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thinking-outside-box-build-better-income-portfolioA recent paper by researchers David Blanchett and Michel Finke found that retirees don’t like spending down their wealth (principal). The paper, titled Retirees Spend Lifetime Income, Not Savings, found that retirees spend a much higher percentage of their annuitized income and spend about half the amount that they could safely spend from non-annuitized wealth. It’s actually quite difficult for savers programmed to build a portfolio to suddenly start spending down that portfolio.
Let’s first examine the typical income portfolio and the associated problems I see with such solutions. Then I’ll propose an income portfolio I built for myself and use for others. Below shows just how different these income portfolios are, both using a 40% stock and 60% fixed income allocation, though this can vary greatly, depending on the client’s situation.
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That is, adding guaranteed-income to the fixed-income portion makes retirement income portfolios more stable and less worrisome.
Just don't overdo it (so, partial annuitization to cover basic expenses) and use low-cost SPIAs (not fancy annuities with lots of bells-and-whistles).
Thinking in terms of COLA annuities, I agree with the conclusion that "buying" more SS by delaying benefits is better than buying a commercial annuity with COLAs. Though looking at the reasoning ...
In saying that 10% should be allocated to delaying SS, the paper seems to be saying that this 10% represents the cost of that delay. It calculates that cost for the typical investor to be $108K. Does that mean that the paper is assuming that a typical investor has a $1M portfolio at age 66? Mixing dollars and percentages is confusing at best.
Commercial annuities with fixed COLAs (e.g. 2% of 4% adjustment per year), are dismissed as having higher risk, citing Blanchett.
Blanchett's analysis shows that for these annuities This analysis would seem to also apply to delaying SS benefits. With a commercial COLA annuity, the investor is accepting lower monthly payments at the start in exchange for higher (adjusted) payments later. With delayed SS, the investor is accepting even lower zero monthly payments for four years in exchange for higher payments once SS starts.
There are differences between commercial COLA annuities and SS but this question of possibly increasing inflation risk by delaying SS is not discussed or dismissed.
People's propensity to spend income but not principal, even as that principal appreciates faster than inflation is not exactly ignored. It's finessed rather than addressed directly.
The suggestion is made that because some companies use what would be dividend money to buy back shares (and boost their prices) you're not really selling off principal when you sell shares. You're just capturing these "dividends". As opposed to companies that plow profits back into their businesses, thus raising their value?
I don't have significant disagreements with the conclusions. And it's hard to clearly articulate reasoning in a limited space.
The house is paid for. We're enjoying security we never enjoyed before. And now we're supposed to change our lifestyles to what end? Consume more stuff? Wander around? Geez we did a heck a lot of that on the cheap while we younger and spryer and child free.
Maybe we would have more to not spend if we had buckled down to the grindstone suggested by those folks that sneer at work-life balance. But we have our memories. I always wonder what sort of relationship such people have with their parents. We wouldn't be where we are now without a little help from our parents. If we can help our kids a little, that would make us happy. Seems to me that happy is the point.
No serious argument with the rest of @bee’s article. I think growth of principle on a reasonably consistent basis is what’s important, whether from fixed income / dividend paying stocks / or other. A retired 65 year old is going to view all this differently than a retired 80 year old.
The American anthem. And why we are in such trouble today.
Glad he seems to have recovered from his emergency CABG and Valve surgery.
Housing extensions could very likely trigger higher taxes and insurance. Upgrades, maybe not.
One of these years we will have to replace our HVAC's condenser (cooling unit). When we do, we will upgrade to a heat pump. It will be more efficient resulting in lower utility bills. We might use the heat pump to replace our furnace as well.
We are just south of climate zone 5 meaning, in theory, we can do without a special cold climate heat pump. That may or may not lower heating bills (depending on how gas prices move relative to electric costs), but it would be better for the environment.
We're also looking at upgrading (renovating) our whole kitchen. That could include replacing our gas stove with an induction stove (for health reasons). If we make our home gasless (no gas furnace, no gas dryer, no gas stove), we can cut our connection to the gas company and save monthly connection charges.
