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[This analysis is prompted by a question that was posed on another board. The subject is off-topic for that board, as it was really a retirement income question. So I moved it here. It was an interesting exercise to work up.]


Scenario:
By active investing, client has built up a $2M investment portfolio. He is now 65 years old and wants to retire with a steady income from the portfolio. Has "won the game" and now wants to have a no-drama, no-excitement portfolio. Does not want to have any more stock volatility, does not want to have to face 20% or 50% drops in year-to-year value anymore.
Any significant stock allocation is not acceptable. Wants to have a near zero chance of running out of money.

The task is: How to invest that $2M. For simplicity, ignore inflation -- even though inflation will certainly be a concern over a period of 35 years remaining lifetime.

============
One possibility:
Put the entire $2M into Tax-Exempt high-quality municipal bonds (such as VWIUX).
This pays approx $68,000 annually. (The equivalent taxable income would be about $80,000.) The principal balance would swing up and down as interest rates changed, but the dollar amount of the dividends would be fairly stable. The principal balance would certainly not swing as wildly as stocks would.

If $68,000 income is enough, that's it.

If the need is more than $68,000, then he will have to dip into principal. Eventually the account will be depleted and run out of money. So if he does this then he needs to make sure that the money will not run out in his lifetime.

The SSA mortality table says that he has essentially zero probability of living past 100, so it seems that he'd be safe in figuring that the portfolio must last for 35 years -- age 65 to age 100.

He could take $80,000/yr and the age 100 balance would be $1M
$90,000/yr and the balance would be $400,000
$95,000/yr and the balance would be $50,000

So the portfolio would sustain $90,000/yr and still last beyond age 100.

============
An alternate possibility:
Put 90% ($1.8M) of the $2M into municipal bonds as above.
Put 10% ($200,000) into a long-term stock market investment that would be ignored and untouched for 25 years.

The first 25 years of retirement, to age 90, he would take income from the municpial bonds, including tapping principal. At age 90, if he is still alive, sell the stocks and put that money into municipal bonds as above.

Looking at the different components, first the $1.8M of bonds.
He could take $80,000/yr and the age 100 balance would be $421,000. He would never need the money that was in stocks.
or

He could take $80,000/yr and the age 90 balance would be $990,000.
$90,000/yr and the balance would be $590,000
$95,000/yr and the balance would be $390,000

At $95,000/yr the account runs out of money in 29 years or age 94.

Second, Looking at the $200,000 invested in stocks, ignored and untouched for 25 years.
Using the historical S&P500 data, including reinvested dividends, on average the stock account would be $2.5M.
The historical worst case 25 year period the stock account would be $1.2M.
Capital gains tax would reduce this amount by 15%.

But the worst case in the past isn't necessarily the worst that can every happen. Let's work with a value that is one-half of the historical worst case -- $600,000.

Now at year 25, age 90, we sell the stocks and put that money into municipal bonds. The total amount in bonds will be:
$1.6M if he was taking $80,000/yr or
$1.2M if he was taking $90,000/yr or
$1M if he was taking $95,000/yr

If he was taking the recommended maximum of $90,000/yr, in this half-cut worst case, the money would last another 18 years, to age 108.

In the historical actual worst case, the $1.2M in stocks would be added to the $590,000 in remaining bonds for a total of $1.8M. Which is coincidently the same as we started out with. This would last for 32 years, to age 122.


============
Another alternate possibility:
Put the entire $2M into an Indexed universal life (IUL) policy. We'll ignore the logistical problems of putting $2M all at once into an IUL -- which are not inconsiderable, since the IRS has rules in place that are designed to prevent exactly that.

If we ignore the price of the life insurance that is an integral component of an IUL, at a withdrawal of $68,000/yr the IUL runs out of money in 27 years - age 92.
At $90,000/yr, the IUL runs out of money in 19 years - age 84.

But we cannot ignore the price of the life insurance. Life insurance at age 65 is very expensive. Easily $20,000 to $50,000 a year -- depending on how the IUL is structured. Even at $20,000/yr he would have to effectively withdraw $88,000 to get $68,000 of income.
And the IUL would run out of money in 19 years - age 84.

This alternative fails - it does not last 35 years.

============
Another alternate possibility:
Use the entire $2M to buy a Single Premium Immediate Annuity (SPIA).
Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone. All there is is the $132,000/yr income.
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Another alternate possibility:
Use the entire $2M to buy a Single Premium Immediate Annuity (SPIA).
Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone.All there is is the $132,000/yr income.


