It's not, but insurer based annuities are protected by reinsurance in similar ways to banks and brokers, that is, accounts under a certain amount (typically 250k-500k). This just means that one should never have more than X amount in the same account. Spread it out.
What's your withdrawal strategy?
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jacob
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Re: What's your withdrawal strategy?
Re: What's your withdrawal strategy?
@erytu - I think it'd be unusual to go all in with a single insurer and annuity. In the event of insolvency, there are state protections in place and industry incentives to make people whole. You'd want to buy with dollar limits for those protections in mind.
If the underlying business model fundamentally changes though - say people living 20% longer - it's a very real risk. The entire risk pool is disrupted. Then the industry incentive to avoid spooking the public is shattered. LTC ran into this with medical costs in the past few decades.
The inflation protection is also a little more suspect than one might infer at first. A fixed return means you're still carrying inflation risk. A decade of 4% inflation is going to hit much different than 3%. As would a decade of 2%.
From what I've read, buying a true inflation adjusted annuity is not easy. Offering the protection cuts the yield enough that people weren't interested in the product. So insurers stopped offering them. Maybe that's changed with interest rates coming back up.
Social security does adjust with CPI. See here for how that varies:
https://www.aarp.org/social-security/cola-history/
8.3% in 2023. Someone on a 6% annuity is feeling the pinch.
A couple also probably wants a joint annuity, which further lowers the yield payout. The surviving spouse cannot be left with no income or assets. Though of course there are slice and dice options for the problem.
Annuities are complex products. Most will need help understanding them. That also raises risk of being sold a product that is a poor fit. Or simply misunderstanding very reasonable constraints on the protections.
I guess all that to say - I'd lean towards a reputable financial planning firm before an annuity. And hopefully have some connection to the next generation as a check and balance. If other conservative financial supports are gone (no home ownership, no social security) the financial advisor might still encourage a partial annuity. If you've got 5-15 years left, they can be a reasonable hedge for longevity risk.
If the underlying business model fundamentally changes though - say people living 20% longer - it's a very real risk. The entire risk pool is disrupted. Then the industry incentive to avoid spooking the public is shattered. LTC ran into this with medical costs in the past few decades.
The inflation protection is also a little more suspect than one might infer at first. A fixed return means you're still carrying inflation risk. A decade of 4% inflation is going to hit much different than 3%. As would a decade of 2%.
From what I've read, buying a true inflation adjusted annuity is not easy. Offering the protection cuts the yield enough that people weren't interested in the product. So insurers stopped offering them. Maybe that's changed with interest rates coming back up.
Social security does adjust with CPI. See here for how that varies:
https://www.aarp.org/social-security/cola-history/
8.3% in 2023. Someone on a 6% annuity is feeling the pinch.
A couple also probably wants a joint annuity, which further lowers the yield payout. The surviving spouse cannot be left with no income or assets. Though of course there are slice and dice options for the problem.
Annuities are complex products. Most will need help understanding them. That also raises risk of being sold a product that is a poor fit. Or simply misunderstanding very reasonable constraints on the protections.
I guess all that to say - I'd lean towards a reputable financial planning firm before an annuity. And hopefully have some connection to the next generation as a check and balance. If other conservative financial supports are gone (no home ownership, no social security) the financial advisor might still encourage a partial annuity. If you've got 5-15 years left, they can be a reasonable hedge for longevity risk.
Re: What's your withdrawal strategy?
I'd be interested to know how very high net worth individuals withdraw income, especially old money whose fortune has several generations.
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jacob
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Re: What's your withdrawal strategy?
It's an entirely different game.
Most would just hire a [personal] wealth manager and have them set something up w/o you having to think about it. This option becomes available once you pass 500k (at this point, you probably need a reference) ... alternatively 3-5M if you're a walk-in.
Of the few exceptions I know (second hand), one way is simply to keep the money in a giant checking account. They'll never run out in their lifetime and there's enough that even inflation is not a problem. That's basically playing it like someone who won the powerball lottery.
Another "withdrawal" strategy is to keep it all invested [in assets] and take out loans with security in those assets and then spend that money instead. As long as the assets keep growing, the loans can be paid back by simply taking out a bigger loan. This is not really much different from the way government runs their finances or how a working stiff would use credit cards to pay off other credit cards based on the credit rating. Why do it this way? Because there's no income realized and thus no taxes to be paid. Let that sink in.
Multi-generational wealth is usually tied to a substantial ownership position in a single company which is likely private. I don't know how common this actually is. The general "saying" is that wealth is made in the first generation, kept in the second, and squandered in the third. There are many reasons for why that is.
