Pensionize Your Nest Egg

List of Exhibits xi Preface xv Preface to the Second Edition xv Preface to the First Edition xvii How to Use This Book xviii Introduction: Why Retirement Income Is Better than Retirement Savings 1 PART ONE: WHY YOU NEED TO BUILD YOUR OWN PENSION PLAN: THE MOST PREDICTABLE CRISIS IN HISTORY 7 Chapter 1: The Real Pension Crisis 9 Up a Creek without a Pension Paddle 11 Mixing Defined Benefit Apples and Defined Contribution Oranges 12 It Takes Two to Tango: A Basic Lesson about the Nature of True Pensions 22 Guarantee versus Ruin 23 When Is a Pension Not a Pension? 24 There Ain’t No Such Thing … as a Free Pension 25 The First True Pensions 27 Chapter 2: Planning for Longevity: Risks While Waiting for Your Return 31 The Grim Reaper’s Coin Toss 35 Introducing Longevity Risk 36 Predicting Future Longevity 39 How Should You Insure against Longevity Risk? 41 Will You Get Heads … or Tails? 41 Chapter 3: How the Sequence of Returns Can Ruin Your Retirement 43 How Long Will the Money Last? 44 Clockwise Investment Returns 47 Counterclockwise Returns 49 Triangles, Bulls, and Bears: The Retirement Income Circus 51 Can Buckets Bail Out a Poor Sequence of Returns? 52 Chapter 4: Inflation: The Great Money Illusion 55 What Does This Mean for Retirees? 58 The CPI-ME and the CPI-YOU 60 Does the CPI Measure Your Spending? 62 A Reality Check for Your Retirement Spending 63 What Have We Learned So Far? 64 PART TWO: DEVELOPING A SUSTAINABLE RETIREMENT SOLUTION: THE MODERN APPROACH THAT IS HUNDREDS OF YEARS OLD 65 Chapter 5: Beyond Asset Allocation: Introducing Product Allocation 67 Product Allocation: New Baskets for Your Nest Egg 67 Three Product Silos 68 The Spectrum of Retirement Income Silos 70 How Do the Silos Stack Up? 72 Chapter 6: An Introduction to Life Annuities 73 Pension Contributions as Insurance Premiums 74 Buying a Personal Pension 75 When Should You Buy an Annuity? 77 Annuities versus Term Deposits 79 Is the Annuity Gamble Worth It? 81 Great-Grandma’s Gamble 81 The Power of Mortality Credits 83 What about 50-Year-Olds—Should They Buy Personal Pensions? 84 What about Interest Rates? 87 How Can I Use Annuities to Protect against Inflation? 89 Unique and Personal Insurance 90 Chapter 7: A Review of Traditional Investment Accounts 93 Asset Allocation in Your SWP 95 What Should You Put in the SWP? 96 Chapter 8: Introducing the Third Silo—Annuities with Guaranteed Living Benefits 99 Guarantees and Growth: How Variable Annuities with Guaranteed Living Income Benefits Work 101 Evaluating an Annuity with Guaranteed Living Benefits: How Should You Choose? 104 Chapter 9: Your Retirement Sustainability: Fundamental Concepts in Retirement Income Planning 107 Which Glasses Will You Wear? 109 How Many Eggs Can You Withdraw from Your Nest? 110 What Should You Protect Against: Floods or Meteorites? 113 Do You Feel Lucky? Pensions, Survival Probabilities, and Spending in Retirement 114 Pensions Change the Game 114 How Does Pensionization Impact Your Retirement Sustainability Quotient? 116 Pension Annuities: Step-by-Step Math 122 The True Gift of Pensionization 124 Chapter 10: The Most Diffi cult Question You Will Ever Have to Answer (About Your Retirement) 125 Retirement Sustainability or Financial Legacy? 127 Pricing Your Inheritance 128 Finding Your Spot on the Frontier 130 Chapter 11: Divvying Up Your Nest Egg 133 Creating a Retirement Plan for Robert Retiree: Cases 1 through 10 133 What Is the Cost to Pensionize? 137 When Should You Pensionize? 140 When Should You Turn Your Living Benefi t On? 141 Chapter 12: A Deeper Look at the Promise of Pensionization: Revisiting the Two Gertrudes 147 Activating the Time Machine: Gertrude at Age 65 148 Lifetime Income: Now or Later? The Implied Longevity Yield 150 Lifetime Income: Now or Later? The Role of Changing Interest Rates 152 A Tool to Help with Your Decision: The “What If I Wait?” Analyzer 155 Moving Beyond Yield: Understanding the Cost-Benefit Trade-off of Pensionizing Your Nest Egg 157 Pensionizing: Financial and Nonfi nancial Benefits 160 Summary of Part Two 161 PART THREE: THE SEVEN STEPS TO PENSIONIZE YOUR NEST EGG 163 Chapter 13: Step 1: Identify Your Desired Retirement Income 165 Estimating Your Desired Income from the Top Down 169 Estimating Your Desired Income from the Ground Up 169 Chapter 14: Step 2: Estimate Your Existing Pensionized Income 173 Public Pensions in the United States, United Kingdom, Canada, Australia, and New Zealand 174 How Much Will You Receive? 174 Benefits from a Defined Benefit Pension Plan 175 What If I’m Worried about the Future of My DB Pension Plan? 177 Timing the Retirement Decision 177 Completing Step 2 177 Chapter 15: Step 3: Determine Your Pension Income Gap 179 Your Average Tax Rate 180 Your Pension Income Gap 181 Adjusting for Inflation 183 Chapter 16: Step 4: Calculate Your Retirement Sustainability Quotient 187 What Kind of Eggs Do You Have in Your Nest? 187 Filling the Gap 188 Chapter 17: Step 5: Assess Your Plan: Is It Sustainable? 193 Chapter 18: Step 6: Calculate Your Expected Financial Legacy 197 Chapter 19: Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg 199 Case Study: Jack and Jill Go Up the Hill (to Fetch a Retirement Income Plan) 200 Step 1: Identify Your Desired Retirement Income 201 Step 2: Estimate Your Existing Pensionized Income 202 Step 3: Determine Your Pension Income Gap 202 Step 4: Calculate Your Retirement Sustainability Quotient 203 Step 5: Assess Your Plan: Is It Sustainable? 204 Step 6: Calculate Your Expected Financial Legacy 206 Step 7: Use Product Allocation to Pensionize Your Nest Egg 207 Summary of Part Three 208 Final Thoughts 209 Notes 213 Bibliography 219 Acknowledgments 221 About the Authors 223 Index 225