I realize it may not be for some, but I view that as a lot in retirement, particularly if he has SS or pension on top. He could always save off the top if he wants to leave some behind.

IP
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The downside is the low risk of the annuity company going bust. May be a very low risk, but the outcome is horrible for this person.

If annuities are desired perhaps several different companies.
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My 92 year old Dad has his money set up similar to your first scenario. He has a chunk of $ in PRVAX, some money in actual municipal bonds that expire every so often, and some dividend yielding stocks. The dividends and SS pay his nursing home bills, AFLAC, Medicare D, and incidental costs totaling about $75,000 per year and his medical costs zero out his minor taxable income.

He also has a small IRA which DRIPs and grows during the year. I take his 10% RMS out at the end of the year and put it in his main account described above.

He estimated his retirement age as 100.
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JonathanRoth writes,

The downside is the low risk of the annuity company going bust. May be a very low risk, but the outcome is horrible for this person.

</snip>


Not only that, but single premium immediate annuities (SPIA) sold by insurance companies are terrible deals for almost everyone.

If you delay taking Social Security until age 70, you're effectively buying an SPIA for 50% less than what an insurance company would charge for the same monthly benefit.

http://retireearlyhomepage.com/bad_annuity.html

intercst
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No. of Recommendations: 1
Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone. All there is is the $132,000/yr income.

If one spent $95,000/year to match your first possibility and invested the remaining $37,000/year, there would be quite a bit left at the end.
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How much do they need per year?

How much will they receive each year from social security?

How much risk are they comfortable with?

PF
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If you delay taking Social Security until age 70, you're effectively buying an SPIA for 50% less than what an insurance company would charge for the same monthly benefit.

Which is great if you happen to be looking for exactly the amount that SS determines for you, no more and no less. And it's not really a large amount. The maximum (age 66 FRA) benefit is $2642. If you delay to 70 you'll get another $845/mo or $10,145/yr.

I get a quote of $149,000 premium for an SPIA paying $845/mo. So, yeah, if you want to buy $845/mo it's better to pay $75K than $150K -- but it's nowhere near enough to fund a $6000/mo need.

And very few people receive the maximum SS benefit. The average person would get more like $450-$500/mo extra by delaying to 70.

All in all, I view this as akin to the fancy schemes to earn 6% on your bank account ... on a maximum of $10,000. Yeah, great percentages, but the actual dollar amounts are peanuts.


All being theoretical. At the current interest rates, SPIAs suck and you shouldn't be buying one at all.
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Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone. All there is is the $132,000/yr income.

If one spent $95,000/year to match your first possibility and invested the remaining $37,000/year, there would be quite a bit left at the end.


Not to mention that only a portion of the $132,000 is taxable, at least until all of the $2mn is paid out.

I ran a quick illustration that yielded $94k in income, around $70k taxable and that increased 2% each year for life. Any of the $2mn not paid to the annuitant would go to his estate. Choose no refund and the amounts starts with $103k and increases from there.

And, if he blows out the mortality tables (says the guy with 3 relatives who broke 100 and 2 more closing in.), he can never out live the income.

B
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rayvt: "I get a quote of $149,000 premium for an SPIA paying $845/mo. So, yeah, if you want to buy $845/mo it's better to pay $75K than $150K -- but it's nowhere near enough to fund a $6000/mo need."

I am not sure I understand that response. Your hypothetical dealt with the person who had already saved $2,000,000. Under that scenario, s/he need only withdraw dividend/interest income in the amount of 3.6% per year to meet the $6,000 per month need while letting his/her Social Security benefit grow in value by roughly 8% per year from the ages of 66 to 70.

Then, when s/he starts receiving the additional $10K per year at the age of 70, s/he will also receive the benefit of that number getting inflation adjustments from then on.

As for evaluating the numbers on a case by case basis, the Social Security retirement calculator is one of he easiest calculators around. You sign up, give them an answer to a personal question, plug in your SSN, get your actual estimates for various retirement ages, and then decide whether the numbers add up favorably.
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Use the entire $2M to buy a Single Premium Immediate Annuity (SPIA).
Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone. All there is is the $132,000/yr income.


