not zero. And it seems to be a bigger risk than it was a few months ago.
Apparently (according to that article) there is only one firm in the US offering inflation protected annuities, Principal Financial.
Again, according to that article, quotes on their products can be obtained from blueprintincome.com and immediateannuities.com


I don't sell annuities just to get that out there. I disagree however, that they are overpriced....


As you might guess, with only one company offering the required product, the pricing is not very attractive.
Last year their monthly payments for a single 65 year old for the inflation protected product were $4449 per $100k premium.
They pay you $581/month more to take on all the risk that inflation might be above 2%: the pennies you pick up.
(this is a better way to think of it than "paying more for inflation protection")
The implied "load" (the amount by which the annuity exceeds its actuarially fair value) is about 22% of the premium.
For a typical (dangerous) competitive nominal-dollar annuity it's more like 6%.
Calculations from that same source
https://www.advisorperspectives.com/articles/2019/05/20/infl...
They conclude that the true (real dollar) annuities are priced so unfairly that it actually *is* worth your while to take on the inflation risk.
You buy an initial payment so much larger for your upfront premium that you're better off for a very large number of years, in a very large percentage of outcomes.
I agree that this is a good wager--a positive "expected value" strictly defined--but it's a wager nonetheless.
So, the question becomes:
Did you start this annuity research with the goal of placing a smart wager, or the goal of having an income for life?

Jim
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Did you start this annuity research with the goal of placing a smart wager, or the goal of having an income for life?

Jim
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That is what, I have been analyzing, and wondering if, I could do better myself, by investing in BRK-B, S&P, and other.

Maybe back to idea of a balance split percentage in longevity annuity, and stock investments at this point.
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TIAA CREF
My wife and me both 80
Immediate Annuity -paid monthly--Looks like 7.5% per year



I had a look at things again.
I'd like to revise my comments : )

That's actually not that bad a payment.

My previous comment was that an annuity is generally a spectacularly terrible deal...but my
analysis was assuming you're buying it at the start of a long retirement, say age 60 or 65.
At a higher age, it gradually becomes a more reasonable choice.

The reason for the distinction:
My comments are based on the idea that there is essentially no underlying real return on the money you have put up: the products are overpriced for a variety of reasons.
They're really just giving you your money back.
Mainly because they are ultimately funded by bonds with essentially zero real return.
That's a bad deal if it's a large number of years, but less of an issue with a smaller number of years.
If your life expectancy is something like 35 years, giving up all your future portfolio earnings is a very big deal.
As you get older, it is less of a factor. Fewer years of portfolio earnings foregone, and little time for compounding on those earnings.
The longevity risk insurance benefit is the same in both cases, but only in a long retirement is the return on the underlying capital a dominant issue.
Dominant enough to make an immediate annuity purchase a really bad idea if you're 60, but maybe not if you're 80.

If someone is older, as you are, a single payment annuity is a much more reasonable choice.
(with the caveat that it's only a viable choice if you get full CPI inflation protection, or at least buy one
with payments rising at a fixed rate that is much higher than your inflation expectations, like 5%)

Here's why I advise against an immediate annuity for those at younger retirement ages.
For example, a calculation I did a while back, couple 60 and 62 buying a single premium annuity with inflation protection.
Let's say they could invest in something with a return of inflation + 1%/year. That is definitely not hard to do.
They would be better off with a low withdrawal rate from t heir portfolio than with an annuity until around 38 years later, at least one age 100 or so.
(that's with annuity rates from a few years ago...they're much worse now)
If you can manage inflation + 2%/year, you're better off till around age 111.

So, my conclusion remains, but only for those just retiring:
If you're early in retirement, you don't have to be an investing genius to beat inflation by 1%/year.
So, do that. Invest the money. It doesn't have to be anything that fancy.
The S&P, despite being pricey these days, yields 2% and is functionally inflation adjusted.
I'd estimate the earnings yield of RSP (the equal weight S&P 500) at about inflation+4.3%, and yields 2.3%.
You still have longevity risk to deal with, but my suggestion is to handle that in a different way.
Either invest for a long while before annuitizing at a later date,
or invest most of the money for a (say) 20-25 year linear run down of the portfolio, and a minority of it on an annuity deferred for 20-25 years.

Jim
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That is what, I have been analyzing, and wondering if, I could do better myself, by investing in BRK-B, S&P, and other.
Maybe back to idea of a balance split percentage in longevity annuity, and stock investments at this point.


You could consider annuitizing half now, and holding the rest in investment that you think will be worth more later.
Sell the stock portfolio and buy another annuity with the proceeds at any date maybe 3-6 years from now when the portfolio is looking good and has had a good return.
But as I mentioned in my last post, the payouts on annuities at your age are not really all that bad.

For both annuities, be sure to get way more inflation protection than you think you need. Either true CPI adjustment, or maybe constant 5%/year increases.

---------------------------------------------------------------------
Useless digression:
The best deal is one that is just too much work to organize...a mutual inheritance fund.

Find a bunch of friends, all the same sex as you, and all near your age or older.
Preferably well over 100 people, but it can work with as few as 25-50.
You each put money into a common pot. Say, $100k-$500k each. It can be different amounts for different people.
I've suggested a fixed long term portfolio of 50% BRK and 50% RSP (equal weight S&P 500).
Or, equal parts BRK, RSP, and QQQE (the equal weight Nasdaq 100).
Hire an accounting firm to hold the stocks and act as trustee on an hourly rate.
The fees shouldn't be much...there are only three stock holdings, and no rebalancing or trading to do.
The first dividends pay the accountant's fees, the rest of the dividends are paid out quarterly as "dividends" from the fund.

Then...
Each time someone dies, their shares get sold and sent out as cash to the remaining people in proportion to their shareholding.
Alternately, send them the shares: there might be a tax advantage.
I prefer that this be done in four equal shots for the four quarterly payments after the demise--it
makes payments much smoother, and avoids selling a whole lot of stock during a sudden low market price.
When the number of remaining people gets below 10, the fund is liquidated and all remaining people get the remaining stock in proportion to their holdings.
They can buy a very juicy annuity with that.
That's it.
No fund management firm, no borrowing, no risk, no investment decisions, no trading or trading costs, no actuarial tables to trust, no reserves needed.
It's always 100% pre-funded, so it can't go broke.

End result:
You get somewhat irregular payments from year to year, but even if some people live to a VERY old age nobody ever goes broke.
Payments rise a LOT over time--more than you might imagine. The longer you live, the more you feel like a genius.
You won't mind that payments are irregular once the average annual payment is more than what you put in at the start.
The more people there are in the fund, the smoother the payment stream. It still works for smaller groups, it's just that the payments are more irregular.

