Now, it's clear that when the withdrawal rate is smaller, our Portfolio lasts longer. That means that there is a greater chance of having our Portfolio last for thirty years or forty or ... >Your point?
>The annuity amount increases with inflation?
>But it isn't a good strategy, right? I mean, inflation could kill you, right?
- Suppose you need $
**A**from your Portfolio, currently worth $**P**. - The withdrawal rate is
**W**=**A/P**which may be something like**W**= 0.04 (using the notorious 4%*Safe Withdrawal Rate*). - You use a fraction
**f**of your Portfolio to buy an annuity. (**f**= 0.25 means 25% devoted to the annuity) - Assume the annuity pays a fixed fraction
**r**every year. (**r**= 0.08 means 8%) - You then get an annuity income worth
**r f P**, every year (a fraction**r**of the amount**f P**which was used to buy the annuity.) - Instead of needing
**A**from your Portfolio, you*now*only need**A - r fP**. - Of course, your Portfolio is now worth only
**P (1 - f)**... after using a fraction**f**to buy the annuity. - The withdrawal rate has now changed to
**{A - r fP}/ {P(1 - f)}**(Withdrawal Amount)/(Portfolio Amount) which can be written**W****(1 - r f/****W**)/(1 - f) - This withdrawal rate (
*with*an annuity) is*smaller*than**W**if**(1 - r f/****W**)/(1 - f) < 1 - This means (after some jiggling of terms):
**r > W**
>So?
>And will an annuity pay more than 4%?
>And with the annuity, our reduced Portfolio will last longer?
>So we can withdraw more from the reduced Portfolio?
>Isn't there anything Suppose that: *Without*an annuity you need a certain fraction,**W**, of your__initial__Portfolio,**P(0)**. (That means an__initial__income of**A = WP(0)**.)- If inflation is constant at
**i**(**i**= 0.03 means 3% annual inflation), after**N**years, you'll want a total income of**A(1+i)**.^{N} *With*an annuity which pays a fixed**r f P(0)**each year, you need only withdraw**A(1+i)**from your Portfolio.^{N}- r f P(0)- After using a fraction
**f**of your Portfolio to buy the annuity, the__initial__Portfolio is reduced to**P(0)(1-f)**. - ...
>Can you skip the math?
>When I put 100% of my Portfolio into an Annuity, I >Why quick-and-dirty?
>So, how about pictures, some sample portfolio evolutions ... with Sure. Here are some pictures. What's left of our Portfolio (after buying a 9% Annuity) is invested in the S&P 500
(starting in 1960) and we need an income of $60K per year (increasing at 3%, with inflation):
>So buying an annuity can be good, eh?
Here's another with a 7% Annuity: >Yeah, but
>Remind me. What are these Gs?
>Are you saying that inflation has nothing to do with it?
That whether or not one should buy an annuity doesn't depend upon inflation? That ...?
>Okay, I get it. Any idea what this sum 1/G(1) + 1/G(2) >But what about starting in 1947 or 1970, or using Well, , the spreadsheet described in
actuallyPart I, does that ... if you ask nicely
actuallyThe spreadsheet has a part which looks like this.
There's also a spreadsheet to play with (comparing your portfolio WITH and WITHOUT an annuity).
See also this article in the Financial Planning Journal. See also this post on Morningstar: Check out "typical" annuitites Check out |