Pensionize Your Nest Egg E-Book

Moshe A. Milevsky

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 294

Veröffentlichungsjahr: 2015

Beschreibung

Guarantee your retirement income with a DIY pension

Pensionize Your Nest Egg describes how adding the new approach of "product allocation" to the tried-and-true asset allocation approach can help protect you from the risk of outliving your savings, while maximizing your income in retirement.

This book demonstrates that it isn't the investor with the most money who necessarily has the best retirement income plan. Instead, it's the investor who owns the right type of investment and insurance products, and uses product allocation to allocate the right amounts, at the right time, to each product category.

This revised second edition is expanded to include investors throughout the English-speaking world and updated to reflect current economic realities.

Readers will learn how to distinguish between the various types of retirement income products available today, including life annuities and variable annuities with living income benefits, and how to evaluate the features that are most important to meet their personal retirement goals.

• Evaluate the impacts of longevity, inflation, and sequence of returns risk on your retirement income portfolio
• Make sense of the bewildering array of today's retirement income products
• Measure and maximize your Retirement Sustainability Quotient
• Learn how your product allocation choices can help maximize current income or financial legacy — and how to select the approach that's right for you
• Walk through detailed case studies to explore how to pensionize your nest egg using the new product allocation approach

Whether you do it yourself or work with a financial advisor, Pensionize Your Nest Egg gives you a step-by-step plan to create a guaranteed retirement income for life.

Leseprobe

Pensionize Your Nest Egg

SECOND EDITION

How to Use Product Allocation to Create a Guaranteed Income for Life

Moshe A. Milevsky, PhD

Alexandra C. Macqueen, CFP

Cover image: ©iStock.com/xflaunt Cover design: Wiley

Copyright © 2015 by Moshe A. Milevsky and Alexandra C. Macqueen. All rights reserved.

PensionizeTM and PensionizationTM are trademarks of QWeMA Group Inc.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first edition was published by John Wiley & Sons, Inc. in 2010.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

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ISBN 9781119025252 (Hardcover) ISBN 9781119025283 (ePDF) ISBN 9781119025276 (ePub)

Contents

Preface

Preface to the Second Edition

Preface to the First Edition

How to Use This Book

Introduction

Note

Part One: Why You Need to Build Your Own Pension Plan

Chapter 1: The Real Pension Crisis

Up a Creek without a Pension Paddle

Mixing Defined Benefit Apples and Defined Contribution Oranges

It Takes Two to Tango: A Basic Lesson about the Nature of True Pensions

Guarantee versus Ruin

When Is a Pension Not a Pension?

There Ain’t No Such Thing … as a Free Pension

The First True Pensions

Notes

Chapter 2: Planning for Longevity

The Grim Reaper’s Coin Toss

Introducing Longevity Risk

Predicting Future Longevity

How Should You Insure against Longevity Risk?

Will You Get Heads . . . or Tails?

Note

Chapter 3: How the Sequence of Returns Can Ruin Your Retirement

How Long Will the Money Last?

Clockwise Investment Returns

Counterclockwise Returns

Triangles, Bulls, and Bears: The Retirement Income Circus

Can Buckets Bail Out a Poor Sequence of Returns?

Chapter 4: Inflation

What Does This Mean for Retirees?

The CPI-ME and the CPI-YOU

Does the CPI Measure Your Spending?

A Reality Check for Your Retirement Spending

What Have We Learned So Far?

Notes

Part Two: Developing a Sustainable Retirement Solution

Chapter 5: Beyond Asset Allocation

Product Allocation: New Baskets for Your Nest Egg

Three Product Silos

The Spectrum of Retirement Income Silos

How Do the Silos Stack Up?

Chapter 6: An Introduction to Life Annuities

Pension Contributions as Insurance Premiums

Buying a Personal Pension

When Should You Buy an Annuity?

Annuities versus Term Deposits

Is the Annuity Gamble Worth It?

Great-Grandma’s Gamble

The Power of Mortality Credits

What about 50-Year-Olds—Should They Buy Personal Pensions?

What about Interest Rates?

How Can I Use Annuities to Protect against Inflation?

Unique and Personal Insurance

Note

Chapter 7: A Review of Traditional Investment Accounts

Asset Allocation in Your SWP

What Should You Put in the SWP?

