4% stock, 1% bond and 1% cash. I try to temper what I select based on a long-term view vs whats happening these days, and lean conservative. I suppose if you use multiple periods to show asset class changes over time then you can rely more on current returns and modify them over time, but then you're having to guess what the remaining periods will look like which I have no ability to do.
@hines202 I am not responding to your opinion on the merits of annuities (SPIA) only to the approach you take in formulating your conclusions. As I said before, I am not promoting annuities, they are only a tool that should be a consideration as part of any retirement plan, but as Jim and Chris state, "yes there are issues with the insurance industry, but they are comfortable recommending SPIAs after proper due dilegence.
Broad stroke fear mongering should be replaced with a thoughtful and objective analysis. We need to all use some critical thinking skills rather than jump to conclusions based on emotional or anecdotal based biases. Rely on facts based on proper research. Something bad can always happen, but what is the probability that it will happen?
For example, when assessing risks, one approach is to use some basic statistics to help formulate an estimate of the probability of an event happening. We need to recognize that there is usually a sequence of sub events that led up to the main event that your most conserned about. First, identify the sequence of events that must happen first that leads up to the event you are most concerned about, then assign a probability to those events happening and, in this case, multiply the probabilities to arrive at the risk that you are taking. I realize that this is an academic approach, and I don't think it needs to be overly complicated. Just identifying the sequence of events that must occur may be good enough to convince you one way or the other about the potential risk.
FYI, this is my last post on this subject.
@nc-cpl I do not update my expected rates of return but once per year. My return expectations need to be consistent with my portfolio value so updating throughout the year is something I don't think is necessary. For example, as equity and bond markets sold off in 2022 and interest rates increased, my expected returns were a little higher for both stocks and bonds for 2023 PRC inputs compared to what they were the prior year. YTM's on bonds increased and valuations for stocks declined. This partially offset the fact that I started 2023 with a lower portfolio value. This should be expected because if the opposite were true, my return expectations would have been lower even though my portfolio balance had increased.
@golich428 I hope I didn't offend you in any way. I respect your deep knowledge on these subjects. I'm not fear mongering. To put it simply, this is what I see:
There's a definite trend of US based insurers, who are subject to very stringent requirements when issuing annuities, IULs, permanent, cash value life policies, selling those policies off to off-shore private equity companies, who are subject to none of those stringent requirements. They're free to gamble with the money, enrich themselves, then fail if it doesn't work out, and leave policy holders stranded.
Michael Burry saw what was happening, the trending, the bad tactics that would eventually cause the 2008 financial crisis. I'm not saying I'm him, but this trend with US insurers like Prudential selling policies en masse to private equity firms is alarming. I think it has all the makings of a crisis. The states don't have bailout funds. They rely on other insurers picking up failed policies. But if there aren't many US insurers left, they can't do that. AIG failed and got a massive bailout. We can't do that if many fail at once. I have a responsibility to let my clients know this risk. And yes, if they fail it affects "safe" annuities like SPIAs and QLACs.
As well, if you follow Andy Panko on LinkedIn, he's been on a mission to expose all the false advertising and fallacies salespeople are propagating all over TikTok, LinkedIn, and other social media platforms, such as pitching IULs as "investments" and "self-banking" and other false claims. He has a project where he actually bought an IUL. Same nonsense is going on with annuities.
https://rethinking65.com/2023/01/20/are-iul-insurance-policies-good-retirement-income-tools/
@golich428 I agree in that don;t update my return expectations throughout the year either. I was only curious what you have in place for real returns presently.
@hines202 Well I guess that was not my last post - sorry.
No, you did not offend me at all. I was simply trying to point out that we need to be objective in these types of decisions and base them on facts. It seemed to me that you were providing a lot of color to the facts.
I agree that the trend of private equity firms buying insurance companies is increasing but it is not clear what impact this will have on the ultimate risk to annuity policy holders. However, it does increase the level of due diligence that is required.
