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Annuities in a S/B/C ratio?
Old 07-20-2015, 01:37 PM   #1
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Annuities in a S/B/C ratio?

I didn't see a "Stupid Questions" forum so I'm posting here. Please forgive my ignorance.

Vanguard Wellesley is about 40/60 stocks/bonds. I'm trying to figure out what the stocks/bonds/cash ratio would be if I help my MIL invest as follows.

- $350k in Wellesley
- $150k in an annuity that guarantees a 3% minimum return
- $25K cash
- $25K one-year CD
- $50k gold

Without the annuity, I would say this is 31% stocks / 47% bonds / 22% cash. Is the annuity considered cash? Or is it its own category?

Just trying to learn the lingo! Thanks!
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Old 07-20-2015, 02:01 PM   #2
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There are lots of different "annuity" products. I'm going to guess that your MIL's is a "deferred" annuity. That's an accumulation vehicle - it is not paying her a monthly income, it's just a fund that is getting some interest.

There's a wide variety of deferred annuities - from very simple to very complex. The simplest are kind of like CDs - they guarantee an interest rate for some term. There's usually a surrender charge which frequently ends at about the same time the guarantee ends.

If that's the type she has, I'd classify it about the same way I'd classify a CD with a similar term.

(Note that deferred annuities have a special tax treatment - you can defer taxes on the interest credited until you take money out.)
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Old 07-20-2015, 02:09 PM   #3
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There are lots of different "annuity" products. I'm going to guess that your MIL's is a "deferred" annuity. That's an accumulation vehicle - it is not paying her a monthly income, it's just a fund that is getting some interest.

There's a wide variety of deferred annuities - from very simple to very complex. The simplest are kind of like CDs - they guarantee an interest rate for some term. There's usually a surrender charge which frequently ends at about the same time the guarantee ends.

If that's the type she has, I'd classify it about the same way I'd classify a CD with a similar term.

(Note that deferred annuities have a special tax treatment - you can defer taxes on the interest credited until you take money out.)
You are exactly right. This is a savings annuity, not an income annuity. I assumed it would be treated as cash when factoring it into a s/b/c ratio, but wanted to make sure.
So that would make the ratio, including the annuity, 23% stock / 35% bonds / 42% cash. Thanks!
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Old 07-20-2015, 02:25 PM   #4
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I would say from a pure asset allocation perspective your numbers 23/35/42 are correct (I did not do the math, but rough review seems right). But keep in mind the money being treated as cash tied up in annuities is not immediately available without a potential penalty. If you need more than the immediate $25K on hand, cashing in some of the gold may be better than the hit on the CD or annuities. However, depending on the gold purchase price, you may have losses in that. I would try to use the annuity cash-out when you can, and put it into Wellesley or similar. CDs may be an option, but right now hard to beat inflation with the interest rates.
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Old 07-20-2015, 06:56 PM   #5
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....Is the annuity considered cash? ...
I would consider the annuities to be fixed income similar to a bond. If the one's your MIL have really earn 4.8% and 3%, those are pretty good returns for minimal credit risk and no interest rate risk. I would keep them for now.

Since there are surrender charges in converting them to cash I would not consider your annuities to be cash.
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Old 07-20-2015, 07:34 PM   #6
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You are exactly right. This is a savings annuity, not an income annuity. I assumed it would be treated as cash when factoring it into a s/b/c ratio, but wanted to make sure.
So that would make the ratio, including the annuity, 23% stock / 35% bonds / 42% cash. Thanks!
I'd say the annuity is "cash" if you use it like cash. If the house needs a new roof, will your MIL say

"No problem, I'll just do a wire transfer from the annuity"?
or will she say "I hate to pay that surrender charge, and getting the money is really awkward, I guess I'll sell some stocks instead"?

I don't know which she would do, but that's how I'd determine the label.
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Old 07-20-2015, 07:38 PM   #7
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Under that logic, a bond would be cash.
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Old 07-20-2015, 08:51 PM   #8
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Cash is essentially a bond with an extremely short duration...a duration of zero.


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Old 07-20-2015, 10:01 PM   #9
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I would ditch the gold. Put that money into something that grows.

What's the point of a 1 yr CD? At the current rates, a CD isn't any better than cash, you can get about the same interest rate.
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Old 07-20-2015, 10:52 PM   #10
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+1 on ditching the gold.
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Old 07-20-2015, 11:16 PM   #11
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The CD was simply to get a better interest rate than just a savings account. I haven't checked interest rates but if what you say is true about them being the same, then I agree there is no point in locking up the money in a CD.