Well, if the 90k per year was enough, you wouldn't need to buy 132k of annuity income. I hazard a guess that a 90k SPIA would cost about $1.4 million. That leaves $600k unspent. Stick that in 5 year CDs. If he manages to get an overall average of 3% on those CDs (a bit of a stretch today, but not outrageous historically), he'd end up with $1.6 million after 35 years.

Or the $600k could be the source of inflation increases to the SPIA. With CD interest rates at 3% and inflation at 2%, the $600k lasts to age 98. (Techncially a failure, but just barely.)

And if you really wanted to go with 90k per year to live on with inflation adjustments, buy a $95k annuity for perhaps $1.5 million, put the remaining $500k in CDs, and save the excess SPIA payments for the first few years. Then the same 3% CD return and 2% inflation makes it to age 100 (and fails at age 101). At age 90, you've still got more than $500k in CDs and can still leave a little something to charity (or the grandkids).

--Peter
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rayvt: "I get a quote of $149,000 premium for an SPIA paying $845/mo. So, yeah, if you want to buy $845/mo it's better to pay $75K than $150K -- but it's nowhere near enough to fund a $6000/mo need."

I am not sure I understand that response. Your hypothetical dealt with the person who had already saved $2,000,000. Under that scenario, s/he need only withdraw dividend/interest income in the amount of 3.6% per year to meet the $6,000 per month need while letting his/her Social Security benefit grow in value by roughly 8% per year from the ages of 66 to 70.


Perhaps I buried my point.

For someone who is retiring with $2M, their SS benefit is pocket-change.
On the scale of pocket-change, there is no significant difference between $X and $X + 0.32X. Even 2X a (relative) pittance is still a pittance.

Sure, you can buy a $845/mo annuity from SS, but that's only useful if you want an additonal $10,000/yr (exactly) annuity. If you want a $80,000 annuity or a $122,000 annuity, you can't get that from SS.

That $10,000 is so far away from $122,000 that it's hardly worth doing. You have to do something else anyway (commercial SPIA, bonds, etc.) so the SS annuity is just a tidbit of extra work for an amount that gets lost in the round-off.
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Rayvt analyzes,

That $10,000 is so far away from $122,000 that it's hardly worth doing. You have to do something else anyway (commercial SPIA, bonds, etc.) so the SS annuity is just a tidbit of extra work for an amount that gets lost in the round-off.

What extra work? All you're doing is delaying your phone call to start Social Security until age 70. Even if you want to buy a $1 million annuity, if you can reduce the price of the first $250,000 in annuity premiums by $130,000, why wouldn't you do that?

I don't know about you, but if I see $130,000 scattered on my kitchen floor, I'm picking it up.

intercst
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personally I would stay away from annuities and bonds. I'd put in the stock market fund such as the 500 index and short term corporate bond fund. Simple and sweet and you're not financing the advisors second home. :)
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One thing that no one mentioned that if the 'client' has 2 million, how much of it would be taxable if it were moved to a different asset?

Like 15% of it in cap gains tax if he sold long term held stocks to put into Muni bonds? That's $300,000 of his portfolio gone to Uncle Sam if he moves 100% of it!

----

Second, the average inflation rate over the years is a couple percent. If he lives to 90, he's going to be behind the 8 ball when it comes to paying the bills, and periods of much higher inflation have been known.

I remember living through 1975 to 1985 when the treasury bills were over 13% interest paid! People on 'fixed income' got creamed and prices doubled in less than a decade.

muni bonds may appear 100% safe (they aren't) and they can take a 50% hit if interest rates double, and even bigger hit if interest rates were to spike to 8 or 10 or 12% annually due to inflation. Just go back to the early 1980s for a perfect example.

- - - -

The best thing to do with this client is to get him to read up on diversification.

There is no 'risk free' asset.

You can buy an 'inflation protected' annuity, but you don't get much current return on it.

----

My situation is such...that most of my assets were 'long term'. I keep moving a bit from the dividends/interest over to the 'bond like' side of the portfolio, but with the run up in the stock market, the percentage of stock/bonds keeps heading more toward stocks.

I can easily get by now on living on dividends. Purchased a bunch of nice dividend paying stocks along the way. low taxes on the income, and so far steady increases in dividend payouts over the years as well.

I do have a few percent in muni-bond funds (inherited). They aren't paying much now. I just take the tax free income.

