So today, in succession, within the first 2 hours:
Yes, everyone should still be dumping retirement money into Vanguard funds, anything from 60/40 to 80/20 is fine.
The 4% rule is about spending in retirement. It has long been accepted that retirees could withdraw up to 4% of their portfolio in perpetuity. So if you have $40,000 of expenses and a $1 million portfolio, the assumption, based on a ton of backward looking data analysis, is that you’ll almost never run out of money.
With today’s savings/bond yields, I highly doubt this is true anymore. Which really sucks for retirees. And if they hold more stocks to try to juice the returns, the volatility is as big a threat (maybe more) as withdrawing too much money.
It’s okay though, because retirees will be able to count on their social security to fill any holes!
Just a little color to your basically correct answer: the 4% rule came from a model that looked at a 30 year retirement. There were some failures within 30 years, but a pretty low rate. Most failures were caused by tough markets soon after retiring. (This is known as sequence of returns risk.) Oh, and the 4% is 4% inflation adjusted.
Over the next few weeks I am going to be re-balancing and intend to move 40% of my fixed allocation (so about 15% overall) to TIPS. I wish they held this announcement for another month or so as I feel like a bunch of folks might load up on TIPS now, making them more expensive right when I start buying them.
I definitely expect to get my holes filled by Social Security.
There are various versions of the rule. Alot of the time its framed as withdrawal of 4% of AUM each year, period.
There’s actually not that many people where the 4% rule will make or break their retirement. Most people will get most of their retirement support from SS. For people that need more than SS they usually hit retirement with a hodge podge of assets - SS, plus some home equity, plus some savings, and often some pension earned somewhere along the way.
I think what will really kill retirement is heading into one’s 60s with a bunch of debt. Someone debt free can probably cobble together enough money to get by.
Anyone know anything about Multi Year Guaranteed Annuities? I usually run like hell from any insurance instruments, but I’m almost ready to bite on a MYGA for 10% of our overall allocation.
I’ve found a 5 year MYGA with an A- rated company paying 3.1%. With 5 year CDs paying about 1% this seems like a good deal. The interest reinvests and remains tax free until you take distributions. And I would be remaining under the insurance limit provided by my state, so if the company goes belly up, we’re covered.
The only real drawback I can find is that you cannot take distributions until 59.5 years old or you get nailed with a 10% IRS penalty. But we are virtually certain not to need the money, and we are not all that far from 59.5 anyway.
I guess another drawback is dealing with an insurance company.
Am I missing anything about these?
I had never heard of these but they actually look pretty good! Seems too good to be true, though. With 5 year treasuries paying like .5% I don’t get how this works for the insurance company. Are you sure there isn’t a big front-end load or any other kind of fee?
Not sure if it’s a leak or not, but I have 100% SPX for my retirement. Seems to perform better than Vanguard over time and I’m young
Because they having early withdrawal penalties, the spread between the GIC rate and the MYGA rate is basically a liquidity premium. This doesn’t mean they are necessarily good or bad, but it explains the price difference. Liquidity has value in the market, if you know you aren’t going to sell the product then sure, go ahead and buy it and the extra yield pays you for the premium you are giving up.
Definitely no load and no fees. That was my first instinct to check that out as well!
The “load” is usually just the penalty if you withdraw early. The insurer will pay a premium to get your capital locked up for X years, and if you take your capital back the withdrawal fee compensates them for that. As an actuary I got some exposure to insurance product pricing, part of what makes these things work for insurers is that they are good at guessing how many people will surrender early.
Obviously you should never buy it unless you’re super sure you don’t need the liquidity, but life happens I suppose. I’m a little surprised they can pay 6x the risk free rate but I guess with such a punitive penalty they don’t need many people to cancel for the math to work.
Another esoteric part of the story with insurance products is that they don’t operate on a strictly economic basis. Minimum capital rules created by insurance regulation usually create disconnects with market pricing where and insurer can pay a non intuitive price for a product because they are being indirectly “compensated” on the back end by capital rules. This only goes so far but can explain why an insurer seems to be willing to pay “too much” for something. There’s often a hidden regulatory arbitrage in the background.
Is that penalty the IRS 10% penalty or on top of that? Wouldn’t matter to me because I’m positive we can lock this money up, but I’m curious because my BIL is also interested so I want to make sure he has all the info.
My guess is you would also have to pay the insurance company a fee if you withdraw early but you should get all the disclosures for the product before you make a decision. The surrender charge and the penalty tax may be additive.
Sorry - a little clarification. I believe that the 10% IRS tax is a tax on the interest in the product. The surrender charge may be applied to the principal so be careful about that.
That sounds correct.