Gyroscopic Investing

i thought  70 too but when i added the other stuff back in to the equation like spending down assets and losing a life time of compounding on them , giving up the checks and the fact that my wife filed early and she won't get almost 3k of a spousal kicker added to hers until i file  made  delaying more than a few years so not worth it.

even the fact you are not capped by law  as far as medicare increase's  unless you are collecting all chip away at any advantages of delaying .

when you file your medicare increases can never be more than the cola adjustment . if you delay you have no such protection and get the full increase.

not many are aware of the hold harmless law.

those with younger wives have to look at survivor benefits and they can be quite complex to figure out as it is not just they get what you got .

there are age reductions for her as well as minimum floors that she can't get less than to consider .

Desert wrote: I'm in a somewhat similar situation to yours, with my wife 4 years younger than me (I didn't do the full 8.5 years younger trophy wife thing). 

Isn't she only considered a trophy wife if I dumped an old hag only to land her? Just trying to escape that label if at all possible!

mathjak107 wrote: the issues you will hit are not only spousal benefits , but the taxing of ss , what you pay for medicare , medicare surcharges , the effects of rmd's on all of that , tax brackets , and medical subsidy's if you go out before  65.

all tie in to each other and effect each other and you need not only real good knowledge on the subject but software to run the different scenario's .

the less you are working with the more important this stuff gets .

you can be right at edge of getting ss taxed , take just 1k more and see a marguinal tax rate of almost 50% on that extra 1k because how all the moving targets interact

Ugh. All true and a bit of a nightmare to contemplate due to all the complexities. But this definitely counts as a "rich white man's" problem.

Oh no, another mathjak post in the meantime. My head is going to explode. I am glad I don't have to make this decision for another few years.

i remember on everybody loves raymond maries tells raymonds dad he only considers her a trophy wife.

he replied what in hell kind of contest did i win ?    ha ha ha

barrett wrote:

Desert wrote: I'm in a somewhat similar situation to yours, with my wife 4 years younger than me (I didn't do the full 8.5 years younger trophy wife thing). 

Isn't she only considered a trophy wife if I dumped an old hag only to land her? Just trying to escape that label if at all possible!

mathjak107 wrote: the issues you will hit are not only spousal benefits , but the taxing of ss , what you pay for medicare , medicare surcharges , the effects of rmd's on all of that , tax brackets , and medical subsidy's if you go out before  65.

all tie in to each other and effect each other and you need not only real good knowledge on the subject but software to run the different scenario's .

the less you are working with the more important this stuff gets .

you can be right at edge of getting ss taxed , take just 1k more and see a marguinal tax rate of almost 50% on that extra 1k because how all the moving targets interact

Ugh. All true and a bit of a nightmare to contemplate due to all the complexities. But this definitely counts as a "rich white man's" problem.

Oh no, another mathjak post in the meantime. My head is going to explode. I am glad I don't have to make this decision for another few years.

actually it isn't just a rich man problem . the taxation on ss potentially hurts those with lower incomes . it is very easy to hit insane marginal tax rates on lower incomes .  few understand how they can be nailed by this since they think like you did , these tax issues are rich man problems .

take our hypothetical friend harry.


Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.

If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!

Yes, this is a very complicated subject.

I should be ready to start beta testing on my program that deals with a number of these issues in a couple of months. Anyone interested should PM me.

Any annuity other than an immediate annuity is a scam. Immediate annuities pay you a set income for an agreed upon term with no strings. The problem is that with today's low interest rates you are earning around 2%. The annuities that offer lifetime income are scamming you. The life time income numbers they use, such as 5%, are the maximum amounts you may withdraw. It is not interest income. You are taking your own money out. There are two buckets in a variable annuity. One is the income bucket and that is a fake account. That is where they put all those bonuses. You may never take that money in a lump sum. It is the amount they use to decide how much you may take out each year. So in a 5% guaranteed annuity, that bucket is multiplied by 5%. The other bucket is the cash account which is the money you deposited. It increases and decreases based on performance. Most  index annuities cap the upside and do not include dividends. This bucket is reduced by any money/income you take out and all internal expenses are deducted. If you do the math you will see that you will have nothing left when you die. Therefore, you must deduct your initial investment from the money receive. You will find that your real return will be 2%. There are no free lunches on Wall Street.

