Viewing the PP as an Annuity
Posted: Mon Oct 11, 2010 4:34 pm
People seem to be wandering around the investment world in a dazed stupor looking for annuity-like returns (i.e., a guaranteed income stream from a given amount of capital) in a zero interest rate world.
The options are few. Buying long dated debt exposes the investor to interest rate risk, plus default risk in anything but treasurys.
Buying anything from an insurance company exposes one to counterparty risk, plus commissions on any stream of income product.
It seems to me that in many ways the PP is an ideal annuity-like asset allocation for someone who is looking for a way to drawdown savings without outliving their money. Here's why:
First, the PP provides outstanding inflation protection, with returns that seemingly levitate about 4% above inflation year after year. If you want inflation protection in an annuity product, it will cost you.
Second, the PP has low drawdowns in bad years, which reduces the likelihood of messing up a withdrawal plan in response to bad years.
Third, the PP is relatively tax efficient, with a spending plan that minimizes portfolio transactions (i.e., you spend down the cash to 15% before rebalancing the whole portfolio).
I think someone in the bogleheads thread did some backtesting on the percentage of time that the PP survives at various withdrawal percentages, and I believe that a 4% withdrawal rate held up very well over time.
Overall, considering that the PP doesn't require you to pay any sales commissions and exposes you to almost no counterparty, inflation or interest rate risk, I think that it would make an outstanding annuity-like strategy for someone nearing or in retirement and strictly looking for capital preservation and a reasonable stream of income.
Any thoughts on this topic from my PP colleagues?
The options are few. Buying long dated debt exposes the investor to interest rate risk, plus default risk in anything but treasurys.
Buying anything from an insurance company exposes one to counterparty risk, plus commissions on any stream of income product.
It seems to me that in many ways the PP is an ideal annuity-like asset allocation for someone who is looking for a way to drawdown savings without outliving their money. Here's why:
First, the PP provides outstanding inflation protection, with returns that seemingly levitate about 4% above inflation year after year. If you want inflation protection in an annuity product, it will cost you.
Second, the PP has low drawdowns in bad years, which reduces the likelihood of messing up a withdrawal plan in response to bad years.
Third, the PP is relatively tax efficient, with a spending plan that minimizes portfolio transactions (i.e., you spend down the cash to 15% before rebalancing the whole portfolio).
I think someone in the bogleheads thread did some backtesting on the percentage of time that the PP survives at various withdrawal percentages, and I believe that a 4% withdrawal rate held up very well over time.
Overall, considering that the PP doesn't require you to pay any sales commissions and exposes you to almost no counterparty, inflation or interest rate risk, I think that it would make an outstanding annuity-like strategy for someone nearing or in retirement and strictly looking for capital preservation and a reasonable stream of income.
Any thoughts on this topic from my PP colleagues?