In summary, just because someone is wealthy doesn't necessarily mean they're playing better. They're just playing with different amounts.
Re: What's your withdrawal strategy?
There are always new family offices popping up as families sell companies and plan to transition the wealth from Gen 1 to Gen N. Some still own the primary asset that generated the wealth, while others have long since parted with it. Many have lots of branches of the family tree and kids of all ages, while others only have a single elderly divorced person with no kids. These offices often has very different approaches to managing, distributing, and/or giving away the wealth. There is a great book by Stuart Lucas (of the Carnation Milk family) called, appropriately, Wealth: Grow It, Protect It, Spend It, and Share It that discusses how ultra high net worth families manage their money. As the book discusses, the families that want it to last a long time often end up narrowing in on a perpetual withdrawal rate that resembles the same range that us mortals would use, but the factors involved (e.g. trust and estate and tax stuff) requires a whole cast of professional advisors that need to be compensated.
Re: What's your withdrawal strategy?
@AlpineTR - thanks for the recommendation that looks a good read.
I believe some of the robber baron fortunes of the gilded age do still exist, albeit in much dissipated forms. Every beneficiary has 2.4 children so the pies get smaller and smaller after each generation.
Genius.
I believe some of the robber baron fortunes of the gilded age do still exist, albeit in much dissipated forms. Every beneficiary has 2.4 children so the pies get smaller and smaller after each generation.
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IlliniDave
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Re: What's your withdrawal strategy?
That's true, and in my mind I've done that and more-or-less prepared myself for financially for what seems to be the best/most practical options available now. I'm running out of time to wait for someone to create something novel, and the time to make decisions for myself will be here fairly soon. My own 'innovation' (relative to the past history of my family) is to observe it sucks to be an adult child who has to try to make those decisions for an aged parent, so I'm doing my best to make all the decisions ahead of time, while trying to ensure that I'm not spending other people's money when the time comes.7Wannabe5 wrote: ↑Mon Mar 17, 2025 6:47 am@IlliniDave:
I think one problem with planning for end-of-life based on the current paradigm is that our parent's generation (Silent)is likely to be the last generation for which it will apply, because of increasing expense and increasing proportion of the elderly in society as the Boomer bulge ages ahead of us. IOW, different options will be created, because they will have to be created.
Re: What's your withdrawal strategy?
While that sounds smart, it is also a way to failure. Check the story of Eike Batista or Rick Guerin.jacob wrote: ↑Mon Mar 17, 2025 12:00 pmAnother "withdrawal" strategy is to keep it all invested [in assets] and take out loans with security in those assets and then spend that money instead. As long as the assets keep growing, the loans can be paid back by simply taking out a bigger loan. Why do it this way? Because there's no income realized and thus no taxes to be paid. Let that sink in.
Re: What's your withdrawal strategy?
Yes, it's all about working it at that level. For example, there is no tax for either party on gifts up to $18,000/year or $13 million over lifetime, and you can choose to make the gift in the form of transfer of ownership in an asset such as some greatly appreciated shares of stock. So, for example, the most tax preferred way to keep a sugar baby might be to allow her to live in a domicile held as an asset within a trust, provide her with a car placed into service for your company, and provide allowance through gift stock transfer in order to avoid capital gains.jacob wrote: Why do it this way? Because there's no income realized and thus no taxes to be paid. Let that sink in.
Even running a teeny-tiny business yourself will give you a glimpse into the mechanisms of the Elite class. And one of these it to simply see debt as an opportunity relative to other opportunities. The marginal tax rate to some extent will structure this landscape. This is why billionaires think lowering the income tax on the wealthiest would be good for the economy as a whole.
Re: What's your withdrawal strategy?
I'm also enjoying this thread. Nice reprisal of the "bucket" strategy that gets dismissed in personal finance circles. I do something similar and I even practiced my strategy for a year.
0. Zero bucket is enough cash for working capital and/or until the first bond matures
1. First bucket is a 5-year bond ladder. Each maturing rung is 1.0 expenses. As I near actual retirement, I will increase this to 15 years (built to withstand even a 1966 scenario). These can be normal treasuries with coupons or ZCBs. I'm not a fan of TIPS since they are tax inefficient and they can lose money when inflation picks up (thanks to rising interest rates). Key here is not yield but certainty!
2. Second bucket is a dividend portfolio of individual stocks selected based on fundamental analysis. This produces sustainable qualified dividends equal to 0.5x my expenses, but 1.0 my non-discretionary. I expect this income to grow by a little more than inflation.
3. Third bucket is a boring balanced portfolio equal to 0.5x my expenses and 1.0x my non-discretionary at a 3.0% withdrawal rate (again 3.0% could withstand a 1966 scenario).
