Tag Archives: Annuities

Saving and Investing for Retirement: Part Four

Generating Income: Part Four of Our Special Five Part Series

During their working years, investors focus on saving and investing with a goal of building wealth.  As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income.  This transition from building wealth to income generation is the subject of a great deal of research in retirement planning.  Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years.  Continue reading

The Challenge of Long-Term Income: Part II

In Part I of this article, I explained why I have issues with the traditional idea that individuals should provide for their required level of retirement income (beyond what is provided by Social Security and any pensions) entirely with assets with zero risk of loss of principal (e.g. Treasury bonds).  In Part II, I discuss the alternative approaches.

There are two investments that have zero loss of principal: traditional Treasury bonds and Treasury Inflation-Protected Securities (TIPS), which are Treasury bonds with embedded protection against inflation.

I agree with the notion that people need to save and invest so as to be able to provide a very reliable and consistent income stream in retirement.  Zvi Bodie has presented a compelling argument that investments in stocks do not become less risky as you hold them for longer periods, so that investors cannot rely on stocks as part of their required income stream.  I have performed detailed analysis of Bodie’s argument and I agree with his argument: the magnitude of loss that you can face with an equity-heavy portfolio increases the longer you hold the portfolio.  As I noted in Part I, William Bernstein has recently advocated for a portfolio in which all of your required income is provided by Treasuries and annuities, largely consistent with Bodie. Continue reading

Retirement, Risk and Creating a Lifetime Paycheck

Remember those kids from grammar school who were always top of the math class? They grew up to become actuaries. According to the web site of the American Academy of Actuaries, an actuary is an expert in “putting a price tag on risk.” They use math, statistics, economics and finance to predict the likelihood of future events and then try to come up with solutions.

They also appear to be the only people in the world who really understand pension plans.

Risks in Retirement

The Society of Actuaries (SOA) recently did an in-depth analysis of its 2009 study of the key risks in retirement. Since these guys are all about risk, it seems worth paying a little attention to the issues they highlight. Continue reading

How Much Income in Retirement?

One of the most important questions that investors need to understand is how much income they can expect to safely draw from their portfolios over a long time horizon.  This income problem is often characterized as an attempt to determine a safe or sustainable withdrawal rate (SWR).

I have written about sustainable withdrawal rates in a range of articles, as well as in detailed case studies.  While there are many variations on the theme, the most commonly discussed outcome from SWR studies is what is called the ‘4% rule,’ which states that you can safely draw an inflation-adjusted income equal to 4% of the value of your portfolio in the year of retirement.  If you retire with $1 Million, you can draw $40,000 the first year, and then increase this amount each year by 3% to keep pace with inflation.

Questioning the 4% Rule

To begin any discussion of SWRs, it is important to understand the assumptions that go into the 4% rule. Continue reading