Jim
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thanks Jim and others
I am back to original idea, ,immediate annuity for major portion of money-now at 80, wife and me. It creates certainty, like some invest normally in CDS, BONDS< Money Markets.


I am familiar with tontine and have mentioned the ideas several times in discussions with others,know it is illegal.
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I am familiar with tontine and have mentioned the ideas several times in discussions with others,know it is illegal.

Only in two US states.
Maybe just one, depending on techical details.
The mutual inheritance fund I described likely meets neither definition.
It can not be in a position of being unable to make a committed payment.

The reason tontines got a bad reputation and were clamped down on is because there were essentially no insurance regulators 125 years ago.
Some firms would promise minimum yields unsupported by their reserves, or simply steal the money.

There were no documented murders with the motive of a tontine payout : )
Too bad, because it makes for a great story.

Jim
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There were no documented murders with the motive of a tontine payout : )
Too bad, because it makes for a great story.


There were lots in works of fiction, though.
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There were lots in works of fiction, though.

For sure. I love the movie "The Tontine".

In case anybody is interested, the places tontines are illegal are Louisiana and South Carolina.
The law in Louisiana is so prohibitive the way it's worded that it seems to me that it makes normal insurance contracts illegal too!
It prohibits structures "whereby any part of the principal or interest earned on individual
contributions is to be used for the benefit of other contributors"

Isn't that where the funds for all insurance payments ultimately come from?

The law in South Carolina is quite narrow and (to me) would not apply to many/most tontine-like structures.
It prohibits pension-like funds divided into classes, where the payout to individuals or classes is a function
of the person being the oldest member of the class, or to the person with the policy in force the longest.

As an aside, I think anywhere(?) in the US you can get a bank or brokerage account opened as "joint tenants with right of survivorship".
i.e., if you or your wife dies, the account is automatically and immediately 100% owned by the survivor, without passing through probate etc.
It's not limited to two individuals, provided they all have equal interest, and a couple of other conditions.
This is a tontine.

Jim
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Picking up pennies in front of a steamroller is not usually something you want to do in a long retirement.
The risk of large inflation in the US in the next 20 years is not zero. And it seems to be a bigger risk than it was a few months ago.


Speaking of 20 year risk, I think the greater risk may be that your annuity provider goes belly up at some point, particularly if the inflation protection works out too much in your favor.

Elan
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Speaking of 20 year risk, I think the greater risk may be that your annuity provider goes belly up at some point, particularly if the inflation protection works out too much in your favor.


That is certainly an issue to consider.
I'd much rather have 25% of the annuity at each of four different companies.
Probably overkill...modern insurance regulation is actually pretty good.

Berkshire Hathaway used to sell them, but I don't think they do that any more.
https://www.berkshirehathaway.com/news/Removed%20SEP%2017%20...

Yet one more reason to prefer tontines : )
Being 100% pre funded, there is no requirement that the issuer have lots of capital, or any at all...merely that they not be thieves.

Jim
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There were no documented murders with the motive of a tontine payout

"documented"
IOW, they were successful! ;-)

I just finished reading a great series of books by Lawrence Block. The series is "Keller". Keller is a hit man whose specialty is to make the murder look as if was a natural death. I bought the first book on a whim, and about halfway through ordered the remaining 4.
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I came across this

'Such a system would be cheaper to operate and would always, by definition, be fully funded. The funny thing is that some retirement systems already carry out a version of that process. As Milevsky documents in his book, there is "tontine thinking" embedded in various national pension schemes, and even in a product offered by TIAA-CREF in the United States. These plans adjust payments according to mortality. They just don't use the word tontine.'

Maybe that's why TIAA seems a good annuity?

rrjjgg
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wan123, Suppose you opt for a 'do it yourself' annuity. I downloaded historical prices for SPY and BRK-a from Yahoo and tested a couple of scenarios with no inflation adjustments.

What if you started with $100,000 in June, 1996 paying out $625 each month(7.5%/year, the TIAA return you gave). I took out $625 and put the remainder in SPY or BRK-a, to see what happened. Both were winners: The all SPY account was $154,324 on May 1,2020, indeed, it would be exhausted this month
if $805/month had been withdrawn or 9.66%/year. The BRK-a account would have done much better at $625/month, going to $362,111 May 1,2020. To get $0 in May,2020, one could have drawn out $1082/month or 12.98%/year.

From 1996 to 2000 we had a raging bull market. Suppose instead this process started near the peak of that
bull market, say in April,2000. What then? The SPY account taking out $625/month is bust around
Oct., 2011, around 11.5 years. Cash under the mattress would last about 13.3 years. Not so good, but not extremely bad.
Going to a 5%/year payout worked, final 2020 value of $30,688, so going then to cash, another 6 years can be expected.
The corresponding BRK-a account did, 'live long and prosper', ending at $105k.

Since BRK-a has lagged SPY since 2009, why the difference? Looking at a perf chart of these at stockcharts.com, we see returns from SPY went negative for awhile starting in 2000, while BRK went up to a peak just before the 2008 crash keeping it above the starting value in 2000 during the lows in 2008-9, while SPY went negative then.

These simple examples show that both the withdrawal amount and the starting date matter. So where are we now? Bonds will probably reverse course and come down in value over the next decade, stocks seem
fully valued, maybe overvalued, so opting for going with a large pool of money invested over a number
of years, like TIAA, might be best. If you do decide to try to capture the remainder by doing it yourself, maybe fund it partially over several years, starting with a lower payout and adjusting it
as the future dictates?



rrjjgg
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wan123, Suppose you opt for a 'do it yourself' annuity. I downloaded historical prices for SPY and BRK-a from Yahoo and tested a couple of scenarios with no inflation adjustments. ..

FWIW, my analysis suggests that there is no such thing as a do it yourself annuity, nor can there ever be.
You can run down a portfolio till it runs out, or you can live from the income on a portfolio, but you can never get a reliable "good for life" income stream unless you either
* join a shared risk pool with an annuity or similar, or
* withdraw so little that your portfolio might as well be designed to last perpetually

Most "safe withdrawal rate" calculations work on the principle of *probably* working.
Usually they are designed to optimize income with no more than a 5% failure rate based on historical outcomes.
Even leaving aside the observation that the future may not much resemble the past, the important
point is that a "failure" here means being simultaneously very old and stone broke.
I don't think that's an outcome one should allow as a possibility, certainly not a 5% chance.
It's worth insuring against. The appropriate insurance is available (and only available) at an affordable price as part of a pooled risk scheme.
At least, that's my conclusion.

