A Two-Tier Economy
“Well-paying sectors that once employed lower-skilled workers have all but disappeared. In essence, there is a growing underclass that, while technically "employed" insofar as it has work, is not enjoying "employment" in the sense that it once was, i.e. permanent, full-time jobs, that provide benefits and pay a middle-class salary.” (Roger Salus)
Effective Trading
“As a trader, you shouldn't be stubbornly focused on being right all the time. It's okay to be wrong sometimes (as long as your losers are less than your winners), and remember to take what the market gives you instead of stubbornly focusing on what you are so certain is "right." Being right and being successful are not the same.” (Jeff Miller)
FIRE Movement
“The basic FIRE premise is that you need to save 50% of income until you have saved 25x your annual income. Then you live on a 4% withdrawal rate. Here is an example: Current annual income is $50,000 x 25 = $1,250,000 at 4% = $50,000. It's simple math. As I said, it's wrong because it is based on TODAY'S income level and not that of future income requirements.” (Lance Roberts)
The Annuity Puzzle
“A self-directed investor faced with uncertainty about how long she will live will want to keep some savings in reserve against long life. But, if she converts her savings into an annuity with reasonable terms she should get to spend substantially more because her longevity risk can be pooled with other people. The puzzle is: why don't more people convert their savings into a lifetime annuity as they get older, thus enjoying the benefits of being able to reserve less and spend more?” (Victor Haghani)
Thought For The Day
The above-linked article by Victor Haghani offers fresh ideas on the so-called “annuity puzzle,” which puzzles economists who expect that people would want to smooth out their income in retirement. There are numerous solutions to the annuity puzzle, which Haghani reviews in addition to his own thought that annuity avoiders are miscalculating the risks they are taking. As he puts it:
Bearing one's own longevity risk does not offer compensation in the form of a risk-premium. For many people, longevity risk can be more consequential than the risk they bear in their investment portfolio.”
This may well be the case for lots of investors, for which reason I highly commend this article. But for our purposes here, I’ll suggest my own solution to the annuity puzzle, as well as a critical takeaway that flows from it. The reason annuity sales are just 8% of retirement assets is that people don’t like to lose. As studies have shown, the pain of loss greatly exceeds the thrill of gain. The chance that the insurance company may “win,” and the investor ends up with less than he puts into his annuity is psychologically displeasing, a displeasure compounded by the fact that the investor cannot bequeath any remaining funds to his heirs, and that the sum in question is his life savings.
Put differently, an annuity investment is unlike an investment in real estate, in which an investor who partners with a financial institution sees his equity rise over time, while maintaining the hope that the underlying asset appreciates in value.
And yet while I can understand that an annuity contract and a home purchase are processed differently psychologically, I believe it would behoove investors to see a common advantage they have. There’s a reason we are prepared to take our hard earned savings – our cold hard cash sitting in the bank – and trade it in for a home. From a lifecycle point of view, people intuitively grasp an advantage in trading something impermanent for that which is enduring. We trade our labor – by selling goods or services – for income we use to pay rent, accumulating savings to purchase a home that we control. No less than the Monopoly player who owns properties on Boardwalk and Illinois Avenue, we make money by collecting income, not by paying rent.
And while annuity ownership is certainly not the same as property ownership – unless you outlive other annuitants and thus “profit” thereby – what the former has in common with the latter is the satisfaction of exchanging the impermanent (life savings that will wither from inflation) for the permanent (an income that you cannot outlive).
Not wanting to pay an insurance company is understandable, as is wanting to leave a bequest. By all means, become a real estate monopolist and retire rich, and you’ll never need an annuity. But however you do it, the life-cycle challenge of your post-working years is to replace your pre-retirement income. Whether through a bond ladder, dividend income, stock sales or rental income, some form of permanent income is the manifestation of post-work financial achievement.