----

I've got 20% of my assets in an IRA....(didn't have to time to stash more - retired 15 years ago).....and I'll have to start tapping it in 2 years at age 70 1/2 to keep Uncle Sam happy.

--------

YOu didn't mention if this client had assets in tax deferred accounts or was going to receive SS or a private pension, or had other income sources.

Nor did you mention his 'wanted' income in retirement vs what he was 'spending' while working.

YOu can throw out all sorts of numbers, $60K, 90K income....but....if the person was frugal to start with, maybe he'll be happier taking out LESS each year - giving him a lower annual withdrawal rate.

I can sense that if this was a client, that a percent or so 'sticks to' the hands of the person making the 'investments' for him. Plus transaction fees, and who knows how much if the 'client' is put into an annuity through a broker.





------

t
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Even if you want to buy a $1 million annuity, if you can reduce the price of the first $250,000 in annuity premiums by $130,000, why wouldn't you do that?

Indeed, I would. But I won't -- because I'm not the least bit interested in buying an annuity in the first place.

"If it's not worth doing, it's not worth doing well."

But, yes, if I wanted to buy an annuity I'd probably look into getting the first $500-$800/mo from the SSA.

Uhh, well, except the "I" in SPIA means "immediate", not "wait until age 70".

In the OP, the scenario was a 65 year old. You can't "buy" the SS pseudo-annuity at 65.

(Hmmm, unless you view 62 as the base age, so then claiming at 65 could be viewed as an annuity paid for by the delay from 62 to 65. That's pretty kinky, though. I don't recall anybody, even you, talking about deferring from 62 to 66. It's always deferring from 66 to 70. And if anything, railing about people taking at 62.)

So, anyway, YAY!!! Our anonymous client took this advice to heart and got a cheap annuity from the SSA by delaying his SS from 62 to 65. High-five!! (Friend wife just walked by, read this, and gave me a pop on the back of my head. Booooo. I was just trying to be helpful.)

(Anchoring bias. Just because SSA calls 62 early and 66 on time doesn't mean it The One Truth. Calling 62 normal and 66 delayed is just as valid. Symmetric, too. The increase from 62 to 66 is 33%, the increase from 66 to 70 is 32%.)


(This 65/66 retirement age thing introduces a lot of static in discussing these things. Everybody thinks of 65 as normal retirement age, SS used to be 65, then SS changed FRA to 66, which is, okay, only 1 year off. But wait til they change FRA to 68 or 69! (That's what the local political ads say Mark Pryor wants to do.) Then nobody will be able to think straight about the math.)
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personally I would stay away from annuities and bonds. I'd put in the stock market fund such as the 500 index and short term corporate bond fund. Simple and sweet

Yeah, me too.

But CCinOC who posed the original question specifically rejects any stock allocation. So a stock/bond portfolio is not acceptable right off the bat.
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Rayvt:

"(This 65/66 retirement age thing introduces a lot of static in discussing these things. Everybody thinks of 65 as normal retirement age, SS used to be 65, then SS changed FRA to 66, which is, okay, only 1 year off. But wait til they change FRA to 68 or 69!"

You probably know this, given your choice of 68 or 69, but the FRA is already rising on the way to age 67 for those born in 1960 or later. Beginning with people born in 1938 or later, thhe 65 FRA age gradually increases until it reaches 67 for people born after 1959.

http://www.ssa.gov/retirement/ageincrease.htm

Regards, JAFO
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But CCinOC who posed the original question specifically rejects any stock allocation. So a stock/bond portfolio is not acceptable right off the bat.

My question would be, how did they get the $2 million accumulated? I'm sure they took some "risk" with stocks. So why the aversion now?

Every option given has its own set of risks, some with a greater perceived risk than others.

Personally, my plan is the gross majority of my retirement income to come from dividend growing stocks. With the dividends covering all my living expenses. And since they are dividend growth stocks, hopefully the increasing dividends keep pace or beat inflation.

In this scenario, I essentially don't care if the stock price goes down or up as long as the dividend is paid and keeps growing. Although it would be nice if they kept going up.

JLC
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personally I would stay away from annuities and bonds. I'd put in the stock market fund such as the 500 index and short term corporate bond fund. Simple and sweet

Yeah, me too.

But CCinOC who posed the original question specifically rejects any stock allocation. So a stock/bond portfolio is not acceptable right off the bat.
Ravvt

?????

well, that's nice. I suppose some like to get a "paycheck" each month, same amount, same time, until they kick the bucket.