Chapter 8: Introducing the Third Silo—Annuities with Guaranteed Living Benefits

Guarantees and Growth: How Variable Annuities with Guaranteed Living Income Benefits Work

Evaluating an Annuity with Guaranteed Living Benefits: How Should You Choose?

Chapter 9: Your Retirement Sustainability

Which Glasses Will You Wear?

How Many Eggs Can You Withdraw from Your Nest?

What Should You Protect Against: Floods or Meteorites?

Do You Feel Lucky? Pensions, Survival Probabilities, and Spending in Retirement

Pensions Change the Game

How Does Pensionization Impact Your Retirement Sustainability Quotient?

Pension Annuities: Step-by-Step Math

The True Gift of Pensionization

Notes

Chapter 10: The Most Difficult Question You Will Ever Have to Answer (About Your Retirement)

Retirement Sustainability or Financial Legacy?

Pricing Your Inheritance

Finding Your Spot on the Frontier

Chapter 11: Divvying Up Your Nest Egg

Creating a Retirement Plan for Robert Retiree: Cases 1 through 10

What Is the Cost to Pensionize?

When Should You Pensionize?

When Should You Turn Your Living Benefit On?

Notes

Chapter 12: A Deeper Look at the Promise of Pensionization

Activating the Time Machine: Gertrude at Age 65

Lifetime Income: Now or Later? The Implied Longevity Yield

Lifetime Income: Now or Later? The Role of Changing Interest Rates

A Tool to Help with Your Decision: The “What If I Wait?” Analyzer

Moving Beyond Yield: Understanding the Cost-Benefit Trade-off of Pensionizing Your Nest Egg

Pensionizing: Financial and Nonfinancial Benefits

Summary of Part Two

Part Three: The Seven Steps to Pensionize Your Nest Egg

Chapter 13: Step 1: Identify Your Desired Retirement Income

Estimating Your Desired Income from the Top Down

Estimating Your Desired Income from the Ground Up

Chapter 14: Step 2: Estimate Your Existing Pensionized Income

Public Pensions in the United States, United Kingdom, Canada, Australia, and New Zealand

How Much Will You Receive?

Benefits from a Defined Benefit Pension Plan

What If I’m Worried about the Future of My DB Pension Plan?

Timing the Retirement Decision

Completing Step 2

Chapter 15: Step 3: Determine Your Pension Income Gap

Your Average Tax Rate

Your Pension Income Gap

Adjusting for Inflation

Note

Chapter 16: Step 4: Calculate Your Retirement Sustainability Quotient

What Kind of Eggs Do You Have in Your Nest?

Filling the Gap

Chapter 17: Step 5: Assess Your Plan: Is It Sustainable?

Chapter 18: Step 6: Calculate Your Expected Financial Legacy

Chapter 19: Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg

Case Study: Jack and Jill Go Up the Hill (to Fetch a Retirement Income Plan)

Step 1: Identify Your Desired Retirement Income

Step 2: Estimate Your Existing Pensionized Income

Step 3: Determine Your Pension Income Gap

Step 4: Calculate Your Retirement Sustainability Quotient

Step 5: Assess Your Plan: Is It Sustainable?

Step 6: Calculate Your Expected Financial Legacy

Step 7: Use Product Allocation to Pensionize Your Nest Egg

Summary of Part Three

Final Thoughts

Bibliography

Acknowledgments

About the Authors

Index

EULA

List of Illustrations

Chapter 1

Exhibit 1.1

Defined Benefit versus Defined Contribution, Hybrid, and Target Benefit Pension Plans

Exhibit 1.2

Who Has a True Pension?

Chapter 2

Exhibit 2.1

Read the Obituaries: How Many Years Did They Spend in Retirement (Above the Age of 65)?

