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Fixed annuities vs TIPs
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beachbumz
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Joined: 07 Feb 2005
Posts: 79
Location: Cocoa Beach, FL

PostPosted: Wed Mar 16, 2005 5:28 pm    Post subject: Reply with quote

unclemick wrote:
Ah yes - The SWAG.

Wether Bogle's method(one I like) or some of the methods employed here - we all have a future SWR either consiously or subconsiously in the way we have deployed our retirement assets.

We have what we HOPE is a future SafeWR! Laughing

I really like your plan at your age Unclemick, I'm just not sure it will work at mine, but who knows. I like the idea of dividends. I'm also all for people looking at different potential SWR angles, but it's not going to change my CWR and I will re-evaluate every year.

Beachbumz Cool



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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Mar 17, 2005 11:55 am    Post subject: Reply with quote

beachbumz wrote:
...
I think I've got a pretty good grip on what an SWR is. It's a withdrawal rate that would have been safe in hindsight (ie the past). That is the only SWR and will always be the only SWR.

Beachbumz Cool

Then you haven't the slightest idea of what I am talking about.

This matter of definitions is critically important. What you have described are Historical Surviving Withdrawal Rates (previously referred to as the Historical Database Rates). It looks at the past. Safe Withdrawal Rates look to the future.

I have discussed this matter in my May 2004 Overview post dated Wednesday, May 19, 2004. It is at the top of the first page of the table of contents. It has a sticky.
http://nofeeboards.com/boards/viewtopic.php?t=2505

Have fun.

John R.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Mar 17, 2005 2:51 pm    Post subject: Reply with quote

Here is what unclemick needs to know.

The mathematics of annuities, bonds and mortgages are all similar for making comparisons. An actual retiree has to plan for the fortunate possibility of living longer than his life expectancy. Insurance companies take advantage of statistics.

Here are the total payments versus the interest rate using the mortgage formula.

Identify the rate for the correct interest rate and number of years and multiply it by the total amount of the mortgage. The product equals the total payment amount, principal plus interest. With bonds and traditional mortgages, all are in nominal dollars. With TIPS and Ibonds, the interest rates and the payment amounts both match inflation.

interest = 0%
20 years: 5.00%
30 years: 3.33%
40 years: 2.50%

interest = 2%
20 years: 6.12%
30 years: 4.46%
40 years: 3.66%

interest = 4%
20 years: 7.36%
30 years: 5.78%
40 years: 5.08%

interest = 6%
20 years: 8.72%
30 years: 7.26%
40 years: 6.65%

The numbers that you have presented come close to matching the payments at a 5% interest rate through one's 80th birthday.

interest = 5%
20 years: 8.02%
30 years: 6.51%
40 years: 5.83%

The insurance company is prepared for unclemick to live a little bit longer. The news is not so good for beachbumz, but it is not especially bad.

This is the formula:

The total payment (which I refer to as the TIPS Equivalent Safe Withdrawal Rate) with an interest rate r over N years can be simplified to: r / [1 - (1 / [1+r]^N ) ] This particular form is good when using a scientific calculator.

The following post has several formulas of this type. From the 3% SWR for 56 Years thread dated Monday, Oct 13, 2003, these formulas come in handy when constructing risk-free baselines.
http://nofeeboards.com/boards/viewtopic.php?p=12536#12536

This is what you need to know mathematically. What you can withdraw as an individual is limited by an uncertain lifespan (suicide is no solution). You can calculate the advantage that you get because an insurance company charges based on statistical averages, not individuals.

Have fun.

John R.


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