An Integrated Approach for a Worry-Free Retirement, by Wade Pfau
Philosophy
This is another Wade Pfau book that I enjoyed for its in depth coverage of annuities and cash value life insurance products. If you have read any of Wade’s other books on retirement you will be familiar with the background material he presents in his books. Much of it is a repeat of what he presents in his other books. So you can skip to the chapters that interest you. If you are unfamiliar with terms like “Sequence of returns risk” or “longevity risk” then you’ll want to start at the beginning.
Main Points
The main point of the book is that Annuities can be efficient products for funding retirement income. This is due to the mortality credits received by those that live longer than average. Mortality credits are excess funds from annuitants that die early. These funds are spread out through the magic of actuarial science to increase the yield of your annuity contract. In short you will probably get more than 4% on your lifetime annuity contract. If you based your whole retirement strategy on stocks and bonds, and limited your withdrawals to 4% you would have a lower standard of living than if you put the same money in annuities. The recommendation is to use annuitized products like Social Security, Pensions and Lifetime Annuities to fund necessities and keep the rest of your money in stocks and bonds like the rest of the F.I.R.E. community is doing.
Are you safety first?
The difference between this book and the one on the 4% rule and safe withdrawals from a stock/bond portfolio is one of risk tolerance. If you are risk averse you might want to dial your strategy more toward the safety first strategy discussed in this book. If you want all the upside potential of stocks and you don’t mind some extra risk, you might still be comfortable with an all stock/bond portfolio.
The reality is that for early retirement strategists, if you have your 25X expenses fully committed to stocks and bonds, you still have annuitized income later in life when you start getting social security. So you are already significantly protected from longevity risk. You are also already above your financial freedom number because the 4% rule doesn’t factor in any other income sources.
Other Products
Wade also goes into cash value life insurance products like whole life and universal life insurance contracts. In the end these products turn out to be less efficient for the strategies espoused in the safety-first philosophy than annuities.
Would Recommend
I would recommend this book to anyone that has reservations about putting all their eggs in the stock/bond basket. If you want to gain spending power while also adding security to your retirement strategy and are willing to forgo some market returns, then this is a good introduction to the efficient ways to go about it.
