End-the-Ponzi-Scheme, a regular reader who frequently comments, complained about the blog I wrote a couple of days ago. The blog said that the odds of being able to pull $1,000 per month from a $150,000 nest egg without running out of money after about a dozen years were 50/50. End-the-Ponzi-Scheme said I didn't provide enough information and scoffed at the suggestion that considering an annuity was a good idea.
Then he rolled out some assumptions that were once true, but don't make good sense in today's economic environment. Ponzi wrote, "At a small 8 percent return, the $150,000 generates $12,000 a year. Withdrawing $12,000 a year doesn't even touch the principal. If you haven't touched the principal, what is the odds of running out of money? I'd guess near zero."
My question for Ponzi is: Where are you going to get 8 percent these days? A retiree with that goal will have to take a lot more risk than most of us would think prudent to get anywhere close. Heck, with investment-grade bond yields at 1.5 percent to 3 percent, you'll have to take quite a bit of risk to even get 5 percent.
Historically, those in retirement could put 20 percent in stocks and 80 percent in bonds and expect to generate a safe 6 percent return. Today, you'll be lucky to get 3 percent to 4 percent.
Should retirees be looking at putting more than 20 percent in equities in this market? Some financial advisers are still suggesting that. But for a lot of us that's a scary retirement planning thought, and that's why I think it is worth looking hard at annuities, especially when you don't have a huge nest egg. Annuities let you offload on an insurance company some of the risk that you'll run out of money.
If you have $2 million or $3 million to invest, that's a different story. But most of us aren't that lucky.