If you're really rich and can live very comfortably from 2% dividends, then that's great.
But most people should have some sort of longevity insurance. They get a much higher retirement income that way, since few people live to 105, yet you have to be prepared for it.
e.g., at age 85, maybe convert some or all of your remaining portfolio to an annuity.
Or at whatever fairly old age you get a rough income match between running down some fraction of your remaining portfolio in N years,
and the income from an N-year-deferred annuity purchased with the rest of the money.

Thus endeth my two cents : )

Jim
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FWIW, my analysis suggests that there is no such thing as a do it yourself annuity, nor can there ever be.

Indeed. You don't even need to do any analysis. All you need to do is consider the Law of Large Numbers, and realize that an insurance company has that working for them, but a DIY'er does not.

Even so, insurance companies & banks can and do fail. Just rarely enough so it probably won't happen in your lifetime.
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Thanks to all for comments. Reminder both are 80 years old.

My wife and I decided to purchase with most of our money in annuity when one passes, other will purchase it.

W have enough for all needs now.

Any final comments on our decision are appreciated?
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Any final comments on our decision are appreciated?

If a creditworthy annuity gets you the income you need, it's a fine way to go.
There is no need to work harder.

The only objections I have ever had from typically available annuities is that they are often bad deals.
But a bad deal means "less than you might expect from a fair price", which can still be "more than your minimum requirement".


Just this last thought:
The creditworthiness of the counterparty matters: the insurer making the payments.
One simple way to improve that safety is get two or three smaller annuities (from the best firms) rather than just one big annuity from one firm.
It's like diversifying a portfolio to reduce company-specific investment risk, and like a diversified portfolio, it doesn't cost any more, so why not?

Jim
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Thanks Jim. I am all set now.
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I don't really have any annuities and I can understand why some dislike them, especially variable annuities but I don't think there is anyone on these boards that don't make some kind of bad investment/expenditure at times. You got car lovers who spend tens of thousands on cars I couldn't imagine spending, You have foodies, wine connoisseurs, etc.

If you can have a guarantee income stream to meet all your needs, I'd imagine that is a great feeling. No longer worry about the market, where to invest, etc.

Good luck
Rich
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wife and are now 82
Current plan is to buy an annuity for all the money, when one of is survivor because you get a lot more than annuity for couple
Till then safe 3 month to 1 yr cd's and bonds
Commnets and suggestions appreciated.
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wife and are now 82
Current plan is to buy an annuity for all the money, when one of is survivor because you get a lot more than annuity for couple
Till then safe 3 month to 1 yr cd's and bonds
Comments and suggestions appreciated.


I'd reiterate one of my comments further up the thread:
The prudent answer depends a lot on something not suited to a public forum: how wealthy you are.
Without that knowledge, it's hard to offer any meaningful comment, and we (I) don't really want that information : )
There are three categories:
1. If the annuity payout provides a comfortable level of income and more, than why work harder? Great choice. Spend your time on something else.
2. If you need a meaningful return on your capital to get to the income level you need, other alternatives might work better.
3. If you really don't have enough capital with or without a plausible return on your money, then choosing the optimal strategy isn't going to help.
Surprisingly few people are in the middle category, especially at an advanced age, as a return on capital takes a lot of years.

Unfortunately this year's economy has reminded us that the problem is inflation: inflation protected annuities are extraordinarily rare and/or expensive, yet they're what you need.
So you have to buy a lot more income than you need, because it will start fading.
There are some choices for "semi inflation protected": payouts rise with inflation, but only a maximum amount per year.
I guess those are better than nothing, but it depends on price, which I suspect is high at the moment.

One possibility for getting some fraction of the inflation protection at a reasonable price:
Instead of buying just an immediate annuity with all the money, have a look at putting some percentage of it into a 5-year-deferred annuity.
I don't know the specific math or the situation, but maybe 10% of the capital?
It will kick in just when the income from the immediate annuity is starting to show signs of losing purchasing power.
And at your age you get quite a big lift on the ratio of capital to income by choosing a deferral, even a modest one.
This might (or might not) be a better choice than some of the pricier inflation protected products.

