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I am thrilled that you're able to design a risk free portfolio returning inflation + 4% annually. Please share this with the rest of the world, that we may all

by Ntrails 12y ago

I am thrilled that you're able to design a risk free portfolio returning inflation + 4% annually. Please share this with the rest of the world, that we may all have better annuities... People massively undervalue pensions - especially those with additional benefits such as spousal, early retirement, minimum payment periods etc. The only valid valuation for any asset remains what it would cost in the market, and as such $2m is the correct value. It is entirely possible you'd rather have the cash, but it's not objectively superior.

patio11 12y ago
Let me try rewording my explanation: an annuity which pays $80k from the day you retire until you and/or your wife die is a product which you can buy from many providers (typically insurance companies, because they're going to make this bet in parallel with enough people such that variations in length of the annuity get smoothed out by actuarial reality). This product has a negotiable price tag. You will find quotes for this product to be approximately $1 million, not $2 million. [Edit: P.S. Most HN users should not buy annuities. Ask me, or a fee-only financial adviser, later if you want to know why, but the short version is "They optimize for emotions but you have the compelling alternative to optimize using math."]
- Ntrails 12y ago
  I can't really comment on the US annuity prices, as I am based in the UK - but I find it unlikely that an $80k annuity at 55 is purchasable for a million dollars given where yields are atm. I mean cripes, right now you would be lucky to find a 5k inflation linked joint life-annuity with 100k retiring at 65. The annuity market is in no way optimised for emotion. It is priced based on capital retirements, mortality numbers, longevity trends, investment returns, bond yields, and a bunch of other things - before you even get to the insurer then trying to be competitive in the market. You are buying insurance. Same as medical insurance, plenty of people get less than they pay in - that's the whole point. Risk pooling means redistribution of wealth, always. If you want to run the numbers on drawdown and argue it's better than annuitisation, feel free. Just make sure you price in your 40% drop in equities scenario.
  - declan 12y ago
    Ahem! This is really an empirical question with an easy Google search answer. :) If you go to http://www.immediateannuities.com/ http://www.immediateannuities.com/ and say you're a 50-year old man (the age at which at least in some CA cities a police/fire municipal worker can retire with 90% pension), with a 40-year old wife, and you invest $2 million, you'll get an immediate income annuity of $88,560 a year. That's in the ballpark of what the Forbes article was saying ($80,000 a year). The numbers don't change that much if the age of the wife approaches 50. So <ntrails> has the better of the argument, I think: There's no evidence you can buy an $80K annuity for $1M. And I suspect it would cost even more if it were indexed for inflation, as many municipal pension benefits are.
    - parennoob 12y ago
      patio11 / others, do you know of any specific annuities (that you can link to) that would guarantee ~$80,000 a year for $1 million? I would be strongly interested in following them.

by Ntrails 12y ago

patio11 12y ago

Let me try rewording my explanation: an annuity which pays $80k from the day you retire until you and/or your wife die is a product which you can buy from many providers (typically insurance companies, because they're going to make this bet in parallel with enough people such that variations in length of the annuity get smoothed out by actuarial reality). This product has a negotiable price tag. You will find quotes for this product to be approximately $1 million, not $2 million. [Edit: P.S. Most HN users should not buy annuities. Ask me, or a fee-only financial adviser, later if you want to know why, but the short version is "They optimize for emotions but you have the compelling alternative to optimize using math."]

Ntrails 12y ago
I can't really comment on the US annuity prices, as I am based in the UK - but I find it unlikely that an $80k annuity at 55 is purchasable for a million dollars given where yields are atm. I mean cripes, right now you would be lucky to find a 5k inflation linked joint life-annuity with 100k retiring at 65. The annuity market is in no way optimised for emotion. It is priced based on capital retirements, mortality numbers, longevity trends, investment returns, bond yields, and a bunch of other things - before you even get to the insurer then trying to be competitive in the market. You are buying insurance. Same as medical insurance, plenty of people get less than they pay in - that's the whole point. Risk pooling means redistribution of wealth, always. If you want to run the numbers on drawdown and argue it's better than annuitisation, feel free. Just make sure you price in your 40% drop in equities scenario.
- declan 12y ago
  Ahem! This is really an empirical question with an easy Google search answer. :) If you go to http://www.immediateannuities.com/ http://www.immediateannuities.com/ and say you're a 50-year old man (the age at which at least in some CA cities a police/fire municipal worker can retire with 90% pension), with a 40-year old wife, and you invest $2 million, you'll get an immediate income annuity of $88,560 a year. That's in the ballpark of what the Forbes article was saying ($80,000 a year). The numbers don't change that much if the age of the wife approaches 50. So <ntrails> has the better of the argument, I think: There's no evidence you can buy an $80K annuity for $1M. And I suspect it would cost even more if it were indexed for inflation, as many municipal pension benefits are.
  - parennoob 12y ago
    patio11 / others, do you know of any specific annuities (that you can link to) that would guarantee ~$80,000 a year for $1 million? I would be strongly interested in following them.