So:
- In a good year, I use my dividends and my balanced portfolio to pay the bills. I let the bonds reinvest at the long end (note in a 15-year ladder, one maturing year buys two new years in years 15 and 16, so good years you're adding rungs until even the most conservative investor says enough!).
- In a bad year, I can use my dividends and my maturing bonds, reinvesting an excess - and later topping up the ladder shortfall when the market recovers or by working part-time.
- In a truly bad year (even dividends aren't paid), I would use a full rung of the bond ladder. It's worth noting that dividends have been resilient (for non-financial companies) even during the Great Depression.
It requires about 33x expenses, depending on rates and market levels. Overall portfolio ends up at a sub-3.0% WR.
In theory, each leg is independently perpetual and somewhat compensates for the deficiencies of other legs. Dividends are a nice middle ground in stagnant markets to mitigate the cult of infinite capital gains in a finite world. Active stock selection for a portion, but participating in broad market beta upside with a passive strategy. Certainty of bonds with the inflation protection of a balance portfolio. The psychological benefits of having cash flow directly from dividends to your checking account versus having to work.
0. Zero bucket is enough cash for working capital and/or until the first bond matures
1. First bucket is a 5-year bond ladder. Each maturing rung is 1.0 expenses. As I near actual retirement, I will increase this to 15 years (built to withstand even a 1966 scenario). These can be normal treasuries with coupons or ZCBs. I'm not a fan of TIPS since they are tax inefficient and they can lose money when inflation picks up (thanks to rising interest rates). Key here is not yield but certainty!
2. Second bucket is a dividend portfolio of individual stocks selected based on fundamental analysis. This produces sustainable qualified dividends equal to 0.5x my expenses, but 1.0 my non-discretionary. I expect this income to grow by a little more than inflation.
3. Third bucket is a boring balanced portfolio equal to 0.5x my expenses and 1.0x my non-discretionary at a 3.0% withdrawal rate (again 3.0% could withstand a 1966 scenario).
So:
- In a good year, I use my dividends and my balanced portfolio to pay the bills. I let the bonds reinvest at the long end (note in a 15-year ladder, one maturing year buys two new years in years 15 and 16, so good years you're adding rungs until even the most conservative investor says enough!).
- In a bad year, I can use my dividends and my maturing bonds, reinvesting an excess - and later topping up the ladder shortfall when the market recovers or by working part-time.
- In a truly bad year (even dividends aren't paid), I would use a full rung of the bond ladder. It's worth noting that dividends have been resilient (for non-financial companies) even during the Great Depression.
It requires about 33x expenses, depending on rates and market levels. Overall portfolio ends up at a sub-3.0% WR.
In theory, each leg is independently perpetual and somewhat compensates for the deficiencies of other legs. Dividends are a nice middle ground in stagnant markets to mitigate the cult of infinite capital gains in a finite world. Active stock selection for a portion, but participating in broad market beta upside with a passive strategy. Certainty of bonds with the inflation protection of a balance portfolio. The psychological benefits of having cash flow directly from dividends to your checking account versus having to work.
Re: What's your withdrawal strategy?
Currently in a semi-ere position as I have moved from doing 100% no work for a few years to doing various fun PT & almost FT income gigs since doing a "traditional" retirement in 2017. DW is loving her new late in life work pursuit and wants to keep working for another 2-3 yrs for sure, she is rocketing up the ladder in her job so why not maximize it if she is having fun and loving it was her comment.
So with that lets just say both of us full retirement at 55 in 4 years (2029) for the heck of it.
We have a full year built up in cash to start that year
We have a small business that we will possibly liquidate at that time to invest into our savings accounts
We have a rental property that will trickle in passive income or we sell to put into our savings accounts
We have a house with significant equity, will nearly be paid off so may downsize or sell to invest equity
We live in Canada so healthcare is free and covered, we now have national free dentalcare and pharmacare programs
We plan to draw just enough from both our RRSP (similar to an IRA) to meet annual cost of living plus extra to transfer full annual contribution limits into our TFSA (currently $7000/yr). This will easily have us below the ceiling to be in the lowest Canadian tax bracket of $57,000 per person
We will most likely both start taking CPP (govt Canadian Pension Plan) at age 65, eligible at 60 but for every year you defer the monthly payment goes up. (Our estimates right now have us receiving about $2100/month)
We will most likely both start taking OAS (govt Old Age Security) at age 70, eligible at 65 but for every year you defer the monthly payment goes up. This program is available to every Canadian and payment clawbacks start if you make more than $90,000/yr. The current amount is $727/month per person and is indexed to inflation. (This means at 70 between DW & Myself we will get about $1500/month)
At age 70 when we will be getting both CPP and OAS I suspect we will have a low monthly cost of living and it will be hard to need to pull more from our RRSP because of the $3600/month in government program income.