I didn't entirely understand your comment about not getting the "annuity for a couple".
Do I understand you're opting for one (or two) single annuities rather than a joint annuity?
Typically a joint annuity costs more, but really fits the need best.
Your household needs income as long as there is at least one person living there.

~~~~~

I know what I'm recommending to my spouse when I die, but I am a very unusual person and I have eccentric thoughts about investment.
I definitely do not suggest that my approach would be appropriate for others, so I offer it purely for entertainment purposes for others reading this:
On my death, restructure the portfolio so it holds nothing except a specific initial mix of Berkshire Hathaway stock,
RSP (the S&P 500 but equally weighted), and QQQE (the Nasdaq 100, but equally weighted).
Maybe a fourth pick.
Spend any dividends, and also sell 1% of the original number of shares of each position every quarter and spend that.
There are brokers that will take that standing order, so it's no work.
The income will definitely vary, but probably rise a bit over time, probably faster than inflation.
By construction it will of course run out of money in year 100.
Theoretically at some age it would make sense to sell it all and buy an immediate annuity--
that would be easy to estimate just by getting an annuity quote every year or two and compare the income.
She'd give up inflation protection in return for a very big one-time and (from her point of view) permanent jump in income.
But giving up inflation protection is a big decision.

Jim
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Jim,

Thank you for sharing your recommendation to your spouse, and for all the amazing insights and tips over the years. Much appreciated.

A quick question: Are you not concerned about jurisdictional risk in the portfolio you recommended to your spouse (since it is heavily tilted towards US equities)? I think you recently alluded that this is more of a concern now than before.
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A quick question: Are you not concerned about jurisdictional risk in the portfolio you recommended
to your spouse (since it is heavily tilted towards US equities)? I think you recently alluded that
this is more of a concern now than before.


Well, the advice might change a bit from time to time...until it can't any more, of course.
There is an MSCI Europe 350 Equal Weight index. I'm looking for a viable ETF that tracks it.
Seems to be one listed in Toronto on the NEO exchange, but it doesn't look like it's going to thrive.
There's a UCITS fund listed in Europe that tracks the Europe 600 equal weight index. Also no volume and likely doomed.

My preference would be to pick a *very* broad slate of stocks myself, with the same idea: sell 1/N of the shares in each position periodically.
(But ditch all of something when it's no longer in the index; you don't want to ride the next Kodak all the way down to zero)
This allows elimination of things that it's not nice to own, too risky to own, or in industries that are perennial laggards and not worth the bother.
But it's a lot more lines on a brokerage statement to deal with, so someone would have to be hired to do that.

Jim
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I didn't entirely understand your comment about not getting the "annuity for a couple".
Do I understand you're opting for one (or two) single annuities rather than a joint annuity?
Typically a joint annuity costs more, but really fits the need best.
Your household needs income as long as there is at least one person living there.
----------------------------------------------------------------------------------------
We are not rich but have more than enough for with pension and soc sec for our living costs.

What I meant was immediate annuity for couple now, or wait and buy one for surviving spouse.
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There is an MSCI Europe 350 Equal Weight index. I'm looking for a viable ETF that tracks it.
Seems to be one listed in Toronto on the NEO exchange, but it doesn't look like it's going to thrive.
There's a UCITS fund listed in Europe that tracks the Europe 600 equal weight index. Also no volume and likely doomed.


In the UK, the FTSE 250 midcap index is much more equally weighted than the 100, since the really big outliers are in the 100. Ok, it's still mktcap weighted, but the spread is much more even than the 100 where the biggest companies really dominate. Seems very unlikely that VMID and MIDD will ever disappear. Still has about 50% of revenue from outside the UK (from memory). Maybe that's of interest and I assume there's an equivalent in Europe and the US?

SA
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Thank you, Jim, for the prompt and helpful response. I appreciate it.
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What I meant was immediate annuity for couple now, or wait and buy one for surviving spouse.

Ah! I misunderstood. Sorry.

That's an pretty interesting choice.
I think it's advantage come more from the delay in purchasing the annuity than from the fact that it's single rather than joint.
The switch from single to joint is one of the few ways in which annuities tend to be "actuarially fair".
i.e., they're not ripping you off on that specific line item, the price increase for joint is probably pretty proportional to the benefit increase.
I guess it leaves things a bit "unsettled" till then, as you don't know how all the numbers will settle out, or when.
But other than that, why not?
The only counterargument is that if immediate annuitization gets you more than enough, that does make life simpler thereafter.
One of those many advantages of being well-to-do.


Another thought, just to add confusion.
Particularly if you're already considering getting the annuity later.

For a lot of people, I suggest they consider this strategy, which I think is the best starting idea for most:
Use some fraction of your money, say 10-20%, to buy a deferred annuity, deferred quite a long way, say 10-15 years depending on the person's situation.
Maybe 20 if they are younger.
You get quite a lot of annuity payout if the deferral is large, especially if the annuitants are pretty old to start with.
Use the rest of the money, say 80-90%, to support yourself till that kicks in.
It is very hard to design a way to run down your portfolio if you don't know how long it will last.
Way too many overwrought books have been written on this subject.
But it's quite easy to come up with a way to run down your portfolio so it runs dry exactly 10 years later.
The simplest: take the portfolio value and divide it by the number of years left. Spend that.
Pick the split (e.g., 15% annuity / 85% run-down) based on whatever gets you about the same cash income before and after the income source switches.
As always, the thing to watch out for is inflation on the annuity side.

An obvious variation, perhaps better, more like your plan:
Rather than buying a deferred annuity now, just hold back that money and buy an immediate annuity when you want it to start.
You have to have the discipline to hold back the money, and a portfolio which doesn't suddenly plummet near the end date, but it gets a considerably higher income for life.
Similar to what you were planning, but with t he added notion that you have two buckets, fixed in advance.
One bucket you run down to zero linearly in a predetermined number of years, the other is used to buy an annuity on that date.

Jim
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An obvious variation, perhaps better, more like your plan:
Rather than buying a deferred annuity now, just hold back that money and buy an immediate annuity when you want it to start.
You have to have the discipline to hold back the money, and a portfolio which doesn't suddenly plummet near the end date, but it gets a considerably higher income for life.
Similar to what you were planning, but with t he added notion that you have two buckets, fixed in advance.
One bucket you run down to zero linearly in a predetermined number of years, the other is used to buy an annuity on that date.

Jim
------------------------------------------------------------------------------------------------
Buy annuity when one spouse passes, the other buys the annuity. Both are 82 year olds now.
Invest in what now?
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Buy annuity when one spouse passes, the other buys the annuity. Both are 82 year olds now.
Invest in what now?


As an aside, I think a better plan is to switch to an annuity at particular fixed future date, rather than based on the population of the household.