The same is true for the increasing trend of companies selling pension plans to insurance companies. This should be considered when deciding between a lump sum and annuitizing the pension. But again, it is not clear that the risk is elevated due to these transactions. The PBGC insurance will be lost if the pension is replaced by an insurance annuity contract and that is (in my opinion) one if the major drawbacks assuming failure.
Here is a report by the Department of Labor that covers much of the concerns we have discussed. It is focused on the bulletin 95-1 which addresses the annuities that are purchased by a pension plan from a provider with the intention of transferring the liability for benefits promised by the plan to the provider (insurance company). It is a summary of 25 stakeholder meetings that were used to capture feedback as a review of 95-1 as part of Secure Act 2.0. I think it provides a balanced view of what is going on and the different viewpoints that stakeholders have.
I also realize that I am not an advisor to anyone but myself and that changes the equation when being a fiduciary for others.
I do follow Andy Panko.
Came across an interesting blog post from 2017 on Fixed Index Annuities:
https://gregable.com/2017/10/indexed-annuity.html
The PDF files linked in the blog meant strictly for agents (brochures, commission schedules, FIA rates, early withdrawal penalties, etc.) were illuminating for me...of course this is a snapshot from 2017. I wonder what similar annuity literature looks like today?
P.S. The blogger also produced a useful social security calculator which appears to be pretty comprehensive: https://ssa.tools/calculator
Because of the much improved rates on CD’s and US Treasuries in the second half of 2023, and all the great discussions on the various PRC threads 🤗, I was inspired to conduct a complete overview of our retirement plans and investments. Because of the great performance of the US stock market this year (S&P up about 15% 🤑), my asset allocation in equities rose to 85%. That’s a little high even for me 😮, so I will bring that down to 75%. My main change in our plans are in what/how we will withdraw money from our retirement accounts to live on. First, we have 2 years of living expenses in a money market with Fidelity that is currently earning 5.16% (7-day yield). This is our emergency money. Next I have my regular IRA invested in short term CD’s and US treasuries all earning over 5%. This is the money we will live on over the next 5 or so years (I am older than my wife 🤫) by which time my IRA will be depleted (no RMDs for me thank you 😏). My wife’s regular IRA will be used next to live off of. This is the big change in our plan 😶. A portion of her IRA will contain a mix of brokered CD’s and US Treasuries that will reach various maturities over a 6 year period from 2028 through 2034. Interest rates range from 4.42% to 4.60%. At the end of this 6 year period is about the time that our social security (SS) payments start. This will give us 11 years of essentially risk free living expenses 🤩, followed by SS. The remaining amounts in her IRA and both of our Roth IRA’s will be in total US stock market mutual funds which we will then live off of, plus SS of course.
My regular IRA may last a little longer because right now I am taking some money out of my Roth IRA to keep our MAGI low so we qualify for the enhanced ACA subsidies before I go on Medicare 😷. My real (after inflation is taken into account) inputs into PRC are 4.5% for stock growth, 1% for bonds and 0% for money market, 4% general inflation, 2% additional healthcare inflation, assume tax rates go back up in 2026, and social security goes down 20% in 2033. Plugging all this in to PRC, it says that my wife and I are fine to age 100. Living in the Midwest and having had no kids helps 🍻.
See any holes in my plan??? 🧐
Your adjustments had me wondering about my real ROR. An article by Larry Swedroe highllghts his perspective: (dated )
The Seven Great Challenges to Retirement Plans
Investors planning for retirement are facing seven significant challenges: historically high equity valuations; historically low bond yields; increasing longevity and the potential need for expensive long-term care; the failure of government to fully fund the Social Security and Medicare programs; the likelihood of slower economic growth due to the rising debt-to-GDP ratio; and the end (and even likely reversal) of favorable tailwinds for corporate profits (falling interest rates, profits growing faster than GDP, and falling tax rates).