I like to make money on my investments so I don't run out of it before I kick the bucket.

I can understand someone having a small annuity just as additional income, but the whole kit and kaboodle is not the wisest thing. Heck, if nothing else, someone could put the money in the bank-give away 3/4's of it to charity to mimic the sales charge/cost of annuity, then draw a set amount of money each month. Voila! They'll get a tax deduction for the donation to recognized charities.

Still, the money is not earning anything.....seems like a waste to me.

I'm a woman and I think most people want to feel secure that they'll never live in their car. I've never committed all my funds in the stock market. I like knowing I can get my hands on cash/check easily in case my life drastically changes.....some sort of economic disaster....without having to sell stocks or other holdings. The bulk of my money is invested...but I have a good sized chunk in MMA's, CD's, Savings Bonds, short term corporate funds and of course, cash on hand.

LuckyDog
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My question would be, how did they get the $2 million accumulated? I'm sure they took some "risk" with stocks. So why the aversion now?

Beats me. Realize that this is just a hypothetical, though, so she doesn't actually have $2M and isn't getting ready to retire just now.

It's taken 2 years of discussions for her to realize that a "naked" (her term) S&P500 position accumulates 3 or 4 times as much money as an IUL, over a 30 year period. She hated it every step of the way, because she just hated hated hated that sometime you'd get a 20%-50% haircut.

Now that the client has "won the game", she wants to never ever take a year-to-year loss. Some people are like that. De gustibus non disputandum est. When they win the game they want to head for the bleachers and clip coupons for the rest of their life.

Me, when I've won the game, the next step is running up the score. ;-)
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Me, when I've won the game, the next step is running up the score. ;-)

Anyone who's watched basketball has seen their team go conservative with a 10 point lead watch it evaporate because they went away from what got them there.

Sure, some changes in asset allocation is prudent with aging, but a complete change of investment strategy seems extreme.
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Use the entire $2M to buy a Single Premium Immediate Annuity (SPIA).
Currently this would buy an lifetime income of $132,000 per year for the rest of his life. But that's it. There is no residual value, either before or after death. Once the $2M goes into the SPIA it is gone. All there is is the $132,000/yr income.


With all due respect, if you're adding a SPIA into the mix as a consideration, you can no longer ignore inflation. Why? Because the only reason a $2M SPIA purchased by a 65 year old pays 132K/yr for life is BECAUSE of inflation.

In general, the IRR on a SPIA at life expectancy will be in the ballpark of prevailing bond interest rates - likely a little higher if current bond rates are below historical norms and vice versa. If we're assuming no inflation at all, then the SPIA payout would almost certainly be lower.

One way of approaching this would be to get a quote for a SPIA with an inflation protection rider or something similar. I'll bet you dollars to doughnuts (whatever that prevailing rate is) that you ain't getting 132K/yr on $2M if you also get some form of inflation protection.

-synchronicity
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Me, when I've won the game, the next step is running up the score. ;-)


Well, goody for you, cupcake. You know what you're doing. Some of us applied a little knowledge and just got lucky (not to the tune of $2M, though).

Karen
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finra has a doohickey on variable annuities and other types.

http://www.finra.org/Investors/ProtectYourself/InvestorAlert...

the finra broker check is a joke though, brokers are allowed to shade their dirty pasts. I know of one of them who lives in this town. WSJ had a big article about how they protect their own. Sad for investors. You have to educate yourself even more if you're going to allow someone else to invest your money, they could sell you a sack of doo-doo and tell you it's a sure thing to make money while they rake in the fees. Anyway, that was my realizations decades ago. :) Oh and yes, he sold me those glorious annuities and once my mind got clear about this fellow and his money losing investments, I got the heck out of them.

Older and Wiser Dog
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Now that the client has "won the game", she wants to never ever take a year-to-year loss. Some people are like that. De gustibus non disputandum est. When they win the game they want to head for the bleachers and clip coupons for the rest of their life.

If they never want to take a loss from year to year, they need to go back to work until they have $4 million. They haven't won they game, they are nearly at halftime. At that point the the 1% CD rate will give them $40,000 per year to live. And they will still need to clip coupons.

JLC
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How do they know they won if they ignore inflation?


