Two technical notes:
From the very small print below your first table (my eyes are, I think, about a decade younger than yours, but my optician would have been pleased that I could read that)
Are the 'odds of survival' you've calculated for a couple using the life tables for annuitants or those for the general population?
As others have mentioned, 'With the hedge once and be done' approach, a guess (we could dignify this as a prediction or estimate instead) as to what inflation is required. If you underestimate future inflation, the hedge will not allow the total income to fully increase with inflation, while if you overestimate inflation, then the outcome is that, depending on your point of view, you will leave more unspent (bad) or a larger legacy (hurrah!). Once the hedge fails, there will be residual income from the annuity.
With 'hedge as you go' (which I've now implemented for the DIA/delayed SPIA case - thanks for triggering my thinking on that score), you do not have to guess what future inflation might be, but for any given initial conditions (annuity payout rate and TIPS yield) there will be a threshold inflation above which the hedge will fail. As might be expected, with the pure ladder case, income is sustained for length of the ladder and then falls to zero (with no more than one year where the income is non-zero but below that required). For the pure annuity case (with hedge as you go), the required income is sustained while the combined income from the annuity and that from the ladder is sufficient. Once the ladder is exhausted, the income reverts to annuity only (in other words, failure provides a slightly softer fall than the pure ladder case). One consideration is that 'hedge as you go' requires ongoing work that may be difficult to DIY as one ages.
An interesting question with this work is 'who needs a floor?' since, if social security is enough to support core expenditure, additional flooring (i.e., constant inflation adjusted income for 'life') is not required, while if social security does not support core expenditure only those with sufficient assets to construct a meaningful floor can actually do so.
cheers
StillGoing
From the very small print below your first table (my eyes are, I think, about a decade younger than yours, but my optician would have been pleased that I could read that)
Mathematically it should be the product not the sum, but I agree that in practical terms (given that yields vary from day to day), the difference will tend to be small.*If inflation were constant and every TIPS maturity yielded exactly 2.0% then the divisor should be 1.02 * 1.03 = 1.0506. Uncertainty on this score suggests using the sum instead.
Are the 'odds of survival' you've calculated for a couple using the life tables for annuitants or those for the general population?
As others have mentioned, 'With the hedge once and be done' approach, a guess (we could dignify this as a prediction or estimate instead) as to what inflation is required. If you underestimate future inflation, the hedge will not allow the total income to fully increase with inflation, while if you overestimate inflation, then the outcome is that, depending on your point of view, you will leave more unspent (bad) or a larger legacy (hurrah!). Once the hedge fails, there will be residual income from the annuity.
With 'hedge as you go' (which I've now implemented for the DIA/delayed SPIA case - thanks for triggering my thinking on that score), you do not have to guess what future inflation might be, but for any given initial conditions (annuity payout rate and TIPS yield) there will be a threshold inflation above which the hedge will fail. As might be expected, with the pure ladder case, income is sustained for length of the ladder and then falls to zero (with no more than one year where the income is non-zero but below that required). For the pure annuity case (with hedge as you go), the required income is sustained while the combined income from the annuity and that from the ladder is sufficient. Once the ladder is exhausted, the income reverts to annuity only (in other words, failure provides a slightly softer fall than the pure ladder case). One consideration is that 'hedge as you go' requires ongoing work that may be difficult to DIY as one ages.
An interesting question with this work is 'who needs a floor?' since, if social security is enough to support core expenditure, additional flooring (i.e., constant inflation adjusted income for 'life') is not required, while if social security does not support core expenditure only those with sufficient assets to construct a meaningful floor can actually do so.
cheers
StillGoing
Statistics: Posted by StillGoing — Tue Jun 11, 2024 4:06 am — Replies 24 — Views 2485