Nobody will be in the mood to make a big financial decision, and it makes the financial planning easier too.
What if you need to liquidate some investments but the market prices are low that day?

As for what to hold:
That's a fraught question--it's very dangerous to give advice like that.
The answer you get depends more on who you ask than what the question was.

But, I will answer honestly what I would do personally. It is probably bad advice: I'm just some random guy on the internet.
Think of this as, at most, just one entry in a suggestion box stuffed with ideas.

I'd probably put half into QQQE.
QQQE is the Nasdaq 100 set of companies, but equally weighted, so no position is over 1% of the money.
Thus, it has a vastly lower company-specific risk than almost any normal index fund like SPY.
And, being an index, it can't go bust.
Yet its earnings have historically grown a LOT faster than the average earnings within the S&P 500.
Historically the trend earnings within QQQE have risen about 8%/year faster than inflation in the last ~15 years or so.
By contrast the S&P is not at a price anywhere near its historical norms (neither traditional version nor equally weighted), so I couldn't recommend that these days anyway.
QQQE is trading at about its historically average valuation multiple, give or take, so a purchase now is not a one time dead loss due to overvaluation on purchase day.
So: QQQE has better prospects, and not the overvaluation, what's not to like?

I'd also likely put the same amount into Berkshire Hathaway, which I personally consider to be approximately as reliable as an asset class, despite being a single firm.
There will be good years and bad for the business, and (separately) good years and bad for the share price,
but you can probably count on trend value growth of inflation plus 7-8% on trend.
Value growth has been more like inflation + 10% in recent years, which I consider a lucky bonus.

This portfolio won't pay anything meaningful in dividends. QQQE usually pays about 0.5%, Berkshire nothing, average about 0.25%.
Once each 3 months I would sell 1% of the original share count of each one, and spend that.
The income will be somewhat variable, but should rise nicely over time, faster than inflation.
This liquidation approach is, by construction, good for up to 25 years.

If the plan is to switch to annuities in (say) 10 years, I'd spend the last 2-3 years gradually shifting to T-bills,
so that the cash realized isn't dependent on the luck of the market pricing the day you do it.
e.g., last 33 months before annuitization, sell 3% of each position each month, linearly increasing the cash allocation while getting an "average" price for the stock.
Of course you can also annuitize early at any time when the market prices seem juicy...the goal is just to avoid doing it on a particularly unlucky day.

If my expectations are correct, after 7 years my suggestion would leave you with about 50-60% more real purchasing power than you started with, if you did no withdrawals.
As you would be withdrawing, I estimate that you'd have about 15% more purchasing power at year 7
after having already withdrawn and spent, in current dollars, 35% of the original lump sum.
Maybe knock a bit off for conservatism, but that doesn't sound so bad.

Note, there is nothing wrong with putting some fraction of today's capital into an immediate joint annuity as well.
With no inflation protection, you could probably get an immediate income of just under 10% on the money spent to purchase the annuity policy.
(I just checked the Schwab calculator)

I'm sure any professional "advisor" would run screaming from this approach.
They would probably put you into bond funds with a negative real return, and some managed funds with high fees that are invested in overvalued things.
I expect you'd therefore have zero increase in value in the next 7 years even without withdrawals.

FWIW, I'm retired, though not as advanced as you.
At the moment, I have quite a bit more than half my family's liquid assets in Berkshire, and have bought a whole lot more lately as it's quite cheap right now.
I have no QQQE.

Parting thought:
As always, if your pile of money is such that converting it all to a joint annuity immediately,
with good inflation protection, leaves with you with a more than comfortable income for life---
there is no need to work harder.
If you want/need a bit of real return, the decision is different.

Jim
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Jim, Thanks for the reply. I think you covered it all.

LW
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We are putting a major portion into T-notes ladder. Does this make sense now, for this 82 year cold couple?
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We are putting a major portion into T-notes ladder. Does this make sense now, for this 82 year cold couple?

This is of course not the forum that will favor T-notes.
But suggest if you go this route then go with new issues on the auction schedule and hold to maturity.
Maybe consider TIPS instead. Avoid commissions.

Treasury auction schedule (subject to change) 
The following table shows the current auction schedule for the US Treasury new issue market. The Treasury maintains the right to change the schedule at any time.* Please refer to the Tentative Auction Schedule (PDF) of US Treasury Securities for the most current details.

Issue                                           Available maturities   Auction frequency
US Treasury bills 4-, 8-, 13-, 26- week Weekly
US Treasury bills 52-week Every 4 weeks
US Treasury notes 2-, 3-, 5-, 7-year Monthly
US Treasury notes 10-year Original Issue: Feb, May, Aug, Nov; Reopened: other eight months
US Treasury bonds 30-year Original Issue: Feb, May, Aug, Nov; Reopened: other eight months

Treasury inflation-protected securities (TIPS) 5-, 10-, and 30-year 5-year TIPS – Original Issue: April; Reopened: August and December 
10-year TIPS – Original Issue: January and July; Reopened: March, May, September, and November 
30-year TIPS – Original Issue: February; Reopened: June and October

US Treasury floating-rate notes (FRNs) 2-years Original Issue: Jan, April, July October; Reopened: other 8 months



Reasons to consider Treasury bonds
High credit quality
Tax advantages
Highly liquid


GD_
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We are putting a major portion into T-notes ladder. Does this make sense now, for this 82 year cold couple?

The answer would depend on a lot of information we don't have and probably don't want.
For what purpose? What fraction of your assets? How many years of ladder?
What other living expense income stream is available, pensions and annuities etc?
Dividends from a stock portfolio?
How comfortable is the total likely to be? Bluntly, is the couple rich or poor or in between?

Don't answer those--too personal, and the advice would still be suspect.

But, we can comment about what you'll get back from such an investment:

You will lose a little bit of money fairly slowly and predictably, since the real yield on all durations is slightly negative.
i.e., the interest coupon you make is somewhat lower than the inflation loss on the capital.
You won't lose a lot, though, unless the US dollar falls quite a lot.
USD cash will be freed up periodically for your use.
Knowing that you will not lose a lot is actually a useful thing, and sometimes worth paying a little money for.
This result is not exciting, but it might be quite good or quite bad depending on the rest of the personal situation.

One thought:

It's a sure bet that inflation will not be exactly what everybody expects. It will be higher or lower.
If it's lower, then T-note ladder will outperform a TIPS ladder.
If it's higher, then a TIPS ladder will do better than a T-note ladder.
If you have a strong and well informed opinion about the direction of inflation--better than the global market consensus--then you know which one to pick.
I don't have a clue, and I suspect you don't.
A corollary: if you do NOT know whether inflation will surprise to the upside or the downside,
then the sensible prudent approach is to buy half and half.
i.e., assuming a ladder is a good choice for you, put half the money into a T-note ladder and half into a TIPS ladder.
One of them will turn out to have been a great idea, maximizing your after-inflation income with no additional risk.
You just don't know which one, so it's best to buy both.


I'm sure you have considered an immediate joint life annuity for some part of your assets, so no need to discuss that as an alternative or companion choice.