I'm not suggesting that these sorts of upgrades are cheap. (This is how you spend down your investments.) But some of them have the potential of lowering utility costs. And they shouldn't affect property taxes the same way as adding on a room would.
Unfortunately others and various charitable and environmental organizations can enjoy what I have reaped after I pass.
I would like to contribute more than we do to various organizations now, except ...
LTC for 2 people can go through a sizable nest egg pretty damn fast. Two in LTC could be $200k+/year!!
And there are also family responsibilities assumed voluntarily - helping out with extraordinary medical expenses, education, and being available as a resource of last resort. Definitely not a complaint - I'm glad we're fortunate enough to be able to help out. But it is a good part of the reason we don't donate more now.
A question or two, if I may? Does vent for stove go outside? Gas is cheaper than electric in your zone, I take it?
Either way ,gas or electric , polluting will take place.
Will the cook be happy with gas? Mind prefers gas!
LTC? Naw. Just give me lots of good drugs and let me fade away, like an old soldier. We could retire to our own newish home in the hills in another country. But my rent here buys me transportation with truly negligible cost, cultural stuff, trade wind climate, fast internet, cash to spend on dinner out sometimes, other personally pleasurable stuff. In that other country, I'd save a bundle on rent; but guess who would come begging, anyhow. Yes, I can say no. Wifey has trouble doing it. Everyone's life is unique. I'm using more dividend-paying single stocks, which hopefully also offers growth; still, it would be a big major undertaking for that element in the portfolio to overtake the mutual funds.
But thanks @msf for the insights into home improvement. I recently replaced the last existing non-insulated (60s era) window in my home with the more modern / energy efficient ”thermal pane” type. Unfortunately, the newer type occasionally fail and fog-up inside, requiring expensive replacement. So, that money saved on heating costs sometimes flies “out the window” years later.
Our city recently started requiring gas detectors near (but not too near) gas appliances. This is primarily to detect gas leaks regardless of whether the appliance is in use. Venting, even if it goes to the outside, won't mitigate those leaks if the fan is only active when the stove is being used.
I've been told that the cost of heating with gas here is much cheaper than using an electric heat pump. (Don't even ask about traditional electric resistance heaters!) I continue to hope that prices converge.
Regardless, and acknowledging that all power production entails pollution, heat pumps can be more "friendly" since the power is required to move heat, not generate it. But heat pump efficiency drops as the temperature gradient (difference between indoor temperature and outdoor winter temperature) increases. That's part of why one's climate zone matters.
You make a good point about satisfaction with induction stoves. I grew up with gas and hate the lack of control on electric stoves. Induction stoves are supposed to be better than electric stoves, but it would be a good idea to do a test run with an induction "hotplate" (single burner countertop unit).
I also like the ability to fine-tune the temperature setting. So I'm currently cooking something at 175, and if I forget about it, the machine turns itself off after an hour unless I have programmed a longer time. In any event, it would never get hotter than 175.
My darling wife loves the blue flame on the gas stove at all seasons. She also buys stuff from Amazon. Otherwise, we all admit She is practically perfect in every way.
I would investigate noise, reliability, and the cost of running a new circuit before looking into going all in on an induction range.
Heat pumps are all the rage in our part of the world. "Older" homes still have gas pipes in place for running gas-fired air conditioners after the end of swamp-cooler season.
Talk about thread drift, yikes.
And what more does a person desire? A bigger house does lead to other expenses. So can buying newer more expensive vehicles. We like our neighbors, which is a big deal. Even if our house has a couple unnecessary rooms. Selling and moving can create a lot of expenses too.
I just cannot think of anything that I truly desire that I don't already have (materially). But, I won't be inconvenienced over money if I can help it. In that regard, travel comes to mind.
OTOH, if I need 1x and have 5x, should I be looking to pass on 10x in 20 years, to people whose lives will not be impacted much by a big influx of cash later in life?