That leaves us with out TFSA (similar to Roth IRA) which will be fully funded and we will be hard pressed to be spending from this. That being said it would be very wise of us from 55 to 70 to be pulling as much from the RRSP and fully funding our TFSA each year because at age 71 in Canada you must convert your RRSP to a RRIF and is subject to minimum annual withdrawals.
This is our plan and basically the goal is to not target a spending amount each year other than covering our expenses, keeping cost of living low and avoiding lifestyle inflation & frivolous consumer culture.
So with that lets just say both of us full retirement at 55 in 4 years (2029) for the heck of it.
We have a full year built up in cash to start that year
We have a small business that we will possibly liquidate at that time to invest into our savings accounts
We have a rental property that will trickle in passive income or we sell to put into our savings accounts
We have a house with significant equity, will nearly be paid off so may downsize or sell to invest equity
We live in Canada so healthcare is free and covered, we now have national free dentalcare and pharmacare programs
We plan to draw just enough from both our RRSP (similar to an IRA) to meet annual cost of living plus extra to transfer full annual contribution limits into our TFSA (currently $7000/yr). This will easily have us below the ceiling to be in the lowest Canadian tax bracket of $57,000 per person
We will most likely both start taking CPP (govt Canadian Pension Plan) at age 65, eligible at 60 but for every year you defer the monthly payment goes up. (Our estimates right now have us receiving about $2100/month)
We will most likely both start taking OAS (govt Old Age Security) at age 70, eligible at 65 but for every year you defer the monthly payment goes up. This program is available to every Canadian and payment clawbacks start if you make more than $90,000/yr. The current amount is $727/month per person and is indexed to inflation. (This means at 70 between DW & Myself we will get about $1500/month)
At age 70 when we will be getting both CPP and OAS I suspect we will have a low monthly cost of living and it will be hard to need to pull more from our RRSP because of the $3600/month in government program income.
That leaves us with out TFSA (similar to Roth IRA) which will be fully funded and we will be hard pressed to be spending from this. That being said it would be very wise of us from 55 to 70 to be pulling as much from the RRSP and fully funding our TFSA each year because at age 71 in Canada you must convert your RRSP to a RRIF and is subject to minimum annual withdrawals.
This is our plan and basically the goal is to not target a spending amount each year other than covering our expenses, keeping cost of living low and avoiding lifestyle inflation & frivolous consumer culture.
Re: What's your withdrawal strategy?
Great replies, thanks everyone!
Some additional thoughts from me...
I try to think of ERE as a whole lifestyle, not just a savings/investing/withdrawing strategy. But that said, it influences the withdrawal.
I think keeping costs low will be a big part of my strategy.
For example, rather than a forced move to a slightly lower cost rental (tactical) I can plan and execute a longer-term move to a significantly lower cost rental (strategic). This kind of thing isn't hypothetical. Just a year ago, viewing various properties over many months, I stumbled on a very cheap shared facility where they offered to potentially lower the rent even further in exchange for me helping to mow the lawn. So I can see myself finding great deals like that more easily due to having several months to years of fixed income to live off, while I move, as opposed to having to scramble or even go homeless because stocks lost 90% overnight. These are obviously worst-case scenarios, it may be that stocks will do well and I'll have nothing to worry about.
A final aspect is the human capital aspect of ERE. I think early retirement allows you to diversify your human capital. Not only in terms of employability, but perhaps more importantly, in terms of health, wellness and ability to live on less. With a longer lifespan, healthier life and more free time, I think spending less and saving more gets easier, even with inflation. You develop the kinds of character traits that make you a more frugal person. Discipline, mental toughness, resourcefulness, general knowledge, contacts and community, cooking and other foundational skills, etc. I think these attributes and skills could be seen as very safe human capital "investments" that are in a way independent of market returns or economic conditions.
All of that said, a lot of this is worst-case thinking. It's possible that stocks will do very well and/or overall prosperity will increase so much that we don't even need investments. Possibly I'll get quite rich while continuing to live a very frugal lifestyle that I quite enjoy. Maybe I'll be able to donate or otherwise help others with the extra money.
Some additional thoughts from me...
I try to think of ERE as a whole lifestyle, not just a savings/investing/withdrawing strategy. But that said, it influences the withdrawal.
I think keeping costs low will be a big part of my strategy.