Personally I like equities and would do something else. But that's just me.
We are both retired, but you have different age, wealth, preferences, skills, and situation.
For whatever it's worth, my liquidation scheme might look more like this:
I have built my retirement fund around mostly Berkshire Hathaway stock, which I know well and know how to value.
It's unusually cheap at the moment. Not record breaking, but definitely more attractive than usual.
I believe one could buy a block of Berkshire shares and do the traditional 4% "safe withdrawal rate" indefinitely.
That is, sell stock and spend the money corresponding to 4% of initial dollar amount, rising with
inflation, and end up with a bigger portfolio in real terms 10 or 20 years from now.
You have to put in a sell order periodically, so it's a nuisance unless you use a broker that will do it for you.

Or...it could be even simpler than doing the dollar amount division and inflation calculations.
If you sell 1% of the original share count each quarter it will generate income for 25 years.
I believe the dollar amount will rise considerably.
Most people would not be happy with that level of concentration, but you could do the same with a portfolio of (say) 50% BRK and 50% the S&P 500.
(my strong preference for safety is RSP, not SPY, but the following figures assume SPY, a conventional cap-weight index fund)
I've tested that 50/50 choice. Each quarter spend all dividends, and also liquidate and spend 1% of original share count.
If you had started that in 1999 when both were insanely overvalued, a nice torture test,
the result would have been:
Inflation adjusted income would have started out at 4.69% of the portfolio value the first year,
and risen by inflation plus 4.88%/year for the last 22.75 years.
The remaining portfolio value would still be 45% of the original size, 26% of the original inflation adjusted, with just 2.25 years to go.
That's a great pension result, and that's with a terrible starting date.
Today's date is terrible for SPY but good for BRK.
Of course, if you live past age 107 it's a problem, as it lasts only 25 years as described.
But you could buy a fantastic life annuity at age 105 with what's left of the portfolio, so that's not really a problem.

Jim
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If you sell 1% of the original share count each quarter it will generate income for 25 years.
I believe the dollar amount will rise considerably.


Thanks for all this, Jim. I find it very valuable, as I too am in my early 80s. However my personal hope is to leave as much as possible of our modest net worth to our four sons. So my goal is to preserve whatever assets we can while affording an enjoyable life to my wife and myself and assisting our sons as best we can.

I've been retired for about 16 years. During the last 11.5 of those years our net liquid assets have increased by 44.7%, after withdrawals of 80.7% of initial value (despite a decline of 12.4% YTD). That spans a mostly bull market, of course, and reflects the benefit of having owned mostly BRK and enjoying what for us is a significant Social Security income. We own a comfortable home in a beautiful neighborhood and are presently free of debt. While we don't live extravagantly, we've been able to meet our needs and satisfy our mostly modest aspirations with average annual withdrawals of 4.7% of running liquid asset value.

So now I'm trying to translate the plans you're proposing here into something that might leave as much as possible to our family. Your remarks would suggest that our home could easily secure a loan far more than adequate to purchase a deferred annuity at any point, thus freeing us up to continue enjoying the benefits of hopefully more fruitful equity investments.

If you have any thoughts for how best to address this scenario, I'd be most receptive to learning of them.

Thanks again for all you contribute to the lives of so many.

Tom
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If you have any thoughts for how best to address this scenario, I'd be most receptive to learning of them. ...

Sounds like you're doing a fine job.

In a way there are three broad categories of retired people with some funds--

* Those not particularly interested in leaving a big estate who are rich enough, or old enough, that a positive return on their funds is not a big problem.
Annuities are a common item for discussion, especially if they are older.

* Those that are a bit younger, also not primarily focused on leaving a big estate, whose main
interest is having a positive return to maximize spendable wealth which will last their lives.
This becomes a discussion about investing for positive return (generally equities) while
managing the longevity risk.
I usually suggest people first consider at two-step: put a small percentage of the money into
a long-deferred annuity (purchased either immediately or when that time comes), and put the rest
into an equity portfolio that you run down to zero at the date that kicks in.
e.g., a 65 year old might put 15% of the pot into an annuity that kicks in at 88,
and liquidate and spend the other 85% in a more or less straight line over 23 years.
Just as the investment portfolio runs out, the longevity insurance kicks in.
Annuity income rates starting at that age aren't bad.

* Those interested in living well, but also leaving a nice big estate.


As you're in the third category, maybe just keep doing what you're doing.
I'm a big fan of small periodic liquidations of a stock portfolio over time.
Some sales will be at terrible valuation levels, some will be at good multiples, but on average over long periods it will be average.
Especially if you can choose to have a little variability in the amount raised each quarter.
(if it's the first quarter of 2009, maybe defer that liquidation a few months ??)

The way I would manage money in that situation is forget that you have a finite life span:
Just invest for the long term. Which means, in this era, no bonds, just equities.
(plus a little cash for the current period or a bit longer--NOT a huge pile like 6 years of expenses)

If you want a small boost to your income, and reduce longevity risk further, maybe consider a small portion of the capital in an annuity?
You've reached the age that a bit of category 1 applies: you won't get a return on that money,
but it buys a lot of "tail risk" insurance for a modest fee if you live to age 120.
Given that you have a solid portfolio anyway, it's less about tail risk and more about adding
a bit of current income for the rest of your lives without worrying about calculations or its [further] effect on the estate.
Presumably you want to really enjoy yourselves and not leave it ALL in the estate.
No sense being imprudently frugal.

But if you consider an annuity slice, realize that it will almost certainly be a negative sum.
i.e., the amount of money you get from it, plus the amount of money in your estate, will be smaller having made this choice.

Annuities are a terrible, terrible deal for someone just retiring, since they generally have no return at all.
The premium is not an investment at all, it is an expense: an insurance premium.
But as you get older, it becomes much more about the advantages of risk pooling, not the return on money.
They're a lot more like a fair deal for someone 85 than they are for someone 65.

Then there is the question of what to invest in.
I trust Berkshire a lot, and that's most of my portfolio, but not everyone feels that comfortable.
It has an exceeding low single-company risk, but it is still a single company.
Some judicial decision could hit it, perhaps?
If I wanted to diversify some of that money I might consider having a block of QQQE, the Nasdaq 100 equal weight index.
It has 1/100th the company specific risk by definition, has typically risen in value at a remarkably similar rate,
and it not currently particularly overpriced compared to its history. A few percent at most, based on my estimates.
(both Berkshire and QQQE have risen in value in the vicinity of inflation + 8%/year for 20+ years--
a figure which dwarfs the value growth of the S&P 500 which is also expensive these days on almost any metric)
Sure, QQQE will probably be cheaper at some point, but it's hard to rely on "probably".
Just something for the suggestion box.
At the moment, Berkshire is quite cheap. If I were to switch a bit of money from BRK to QQQE, which I might do, I would keep an eye on the ratio of the two.
If switching an investment, it doesn't matter if what you're selling has done well or badly lately, only the ratio!