i would stay away from variable annuity products  as the variable parts  are usually not so hot. on the other hand immediate annuity's are paying out about a 6% draw rate . they really have no return on investment anymore than a pension does .  it is about 40-50% more than you can safely draw on your own out of cash and bonds without spending principal causing you to get less next year.

they can do it because the dead pay for those who live . so they pay out a pretty decent cash flow even with rates this low .


the variables are not scams but they are usually hard to hit a high water mark  on so  that  it exceeds the guaranteed rate .

the guaranteed rates  are your bottom line  have no additional  expenses taken , out while the variable sub account does .  those expenses plus lack of dividends usually won't exceed the guaranteed rate.

You are failing to take into account your are receiving your principal back. So your return is not 6%. To determine your real return take the amount of money u expect to receive from the annuity then back out what you put in. That's the profit which you then divide by what y put in to determine return. As an example if you invest  $100k iand receive 6% a year or $6k for 20 years you received $120k. But as they kept your initial $100k you made 20k over 20 years which is $2k per year or 2%. I would argue you can do much better with almost any other investment. People dying has nothing to do with the calculation. It is based on your mortality age. No matter how long u live it is a terrible investment.

And any fixed indexed annuity is a scam with totally false and misleading advertising.

I need to correct my post. $20k over 20 years is $1k a year or 1%.

julian wrote: You are failing to take into account your are receiving your principal back. So your return is not 6%. To determine your real return take the amount of money u expect to receive from the annuity then back out what you put in. That's the profit which you then divide by what y put in to determine return. As an example if you invest  $100k iand receive 6% a year or $6k for 20 years you received $120k. But as they kept your initial $100k you made 20k over 20 years which is $2k per year or 2%. I would argue you can do much better with almost any other investment. People dying has nothing to do with the calculation. It is based on your mortality age. No matter how long u live it is a terrible investment.

And any fixed indexed annuity is a scam with totally false and misleading advertising.

read what i wrote . i said 6% draw rate not return .
i am not failing to account for anything .

you give them 100k and  they give you back 6k a year . you have zero roi , what you have is a 6% withdrawal rate until you finally get all your money back years later . then you first go on their dime  .
to maintain a rate of cash flow like that from your cash and bonds would drain them to zero  over a number of years . . eventually your bond and cash buckets will be empty and income goes to zero until you refill from equity's.

the annuity cash flow being higher lets you delay selling equity's longer and the cash flow never reduces as you spend down.

that is where the magic happens when you utilize an immediate annuity and your own equity's . 
try pulling 6% from your cash and bonds . each year you will have less and less as you need to spend down principal . if all you need is 4% than you will be adding money back in to your account again delaying the selling of any equity's .

the problem you have is you can't chance a 6% withdrawal rate on your own since you need to keep quite a bit of powder dry  just in case we have the worst of times .

the insurer does not have to do that , they can give you the max and if you outlive  getting your money back they will cover you .


annuity's are income insurance not an investment . you can't have an roi calculated until you die .

Any investment is about return.  If they are giving you 6% I assume you r 70 years old. Do the math about what you would need to earn to take 6% for life. It's is less then 2 %. Buy some dividend stocks.

if you bought those dividend stocks the most you can safely withdraw if you were going to go by the worst of times is 4% .    so  with a million bucks you get to take 40k inflation adjusted and die with the rest  left over because you need to keep that powder dry just in case.

but 1 million in the annuity is a 60k  income which needs no powder dry.

but you really need to incorporate those annuity's in a plan utilizing equity's for inflation adjusting.

when you do you get a powerful team because you need to spend less equity's to produce the same income .

an immediate annuity and equity's has been proven to have a better success rate than bonds ,cash and equty's  just because the initial higher cash flow allows more equity's to be preserved and not needed to refill spending cash as much .