- My spending should (hopefully) trail CPI significantly
- My spending should (hopefully) sit at a very low tax bracket, with most of it tax-free
- My spending should (hopefully) constitute a low withdrawal percentage from my stock portfolio - in the region of 2-3%
- My spending should (hopefully) be easily supplemented by part-time or part-year work, in the case of very bad stock returns
For example, rather than a forced move to a slightly lower cost rental (tactical) I can plan and execute a longer-term move to a significantly lower cost rental (strategic). This kind of thing isn't hypothetical. Just a year ago, viewing various properties over many months, I stumbled on a very cheap shared facility where they offered to potentially lower the rent even further in exchange for me helping to mow the lawn. So I can see myself finding great deals like that more easily due to having several months to years of fixed income to live off, while I move, as opposed to having to scramble or even go homeless because stocks lost 90% overnight. These are obviously worst-case scenarios, it may be that stocks will do well and I'll have nothing to worry about.
A final aspect is the human capital aspect of ERE. I think early retirement allows you to diversify your human capital. Not only in terms of employability, but perhaps more importantly, in terms of health, wellness and ability to live on less. With a longer lifespan, healthier life and more free time, I think spending less and saving more gets easier, even with inflation. You develop the kinds of character traits that make you a more frugal person. Discipline, mental toughness, resourcefulness, general knowledge, contacts and community, cooking and other foundational skills, etc. I think these attributes and skills could be seen as very safe human capital "investments" that are in a way independent of market returns or economic conditions.
All of that said, a lot of this is worst-case thinking. It's possible that stocks will do very well and/or overall prosperity will increase so much that we don't even need investments. Possibly I'll get quite rich while continuing to live a very frugal lifestyle that I quite enjoy. Maybe I'll be able to donate or otherwise help others with the extra money.
Re: What's your withdrawal strategy?
I enjoyed the replies too.
One thing I intended to mention - watch out for TIPS. They don’t always function as expected. For instance in 2022, as inflation picked up, they lost value across most of the yield curve because rates rose so quickly. They are also tax inefficient, of course, with their cashless income.
To your other comment above, an extra “hidden bucket” of your strategy might be to kick off retirement with a buy nothing year.
One thing I intended to mention - watch out for TIPS. They don’t always function as expected. For instance in 2022, as inflation picked up, they lost value across most of the yield curve because rates rose so quickly. They are also tax inefficient, of course, with their cashless income.
To your other comment above, an extra “hidden bucket” of your strategy might be to kick off retirement with a buy nothing year.
Re: What's your withdrawal strategy?
How should one invest in a low-to-zero growth economy a la Japan?
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jayritchie
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Re: What's your withdrawal strategy?
Some say Japan is the harbinger of the future for all developed nations. Permanent economic stagnation.jayritchie wrote: ↑Sun Mar 23, 2025 10:37 amMake the Yen carry trade great again?
Or bet on currency depreciation and hold international assets?
Re: What's your withdrawal strategy?
This is a reality we need to understand and embrace in my opinion, I might look to C40's comment in WRC's journal recently with regards to the Japanese respect for nature and the land as a society. Economic growth through the last century has come primarily at the expense of the environment which has been subsidizing society. Resources are finite and the environment can only give so much, humans and our economic machine are consuming at an unsustainable rate. This is probably why I embrace ERE the most because we need to change the system, and sooner than later. Our withdrawal rate and economic impact as an ERE practitioner is a fraction of that for a MMM practitioner and in a whole different solar system than the average consumer. We could all live with a healthy dose of Japanese economic reality.
Re: What's your withdrawal strategy?
I'm not sure Japan has a particularly good environmental record, although it's widespread nuclear power and very mountainous terrain (which restricts development to small coastal areas) probably helps. This is a good article about the Japanese stock market from its 1989 peak, from which it has never recovered.
https://www.afrugaldoctor.com/home/japa ... 5?rq=Japan
https://www.afrugaldoctor.com/home/japa ... 5?rq=Japan
Re: What's your withdrawal strategy?
The book Living Off Your Money includes the Japan scenario. There's a thread on what the author offers:
viewtopic.php?t=11812
In short, SWR goes down, assets diversify, and fixed asset allocation is recommended against. Depending on the specifics, he lands in the 3-4% SWR space.
viewtopic.php?t=11812
In short, SWR goes down, assets diversify, and fixed asset allocation is recommended against. Depending on the specifics, he lands in the 3-4% SWR space.
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ducknald_don
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Re: What's your withdrawal strategy?
The interesting thing about Japan is it hasn't been that bad for them. People aren't starving in the streets, they haven't been overrun by rioting hordes. There are some demographic challenges but they don't seem insurmountable.