- Historically high equity valuations
From 1926 through June 2023, the S&P 500 provided an annualized (compound) rate of return of 10.2%. With the Consumer Price Index having increased at a rate of 3.0%, the S&P 500 provided a real return of 7.2%. Unfortunately, many investors make the naive mistake of extrapolating historical returns when estimating future returns. It’s an unfortunate error because some of the returns to stocks in this period were the result of a declining equity risk premium, resulting in higher valuations. Those higher valuations forecast lower future returns.
The best metric we have for estimating future returns is the Shiller CAPE (cyclically adjusted price-to-earnings ratio) 10. As of July 22, 2023, the Shiller CAPE 10 stood at 31.6. The best predictor we have of the real future returns to equities is the inverse of that ratio (the earnings yield, or E/P), producing a forecasted real return of just 3.2% – less than half of the 7.2% historical return. To get an estimate of nominal expected returns, we can add the difference between the yield on the 10-year nominal Treasury bond (which stood at about 3.8% on July 22, 2023) and 10-year TIPS (about 1.5%), about 2.3%. That gives us an expected nominal return to stocks of just 5.5% – about half the historical level.
The forecasts for international returns are better, though also below historical returns. The Shiller CAPE 10 earnings yield for non-U.S. developed markets and emerging markets at the end of June 2023 were 5.6% and 7.3%, respectively. If forecasting nominal returns, 2.3% should be added for expected inflation. Thus, if you have an allocation to international markets, your forecast for returns should be somewhat higher than for a U.S.-only portfolio.
Unfortunately, the bond side of the story is not any better.
- Historically low bond yields
From 1926 through June 2023, the five-year Treasury bond returned 4.9%, 1.1 percentage point higher than the 3.8% yield as of July 22, 2023. Clearly, those relying on historical returns are likely to be disappointed, as the best estimate we have of future bond returns is from the yield curve. Combining the 3.8% expected bond return and the 5.5% expected U.S. equity return in a traditional 60% stocks/40% bonds portfolio, the expected return is about 4.8%. Let’s see how that compares to historical returns.
Over the last 41 years, from 1982 through 2022, a 60% S&P 500/40% five-year Treasury portfolio returned 9.8% a year. The 9.8% return was 1.3 percentage points a year higher than the portfolio’s return over the full 97-year period from 1926 through 2022, which was 8.5%. Investors building plans based on that 9.8%% return over the last 41 years, or even the 8.5% return covering the last 97 years, are running the great risk that their plans will fail, as the expected return today is just 4.8%.
Some suggestions from the end of Larry’s article:
“What can investors do?
Equity investors can increase their expected returns in two ways. They can increase their allocations to international assets, where valuations are much lower and thus expected returns much higher. While the Shiller CAPE 10 earnings yield is 3.2%, it is 5.6% for the international developed markets and 7.3% for emerging markets.
Another way to address the issue is to shift equity allocations from broad-market indices to small-value stocks, which have over the long term provided higher returns and which have valuations that are trading at historically low levels relative to the large stocks that dominate broad market indices.”
Combining the 3.8% expected bond return and the 5.5% expected U.S. equity return in a traditional 60% stocks/40% bonds portfolio, the expected return is about 4.8%. Let’s see how that compares to historical returns.
Is the 4.8% real return?
US 5 year Treasury is presently at 4.4%, 10 year is at 4.28%.
Europe's economic outlook worsens:
https://apnews.com/article/european-economy-outlook-inflation-e8ec24496f433825ab37b376eee9695c
When you are looking for international (non-US) funds be careful, the historical returns are all over the place. Total international, developed markets, emerging markets, EU market, European market, Asian market, etc.
@pizzaman See last sentence in second paragraph under point #1 - "That gives us an expected nominal return to stocks of just 5.5% – about half the historical level."
The best predictor we have of the real future returns to equities is the inverse of that ratio (the earnings yield, or E/P), producing a forecasted real return of just 3.2% – less than half of the 7.2% historical return. To get an estimate of nominal expected returns, we can add the difference between the yield on the 10-year nominal Treasury bond (which stood at about 3.8% on July 22, 2023) and 10-year TIPS (about 1.5%), about 2.3%. That gives us an expected nominal return to stocks of just 5.5%
5.5 - 2.3 = 3.2 real ROR. So I suppose if we apply that same 2.3% to the 60/40 portfolio 4.8% (nominal return) we get a real ROR of 2.5% for that 60/40 port.