This is a graph of the ratio. When the line is flat, the two are doing equally well.
If one were going to switch money from BRK to QQQE, you'd want to do it when the ratio line spikes upwards.
https://stockcharts.com/h-sc/ui?s=BRK%2FB%3AQQQE&p=D&...
This May would have been much better than last November.

Jim
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Going with BRKB and QQQE, if you had none now, what would be a good plan to work into them? Avergage in monthly etc?
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Then there is the question of what to invest in.
I trust Berkshire a lot, and that's most of my portfolio, but not everyone feels that comfortable.
It has an exceeding low single-company risk, but it is still a single company.
Some judicial decision could hit it, perhaps?
If I wanted to diversify some of that money I might consider having a block of QQQE, the Nasdaq 100 equal weight index.
It has 1/100th the company specific risk by definition, has typically risen in value at a remarkably similar rate,
and it not currently particularly overpriced compared to its history. A few percent at most, based on my estimates.
(both Berkshire and QQQE have risen in value in the vicinity of inflation + 8%/year for 20+ years--
a figure which dwarfs the value growth of the S&P 500 which is also expensive these days on almost any metric)
Sure, QQQE will probably be cheaper at some point, but it's hard to rely on "probably".
Just something for the suggestion box.
At the moment, Berkshire is quite cheap. If I were to switch a bit of money from BRK to QQQE, which I might do, I would keep an eye on the ratio of the two.
If switching an investment, it doesn't matter if what you're selling has done well or badly lately, only the ratio!
This is a graph of the ratio. When the line is flat, the two are doing equally well.
If one were going to switch money from BRK to QQQE, you'd want to do it when the ratio line spikes upwards.
https://stockcharts.com/h-sc/ui?s=BRK%2FB%3AQQQE&p=D&......
This May would have been much better than last November.

Jim
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Going with BRKB and QQQE, if you had none now, what would be a good plan to work into them? Average in monthly etc?

There is no hurry.
If I wanted to move some money across, I'd keep an eye on the ratio. Bookmark the graph in my post.
Maybe switch a little now, as QQQE is somewhat more reasonably valued than has been true lately.
But I'd wait before swapping the bulk.
Switch another block the next time the ratio looks attractive.
(probably a panic in the tech world, but who knows?). Repeat as necessary.

One reason is that relative valuations right now suggest a brighter short term for Berkshire.
One year returns are wildly unpredictable, but one can estimate the most likely number.
The return about which you could say "it's a 50/50 shot whether the result will be higher or lower".
Berkshire is cheap enough at present that the one year "most likely" figure is very strong, close to 20%.
QQQE is much more random in short time frames, so the error of the guess is likely to be bigger, but the central figure for the next year is probably at/under 10%.
So, it seems reasonable that a 10%+ shift in the ratio is not an unreasonable thing to wait for.

Switching from one position to another is unusual.
For long run returns, it doesn't matter how long you wait or how well the pair has done.
It's only the ratio at the moment you switch that matters.

Jim
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There is no hurry.
If I wanted to move some money across, I'd keep an eye on the ratio. Bookmark the graph in my post.
Maybe switch a little now, as QQQE is somewhat more reasonably valued than has been true lately.
But I'd wait before swapping the bulk.
Switch another block the next time the ratio looks attractive.
(probably a panic in the tech world, but who knows?). Repeat as necessary.


Maybe a moving average could help inform the decision? Here's a 2-year EMA-10 EMA-65 chart:

https://stockcharts.com/h-sc/ui?s=BRK%2FB%3AQQQE&p=D&...

Maybe do a 75% / 25% ratio. 75% BRK, 25% QQQE whenever BRK is doing better, and 75% QQQE when it's doing better. Not too much whipsawing.

Tails
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Maybe a moving average could help inform the decision? Here's a 2-year EMA-10 EMA-65 chart...

Hmmm, I'm not sure I'd try this as a trading system.
There is no reason to believe the range will always be the same.

But for a "slightly better than random" way to shift money from one to the other,
I was just thinking of something a bit simpler, at least for those who care about optimizing.
Most people feel more comfortable with a dollar cost average approach: switch some money every 2 months.

Vary that by the current ratio:
At a ratio of 3, move half the usual dollar amount.
If the ratio is 4, move the usual amount.
At a ratio of 5, move twice as much as usual.
at a ratio of 6, move all the rest you were ever going to move.

If you forget the rule or lose the bookmark, just move the usual amount : )

I, along with pretty much everyone, thinks the Nasdaq companies will be quite a bit cheaper at some point in the next 6-24 months.
But I have no idea if that's correct!

Of course, personally I'm perfectly happy with my overweight Berkshire position.
I won't buy QQQE or anything similar unless it's really cheap, but that's partly because I'm not really an index kind of guy.

For a trading system, the ones that has made me the most money is this one:
When Berkshire is cheaper than usual, buy a lot of it, then sit on your hands for a while.
Today counts.
Berkshire's valuation levels have mostly been in a slightly cheap band since around 2008.
If the near future were to resemble the average in that era, one might expect a return in the vicinity of inflation plus 21% in the next year.
Maybe inflation plus 15-16% in the next two years?
Those numbers will be wrong, but the notion is that it's a 50/50 shot whether they're too high or too low.
That expectation could be off by quite a lot and it would still be a pretty good stretch.
I estimate it has been this cheap or cheaper around 13-15% of the time since '08.

Jim
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If I wanted to move some money across, I'd keep an eye on the ratio. Bookmark the graph in my post.
Maybe switch a little now, as QQQE is somewhat more reasonably valued than has been true lately.
But I'd wait before swapping the bulk.
Switch another block the next time the ratio looks attractive.
(probably a panic in the tech world, but who knows?). Repeat as necessary.

One reason is that relative valuations right now suggest a brighter short term for Berkshire.
One year returns are wildly unpredictable, but one can estimate the most likely number.
The return about which you could say "it's a 50/50 shot whether the result will be higher or lower".
Berkshire is cheap enough at present that the one year "most likely" figure is very strong, close to 20%.
QQQE is much more random in short time frames, so the error of the guess is likely to be bigger, but the central figure for the next year is probably at/under 10%.
So, it seems reasonable that a 10%+ shift in the ratio is not an unreasonable thing to wait for.

Switching from one position to another is unusual.
For long run returns, it doesn't matter how long you wait or how well the pair has done.
It's only the ratio at the moment you switch that matters.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

But for a "slightly better than random" way to shift money from one to the other,
I was just thinking of something a bit simpler, at least for those who care about optimizing.
Most people feel more comfortable with a dollar cost average approach: switch some money every 2 months.

Vary that by the current ratio:
At a ratio of 3, move half the usual dollar amount.
If the ratio is 4, move the usual amount.
At a ratio of 5, move twice as much as usual.
at a ratio of 6, move all the rest you were ever going to move.

If you forget the rule or lose the bookmark, just move the usual amount : )

I, along with pretty much everyone, thinks the Nasdaq companies will be quite a bit cheaper at some point in the next 6-24 months.
But I have no idea if that's correct!

Of course, personally I'm perfectly happy with my overweight Berkshire position.
I won't buy QQQE or anything similar unless it's really cheap, but that's partly because I'm not really an index kind of guy.

For a trading system, the ones that has made me the most money is this one:
When Berkshire is cheaper than usual, buy a lot of it, then sit on your hands for a while.
Today counts.