In 35 years w/ 3% inflation you would need over $110K to match 40K in today's dollars.
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Anyone who's watched basketball has seen their team go conservative with a 10 point lead watch it evaporate because they went away from what got them there.

Or the prevent defense in football. ("prevent" is pronounced preevent for some reason). What it does mostly is let the other team back into the game.
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My question would be, how did they get the $2 million accumulated? I'm sure they took some "risk" with stocks. So why the aversion now?

Beats me. Realize that this is just a hypothetical, though, so she doesn't actually have $2M and isn't getting ready to retire just now.

You must not remember. I told you why:

There are some people who, having accumulated a tidy sum via naked buy-and-hold over several decades, are thinking…

~ The world and the United States are a different place now.
~ I see our government encroaching in many areas where I think they have no business. When the pols' backs are against the wall, who knows what they're capable of.
~ I see Social Security as vulnerable. When the pols' backs are against the wall, who knows what they're capable of.
~ I think the stock market is cruisin' for a bruisin'--notwithstanding Rayvt's predictive talents.
~ I'm getting too old for risk I readily took when I was younger and still in my robust saving years.
~ I'm approaching retirement and I can't afford to lose any money, let alone a 20-40% drawdown--which I think is imminent.
~ Emotionally, I want off the roller coaster.

But why should you stop being obnoxious now?
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I asked the original question to Dave. I am this person you speak of. I have over 1 million now in a company's stock, will get several thousand more shares of stock through inheritance which brings it to just under 2 mil (todays price). Company is poised to go really big in the next few years. IF this happens, I would like to cash out enough to have an income to retire on and last 40 years - give or take.
The reason to pull up on risk is it will be the main income producer. DH's company doesn't pay into SS, he has a pension. Eventually will get around 1 mil cash from mother's other investments. So holding tight for now, just trying to educate myself for the future, although I will pay someone to invest this money. But CC hit it on the head with her last post. Been on this ride for 20 years, hopefully no more than 10 to go, then I am ready to be set up so we can buy a motorhome and tour around the country.
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CCinOC analyzes,

~ I see Social Security as vulnerable. When the pols' backs are against the wall, who knows what they're capable of.

~ I'm approaching retirement and I can't afford to lose any money, let alone a 20-40% drawdown--which I think is imminent.

</snip>


The surest way to see a 20% to 40% drawdown in your nestegg is to buy an annuity from an insurance company.

Uncle Sam will 'sell' you a single-premium immediate annuity (SPIA) for 50% off the insurance company price?
http://retireearlyhomepage.com/bad_annuity_2.html

</snip>


intercst
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But CC hit it on the head with her last post.
I personally don't agree with most of her bullet points, but I can certainly understand someone wanting to get off the roller-coaster.

Trying to think about what I would do if I did want to get off ---- I'd probably go the tax-free muni route. If 4000+ municipalities went bust, everything else would have already gone bust, too.



Been on this ride for 20 years, hopefully no more than 10 to go, then I am ready to be set up so we can buy a motorhome and tour around the country.

We met a couple once on a cruise, they had a two-sided business card. One side had a Washington address, the other side had an Arizona address. Their house was a motorhome and they moved with the seasons, touring along the way.
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If they never want to take a loss from year to year, they need to go back to work until they have $4 million. They haven't won they game, they are nearly at halftime. At that point the the 1% CD rate will give them $40,000 per year to live. And they will still need to clip coupons.

That's true if they want to leave behind a seven figure estate. If they're willing to die without a lot of cash, $2M invested at 1% interest gives them about $110K a year for twenty years.
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If they're willing to die without a lot of cash, $2M invested at 1% interest gives them about $110K a year for twenty years.

To arrive at $110k a year, you have to spend down capital. So....

Y1 - $2,000,000 at 1% yields $20,000 - withdraw $90,000 to get $110,000.
Y2 - $1,910,000 $19,100 - $90,900
Y3 - $1,819,100 $18,191 - $91,809

I could go on, the overall picture is each year you earn less interest, draw down more, eventually you get to zero at some point. As long as they are good living on $0 the year after they run out of money, good for them. But the year or two before, they will not have $110,000 spending money.

JLC
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But the year or two before, they will not have $110,000 spending money.

I was mistaken.

In fact they would only be able to withdraw $109,733.30 per year, not "about $110,000" as I previously stated.

http://www.mycalculators.com/ca/retcalc1m.html
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Another excellent response - thx for the insight.
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