Exhibit 2.2

Remaining Lifetime for a 65-Year-Old (United States)

Exhibit 2.3

Remaining Lifetime for a 65-Year-Old (All Areas)

Exhibit 2.4

Conditional Probability of Survival at Age 65

Exhibit 2.5

Survival Probabilities for Men and Women—Age 65 (United States)

Chapter 3

Exhibit 3.1

Portfolio Ruin with Constant Withdrawals and Constant Returns

Exhibit 3.2

Illustrating an Arithmetic 7 Percent Average Return

Exhibit 3.3

Portfolio Ruin with a “Clockwise” Sequence of Returns

Exhibit 3.4

Reversing the Sequence of Returns

Exhibit 3.5

Portfolio Ruin with a “Counterclockwise” Sequence of Returns

Exhibit 3.6

What Stop Did You Get on the Retirement Merry-Go-Round? The Impact of the Sequence of Returns on Portfolio Longevity

Chapter 4

Exhibit 4.1

How a Dollar Decays over Time

Exhibit 4.2

How Much Is My 1965 Dollar or Pound Worth?

Exhibit 4.3

Inflation: What Does a $1,000 Payment

Really

Buy You?

Chapter 5

Exhibit 5.1

Three Product Silos: Their Benefits and How They Protect against Retirement Risk

Chapter 6

Exhibit 6.1

Lump-Sum Cost of Immediate and Deferred Annuity Payouts

Exhibit 6.2

Cost of $1,000 in Monthly Lifetime Annuity Income, Starting at Age 65

Exhibit 6.3

Great-Grandma’s Poker-Table Bet—How Is the Money Allocated?

Exhibit 6.4

What Is the Expected Investment Return from a One-Year 5 Percent Longevity Bet?

Chapter 8

Exhibit 8.1

Delaying Withdrawals from a VA with GLB with 5 Percent Simple Income Credit (and No Step-Ups)

Chapter 9

Exhibit 9.1

Two Views of Your Finances: Financial Economics versus Financial Planning

Exhibit 9.2

Nest Eggs, Pensionization, and Your RSQ

Chapter 10

Exhibit 10.1

The Conceptual Retirement Income Frontier

Chapter 11

Exhibit 11.1

Robert Retiree’s RSQ and EFL with Three Spending Rates

Exhibit 11.2

Robert Retiree’s RSQ and EFL with Varying Levels of Pensionization

Exhibit 11.3

Comparing RSQ and EFL with Varying Levels of Pensionization: Ten Cases

Exhibit 11.4

The Ongoing Costs to Pensionize

Exhibit 11.5

Guaranteed Size of Birds in Bush Needed to Beat the One in Hand

Chapter 12

Exhibit 12.1

Lifetime Income: Now or Later? Illustrating the Implied Longevity Yield

Exhibit 12.2

What If Gertrude Waits? Analyzing the Annuity Decision

Exhibit 12.3

Illustrating the Cost-Benefit Trade-offs of Pensionizing Your Nest Egg

Chapter 13

Exhibit 13.1

The Seven Steps to Pensionize Your Nest Egg

Exhibit 13.2

Household Spending by Category, All Areas Data for all regions is from 2013. Source: “Final consumption expenditure of households”, OECD.StatExtracts. http://stats.oecd.org (data extracted January 15, 2015).

Chapter 14

Exhibit 14.1

The Seven Steps to Pensionize Your Nest Egg: Step 2

Exhibit 14.2

How Much in Retirement? Gross Pension Replacement Rates from Public and Mandatory Private Pensions

Chapter 15

Exhibit 15.1

The Seven Steps to Pensionize Your Nest Egg: Step 3

Chapter 16

Exhibit 16.1

The Seven Steps to Pensionize Your Nest Egg: Step 4

Chapter 17

Exhibit 17.1

The Seven Steps to Pensionize Your Nest Egg: Step 5

Chapter 18

Exhibit 18.1

The Seven Steps to Pensionize Your Nest Egg: Step 6

Chapter 19

Exhibit 19.1

The Seven Steps to Pensionize Your Nest Egg: Step 7

Exhibit 19.2

The Pensionize Your Nest Egg Calculator

Exhibit 19.3

Jack and Jill’s Pensionization Process

Guide

Cover

Table of Contents

Preface

Pages

1

Preface

Preface to the Second Edition

The first edition of this book was published in 2010 and covered the Canadian market. We wrote it because we felt, both then and now, that Canadians preparing for retirement needed a clear and better understanding of both the risks they (and their finances) face, and how a “true pension” can help protect retirees from those risks. In the first edition, we provided some step-by-step guides on how to use the new approach of product allocation to protect against the new risks of retirement, and obtain a true pension.