Real 2.5% for 60/40 seems awfully low 😫. Hate to think I have to live like a Tibetan monk (not that there is anything wrong with that 😏) only to die with millions in the bank.
The best predictor we have of the real future returns to equities is the inverse of that ratio. Not saying its not true but how does the inverse of the CAPE 10 give you an expected ROR? In the same vain, how does "To get an estimate of nominal expected returns, we can add the difference between the yield on the 10-year nominal Treasury bond and 10-year TIPS, about 2.3%... give you an expected nominal return to stocks, I just don't understand.
I think we need to look at several ways to come up with expected (estimated, predicted, choose your poison) RORs and kind of average them together. I would feel uncomfortable relying solely on CAPE 10. I think I posted concerns about CAPE 10 before but I will include it again:
Critics of the CAPE ratio contend that it is not very useful since it is inherently backward-looking, rather than forward-looking. Another issue is that the ratio relies on GAAP (generally accepted accounting principles) earnings, which have undergone marked changes in recent years.
In June 2016, Jeremy Siegel of the Wharton School published a paper in which he said that forecasts of future equity returns using the CAPE ratio might be overly pessimistic because of changes in the way GAAP earnings are calculated. Siegel said that using consistent earnings data such as operating earnings or NIPA (national income and product account) after-tax corporate profits, rather than GAAP earnings, improves the forecasting ability of the CAPE model and forecasts higher U.S. equity returns. https://www.investopedia.com/terms/c/cape-ratio.asp
One can also find reports/blogs in favor of applying the Cyclically Adjusted Earnings Yield (CAEY = 1/CAPE) as correlated to long term (10+ years) future returns. I suppose that this is why it is used by the various predictions for long term RoR of asset classes. With the Price to Earnings "PE" ratio reflecting asset value, the idea seems to be that this value, when cyclically adjusted over time (10 years in this case) is correlated to the asset return over the long term.
"The price you pay today is extremely indicative of the return you will receive in the future." See L. Roberts (2017):
https://seekingalpha.com/article/4059993-caey-ratio-and-forward-returns
Scroll down in the post to see comparisons of the (real) S&P500 to the CAEY where the plotted data seems to "rhyme". As an academic approach to estimating forward RoR, once can see the appeal to economists...
As I noted elsewhere in the Forum (and in the Pralana Gold Manual), the CAEY can also be used to estimate a dynamic safe withdrawal rate. ("Dynamic" since the CAPE ratio changes with time.) A champion on this topic is Karsten Jeske who has the website/blog: https://earlyretirementnow.com/ (aka "Big Ern"). (His Bio: Karsten “Big Ern” Jeske, Ph.D., CFA retired in 2018 at the age of 44 after a long career in academia, government and Corporate America. He previously taught economics at Emory University in Atlanta and worked at the Federal Reserve Bank of Atlanta and Bank of New York Mellon Asset Management in San Francisco.)
Some of his key articles on using the CAPE (and thus CAEY) include:
https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-CAPE-Based-Rules/ (I ended up using CAPE 1.75/0.5: a=slope=1.75% and b=intercept=0.5 based on this post for an alternative safe withdrawal (consumption) rate estimate in Pralana Gold)
https://earlyretirementnow.com/2022/10/05/building-a-better-cape-ratio/ (adjusts the Shiller CAPE to account for all retained earnings - also has a link to Jeske's dynamic CAPE data which he says is more up to date than Shiller data)
https://earlyretirementnow.com/2022/10/12/dynamic-withdrawal-rates-based-on-the-shiller-cape-swr-series-part-54/ (Shows examples of how to apply the CAEY slope/intercept for SWRs using the free Google spreadsheet he provides- which can of course also be applied in Pralana Gold)
Bottom line: Economists predicting long term (10+ years) future returns appear to use the CAEY as a proxy.