You keep missing you are giving up the $1 million. Take the dividend and use $20k of your principal and your money will last forever and you will have money left over. It's a no brainier

it isn't a no  brainer .  if you have bad sequences you will spend that million down way before 30 years trying to draw 6%  it will be gone , end of  story except under the most favorable conditions . but  that scenario would be silly .you don't buy an annuity without a strategy , it would not really be effective ,

you buy an annuity to use with your own investments . that is where its power is.

in fact it gets even more powerful when the annuity is combined with life insurance for your spouse and your own investing . that trifecta has out performed  your own investing and buying term 2/3 's of every scenario run .

term and investing the difference had more money at age 65 but then the tide turned . the income level was much higher with the integrated strategy and most of the time the tax free life insurance and investing left more for your spouse than the investing alone , which of course was subject to markets and sequence risk .

because you have two types of risk to deal with when only using your investing  the outcomes are subject to be quite variable. you have return risk and sequence risk .

sequence risk can cause a span of as much as 15 years difference in how long your money will last  even at the same average return. you can see this in moshe milevsky's paper sequence risk and retirement ruin .


the immediate annuity's mitigates that risk by a lot when used with your own investing because of the higher cash flow . .

First of all life insurance paid from an annuity is taxed as ordinary income. And I still don't see how you do not understand your annuity is paying u 1%.  If you live 30 years it is paying 2.6%. I think simply putting it in an index fund would accomplish that and still leave money to your heirs. If u received 6% for 30 years from an annuity there would be no life insurance for your heirs. You are getting hung up on the 6% withdrawal rate and guarantee. Putting your money in a mattress you can take 6% for 16 years.

You are confused. The life insurance in the integrated stratagy is a single premium policy , it has nothing to do with the annuity.

As far as a return on the annuity you are missing the point.

For simplicity imagine a 50/50 mix and you are spending down.

Lets assume it is cash and bonds in that 50%  as well as 50% equity's ..

With about 1% on cash and 2.50-3% on bonds how long can you draw  the equivelant 6% before you have zero left in cash and bonds  ? Especially because with each spending of principal to make up that cash flow you get less and less interest..

Maybe 16 years before interest and principal is spent down .  I am guessing while typing  but it will be close.

That is zero balance on the bonds and cash and zero return going forward since the money is spent.

So now you sell off some equity's and refill the cash and bonds for 15 years more of spending.

Lets see the annuity . It generates 6% in cash flow  and that 6% needs no equity's sold since not only does that level not fall it goes on forever leaving equity's untouched.

so 16 years later doing things on your own has just about 50% of that 50/50 mix gone and spent . the annuity though still continues to spin off that cash base forever , first giving you back your own money the first 1/2 16 years and now giving you back the money on their dime the next 16 years  .

Any inflation adjusting comes from equity's in both cases.

That is the simpilest hypothetical  example.

You need no roi on the annuity for it to function. All you need is for it to  return your own money at a higher draw rate then would  be safe  for you to draw on your own.

It can do that because you need not be concerned about roi or sequence risk for that money to continue forever.

The easiest way to picture it is your cash and bonds used for spending have an roi up front which diminishes to zero as it is spent down.

The annuity has zero roi up front but gains  more and more of an roi down the road ,  it gains more and more each year you live past pay back .

That continuing cash flow needs less equity selling over time allowing equitys to run with the ball with a bigger balance .

If you never had to allow for sequence and return risk investing on your own would win . But because you have to hold at around 4%  or so just in case we get a repeat of 1966's group you can't pull the same cash flow
level that the insurer guarantees to you.

It is that higher cash flow with no roi that requires you to sell less equity's.

even if you do not let the bond and cash buckets spend down to zero you still will be replenishing them sooner than the annuity equity combo .

the danger in the annuity equity combo is dying to young  .  if you do not have enough time to make use of the greater cash flow letting those equity's grow longer than you will not do as well.

that is where the annuity  /equity's/ life insurance combo comes in to play .

of course if things go perfect with the returns and sequence risk  , investing on your own will win . but once things go average or less  the integrated combo wins .

dr pfau did  an interesting paper on the subject .

http://www.advisorperspectives.com/arti ... retirement

julian wrote: First of all life insurance paid from an annuity is taxed as ordinary income. And I still don't see how you do not understand your annuity is paying u 1%.  If you live 30 years it is paying 2.6%. I think simply putting it in an index fund would accomplish that and still leave money to your heirs. If u received 6% for 30 years from an annuity there would be no life insurance for your heirs. You are getting hung up on the 6% withdrawal rate and guarantee. Putting your money in a mattress you can take 6% for 16 years.

