February 6, 2023 – Welcome to another installment of my Safe Withdrawal Rate Series. See the landing page of this series here for an intro and a summary of all the posts I’ve written so far. On the menu today is an issue that will impact most retirees: we all likely receive supplemental cash flows in retirement, such as corporate or government pensions, Social Security, etc. Some retirees opt for an annuity, i.e., transform part of their assets into a guaranteed, lifelong cash flow.
Of course, if you are a long-time reader of my blog and my SWR series you may wonder why I would write a new post about this. In my SWR simulation toolkit (see Part 28), there is a feature that allows you to model those supplemental cash flows and study how they would impact your safe withdrawal rate calculations. True, but there are still plenty of unanswered questions. For example, how do I evaluate and weigh the pros and cons of different options, like starting Social Security at age 62 vs. 67 vs. 70 or receiving a pension vs. a lump sum?
Also, you might want to perform those calculations separately from the safe withdrawal rate analysis, from a purely actuarial point of view. For example, we may want to calculate net present values (NPVs) and/or internal rates of returns (IRRs) of the different options before us. Clearly, NPV and IRR calculations are relatively simple, especially with the help of Excel and its built-in functions (NPV, PV, RATE, IRR, XIRR etc.). However, the uncertain lifespan over which you will receive benefits complicates the NPV and IRR calculations. How do we factor an uncertain lifespan into the NPV calculations? Should I just calculate the NPV of the cash flows up to an estimate of my life expectancy? Unfortunately, the actuarially correct way is more complicated. But Big ERN to the rescue, I have another Google Sheet to help with that, and I share that free tool with you.
Let’s take a look…
Continue reading “Evaluating Annuities, Pensions, and Social Security – SWR Series Part 56”
A while ago I created a little toolkit to design my own bond and/or CD ladder. With a bond/CD ladder, by the way, I mean holding a portfolio of bonds and/or CDs so the cash flows comprised of maturing CDs/bonds plus interest income exactly matches a specified time series of target cash flows over time. Of course, if you’re regular readers of this blog you know that I’m not too thrilled about investing in bonds or CDs. Yields are just too low, compliments of my former colleagues at the Federal Reserve. But there are still a few interesting applications for bond/CD ladders. Some of them purely for “academic curiosity” and not because I actually want to implement them. So, here would be a few questions I’d try to answer with this toolkit:
- If I wanted to build my own little “quasi-annuity” to guarantee a certain cash flow for 30 years or so, how much money would I have to set aside today to guarantee that cash flow? This is obviously not because I actually want to do this. As we will see later, the cash outlay today would be so prohibitively high that I’ll prefer to take my chances with the stock market and the Sequence Risk that comes with it!
- How much of a difference would it make if I required regular cost-of-living adjustments (COLA) along the way rather than getting one fixed nominal “income” along the way?
- Related to the issue above, if someone already has a corporate pension without COLA, how much would he or she have to set aside to supplement this pension and guarantee a certain COLA, say, 2% a year?
- When interest rates were higher only a few decades ago, how feasible would it have been to create a bond ladder for retirement? Could we have gotten rid of Sequence Risk completely?
- If I wanted to hedge my first 5-10 years of early retirement against Sequence Risk and at least partially fund my retirement expenses through a CD ladder, how much money would I have to set aside?
So, today I’ll share that spreadsheet and some of my sample calculations and results. I hope you’ll find value in playing around with it, too… Continue reading “A Bond/CD Ladder Toolkit”