Berkshire's valuation levels have mostly been in a slightly cheap band since around 2008.
If the near future were to resemble the average in that era, one might expect a return in the vicinity of inflation plus 21% in the next year.
Maybe inflation plus 15-16% in the next two years?
Those numbers will be wrong, but the notion is that it's a 50/50 shot whether they're too high or too low.
That expectation could be off by quite a lot and it would still be a pretty good stretch.
I estimate it has been this cheap or cheaper around 13-15% of the time since '08.


Thanks again. I very much appreciate your practical suggestions for how to balance a combination of BRK and QQQE. All the logic makes sense to me. My remaining questions have to do with the specifics of implementation.

Based on your remarks, I'm inclined to shift perhaps 5% of my oversized BRK position to QQQE now, just to fully integrate it into my financial management system. After that, as BRK's P/FV is unusually low at the moment, and QQQE's P/FV appears to be less juicy, I'll keep an eye on that ratio and adjust accordingly, with the goal of gradually balancing the two positions.

The chart you provided appears to show the relationship between their changing prices over time. I'd like to also be able to trace the relationship between their respective fair values over time, ideally within some historical context. Thanks to you and others here, I'm able to do that for BRK. Is a comparable metric available for QQQE?

Thanks again.

Tom
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The chart you provided appears to show the relationship between their changing prices over time.
I'd like to also be able to trace the relationship between their respective fair values over time,
ideally within some historical context. Thanks to you and others here, I'm able to do that for BRK.
Is a comparable metric available for QQQE?


I track the trend earnings of QQQE.
So, my fair value estimation process goes like this:
Calculate the earnings yield each day through time.
Since it's an equal weight index, the median earnings yield on a given day gives a good idea for the whole and is numerically very steady over time, unlike the average.
Given a no-dividend index series, convert the daily earnings yields into daily estimated earnings figures for the index.
Inflation adjust all those earnings figures.
Create a trend line through the real earnings figures. (it is an *amazingly* good fit since 2005--R squared 0.946)
Estimate today's "on trend" earnings using that trend line. Earnings are pretty close to the trend line right now.
Divide that trend earnings figure into the current price to calculate the earnings yield now.
Compare that EY to the average EY in the last (say) 15 or 25 years to get an idea of whether it's overvalued or undervalued right now.

Using this sort of method my latest estimate is that QQQE would be trading at about $61-66 if it were at the average valuation level since the tech bubble.
There are lots of steps in the process, meaning this isn't a precise calculation.
But it gives a strong impression that today's price of $64.57 is neither a particularly high nor particularly low valuation level.
It seems pretty normal within rounding error.

So, how to value it in future?
You would probably be OK for quite some time just extrapolating the trend line for a while.
Use my fair value range, adjust for inflation after today, and add about another percentage per year for trend value growth to get a fair value in the future.
My "best" and "more conservative" trend lines rose at about inflation+8.1%/year and inflation+7.1%/year.
So you could probably use inflation plus 7% as the value growth rate and not be overestimating the value.
CPI was 292.3 when I last did the analysis to get the $61-66 figures.

If both Berkshire and QQQE were trading at their average valuation levels in the last ~16 years,
and both have a typical year of progress of value growth,
then you might expect a one year return around 12-13% better for Berkshire than for QQQE starting now.
Or half that advantage for two years, if they're both at average valuation levels two years from now.
A lot of "ifs", big error bars, but broadly speaking Berkshire is rather cheap right now whereas QQQE is about fairly priced.
Or so my spreadsheets tell me, anyway. Sometimes I'm wrong.

Jim
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So, how to value it in future?
You would probably be OK for quite some time just extrapolating the trend line for a while.
Use my fair value range, adjust for inflation after today, and add about another percentage per year for trend value growth to get a fair value in the future.
My "best" and "more conservative" trend lines rose at about inflation+8.1%/year and inflation+7.1%/year.
So you could probably use inflation plus 7% as the value growth rate and not be overestimating the value.
CPI was 292.3 when I last did the analysis to get the $61-66 figures.


Thanks Jim. Seems doable.

Or so my spreadsheets tell me, anyway. Sometimes I'm wrong.

I'll take your spreadsheets over my conjecture anytime.

Tom
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Or so my spreadsheets tell me, anyway. Sometimes I'm wrong.
...
I'll take your spreadsheets over my conjecture anytime.



I hear you.
Not that I think mine are better than those of others, but the general idea:
Even a dodgy compass is better than being blindfolded.

The future is uncertain and companies are hard to value, but hey, you gotta take a stab.
I kind of feel sorry for people who have no idea of the value of what they invest in.
It must be scary.
Or maybe it's only scary for the subset who realize it's something you should know. An even scarier thought.

The highway is full of drivers who don't look out the windshield, and haven't figured out that it's something you should try.
No matter how muddy it is.

Jim
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Jim says:


If I wanted to diversify some of that money I might consider having a block of QQQE, the
Nasdaq 100 equal weight index. It has 1/100th the company specific risk by definition,
has typically risen in value at a remarkably similar rate, and it not currently
particularly overpriced compared to its history. A few percent at most, based on my
estimates. (both Berkshire and QQQE have risen in value in the vicinity of inflation
+ 8%/year for 20+ years--a figure which dwarfs the value growth of the S&P 500 which is
also expensive these days on almost any metric) Sure, QQQE will probably be cheaper at
some point, but it's hard to rely on "probably".


Following you over from the BRK board. I am intrigued by your QQQE discussions. Can you
say something about how you would estimate its valuation which would lead you to say it
is not significantly overpriced.

By the by, I fall in your third category. BRK is the largest chunk of my portfolio (bought
more recently). And based on valuations, I also hold a good size of Emerging Markets
which I suspect you'd criticize due to China exposure. Real estate is a pretty big chunk.
But still have a fair bit of cash to deploy and you've got me thinking QQQE.
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I said:


Can you
say something about how you would estimate its valuation which would
lead you to say it is not significantly overpriced.


I should have read ahead in the thread. I see you addressed just what I
asked.
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I am intrigued by your QQQE discussions. Can you say something about how you would estimate its valuation which would lead you to say it is not significantly overpriced.

Try further up the thread, post 283819
If you have more questions, I'm likely to see them.

And based on valuations, I also hold a good size of Emerging Markets
which I suspect you'd criticize due to China exposure. Real estate is a pretty big chunk.
But still have a fair bit of cash to deploy and you've got me thinking QQQE.


I have no problem if you want to be invested in China. Go for it.
My opinion is limited to the notion that the risks of an extreme downside, given the 100%
arbitrariness of "governance", are quite a bit more substantial than I'm comfortable with.
Mainly I wouldn't invest anything there I wasn't prepared to lose completely.
At 0.1% of my portfolio, I'm willing to have fun. I have some BABA calls, even though 1/3 of the
company value has simply disappeared overnight more than once already.
Not price drops, the evaporation of actual business entities.
My motto: don't sell fire insurance on a building that's already on fire.

Jim
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