And what happens if you outlive the 16 year period?
SPIAs are NOT investments. They are insurance against outliving your money.
This isn't rocket science.

Everything is an investment. If u r satisfied with a meager return then buy it. I am just pointing out that you can accomplish the same thing which is income and have either more income or principal left over. You are being blinded by the guarantee. The 16 years I used assumed you put your money under your mattress.  The 6% is really 2% and u can beat that anywhere and have the same income for life

julian wrote: Everything is an investment. If u r satisfied with a meager return then buy it. I am just pointing out that you can accomplish the same thing which is income and have either more income or principal left over. You are being blinded by the guarantee. The 16 years I used assumed you put your money under your mattress.  The 6% is really 2% and u can beat that anywhere and have the same income for life

If your investments do poorly you can run out of money before you die. That cannot happen with a life annuity.

Again, annuities aren't investments, but insurance against outliving your money, which cannot be purchased any other way, because (as mathjak has pointed out), you can't get the mortality credits any other way. They are only available for institutions that have a statistical universe to make them work, which does describe insurance companies but does not describe individuals.

some folks just refuse to want to learn. they get a piece of information stuck in their  head and then they fail to see how it improves outcomes because they fail to understand it is about consistent  cash  flow in this case which is more powerful than roi.

roi in retirement means little unless it is in the right sequence .  as moshe milevsky proved in his paper the exact same return can have a 15 year difference in how long that money lasts .
the higher rate of cash flow from the return of your own money plus the promise of going on their dime when yours is back to you  can be quite a powerful tool when coupled with your own investing .

but if anyone wants to just keep believing only the  part of the story they have in their head  and lose out on an education on the subject then that is their choice .

I'm intrigued enough by this topic to put together an algorithm to optimally select a sequence of  treasuries and to see if I can beat a standard annuity using just currently available treasuries and amortization math to produce a 30 year 6% disbursement [of the original investment] (sum of coupons and bond maturities) with a guaranteed return.

I would assume that there would be no further transactions beyond the initial purchase, just the coupon disbursements and the bond maturities.

Not sure when I will get to it , But it seems like something that could be put together in a day or two.

I'm curious as to how the guaranteed treasury return (coupons and maturities) will compare with an annuity.

Mathjak,

Congrats on retirement!

thanks , it still feels like just a long weekend  ha ha

Mark Leavy wrote: I'm intrigued enough by this topic to put together an algorithm to optimally select a sequence of  treasuries and to see if I can beat a standard annuity using just currently available treasuries and amortization math to produce a 30 year 6% disbursement [of the original investment] (sum of coupons and bond maturities) with a guaranteed return.

I would assume that there would be no further transactions beyond the initial purchase, just the coupon disbursements and the bond maturities.

Not sure when I will get to it , But it seems like something that could be put together in a day or two.

I'm curious as to how the guaranteed treasury return (coupons and maturities) will compare with an annuity.

it would be very hard to do because the older your are the more you get  , it isn't just an interest rate thing .

typically at 3% interest and a 6% draw  you will be broke in 23 years which  would leave you out of money well before you ran out of time if you or your spouse lived to 95 and retired at 62 like me .  .

you should  ladder the annuty's  for 2 reasons , if rates rise  you get more and as you age you get more . that would make it hard  to duplicate on your own .

the annuity's will always pay more than current rates allow because of mortality credits .

bonds mature eventually , annuity's go on forever  which would be an issue if they matured in to lower rates.

that is why annuity's are insurance and not an investment . they insure your income stream from other variables .

the bottom line is that with out guarantees from sequence of return and return risks we have to keep a lot more powder dry when dealing with equity's for growth and inflation proofing ,.

we can't pull the max because of that or risk retirement failure  so we are typically forced to keep more money than we may want  in the pile at the end for protection .


historically we could pull 6.50% under average market conditions if we eliminate the 4 worst time frames and protecting against a repeat .

but since we have to deal with those 4 time frames we are reduced to a safe withdrawal rate of 4%.    annuity's have  no such need for keeping so much powder dry since the higher cash flow lets equity's grow longer .