The gold is in the form of gold coins which he collected, so there may be some sentimental value attached to them by the children. My DW is okay with selling them and investing, but we have to check with the rest of the family before we take action on the gold.


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Old 07-21-2015, 12:38 AM   #12
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I would put the annuity in the bond category....

I would put the CD in the cash category....

I would put the gold in the 'other' category (which you do not have)....
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Old 07-21-2015, 01:19 AM   #13
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Originally Posted by Griffers View Post
I didn't see a "Stupid Questions" forum so I'm posting here. Please forgive my ignorance.

Vanguard Wellesley is about 40/60 stocks/bonds. I'm trying to figure out what the stocks/bonds/cash ratio would be if I help my MIL invest as follows.

- $350k in Wellesley
- $150k in an annuity that guarantees a 3% minimum return
- $25K cash
- $25K one-year CD
- $50k gold

Without the annuity, I would say this is 31% stocks / 47% bonds / 22% cash. Is the annuity considered cash? Or is it its own category?

Just trying to learn the lingo! Thanks!
just for my education.... where is gold in your 31/47/22 allocation. Assuming you are buying the commodity gold, would this not be a commodity/alternative? Now if you are buying gold miner stocks... then stock sounds would sound correct.
Others are questioning gold (saying to ditch it).... what were your reasons for including it ?
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Old 07-21-2015, 04:48 AM   #14
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Is the annuity considered cash?
The annuity is considered a mistake. One of THE most expensive financial products out there. Your return on investment will always be terrible with an annuity. Stick with bonds and stocks.
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Old 07-21-2015, 06:42 AM   #15
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I agree.... but, if you already have the annuity a lot of those expenses are a sunk cost and not relevant to the decision... what is important is returns and fees from today forward and if the true return is 4.9% and 3% that is quite good compared to a intermediate term bond fund given it has lower credit risk and no interest rate risk.
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Old 07-21-2015, 07:43 AM   #16
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Bingybear- I was counting the gold coins as part of the cash portion because, if the family approved, they could be sold for cash.

ETFS_rule- yes, but I'm dealing with helping my MIL arrange what she already has. I'm not putting her into annuities but helping her decide whether to stay in the ones she's already in. Her recently deceased DH purchased them years ago.


Regarding my main question of determining what goes where in a s/b/c ratio, as I help my MIL I want to make sure the ratio I help her get into is appropriate for her. I know I don't want her, at 73 with low risk tolerance, at 85/10/5. But 23/35/42 seems cash heavy to me.

Working toward a target ratio won't help if I'm incorrectly allocating the annuities (and/or gold) portion. Also, as a newbie to this, I'm also just trying to learn the lingo. 😀


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Old 07-21-2015, 07:56 AM   #17
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Pb4uski- I agree about the sunk costs. Trying to avoid surrender fees now.

I did calculations based on initial deposits in the fixed 4.8% annuity. FIL opened it in early 2008 and has earned a true 4.8% since then. It will continue to do so until April 2016 at which point it will drop to a minimum of 3% and will lose the surrender fees.

Whether it was a good or bad purchase may be an interesting question and a good lesson for others, but, as you say, it's current rate and fees are what will determine what we do with it.




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Old 07-21-2015, 08:28 AM   #18
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Bingybear- I was counting the gold coins as part of the cash portion because, if the family approved, they could be sold for cash.
So could many non-cash assets. I have never tried to sell gold coins, but I think that so called bullion coins are considered fairly liquid, meaning there is not an outrageous bid/ask spread.

However, cash has no market risk, and gold including bullion gold coins has considerable market risk, as recent experience very well shows.

I do not concur with the advice to sell the gold immediately. You may well want to mark it for disposal, and it is certainly possible that the market price of gold is heading down for who knows how long. But I think the odds are against this, if only because the price has been going down for quite a while now. I am no gold bug, but gold price does go up at times, as well as down, This is pretty well demonstrated by the low price below $300/oz in the early oughts, and the high around $1800 in 2011. Gold is always counted a poor asset, unless it is going up, in which case many people who once hated it now will find themselves wanting it.


True of many assets!

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Old 07-21-2015, 08:37 AM   #19
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The 50k in gold. Is that bullion price or collectors price? Big difference between the liquidity of the two. I'm assume MIL isn't planning a bug out.

Your heading down the right path, I don't plan on having that much in safe assets at 73.
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Old 07-21-2015, 08:54 AM   #20
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Under that logic, a bond would be cash.
Bonds have market values that fluctuate with interest rates. CDs and this type of annuity have guaranteed surrender values.

So, I could imagine the MIL saying she wouldn't feel comfortable using a bond for her emergency fund, because she isn't confident of the price, while saying she's fine with categorizing a CD or this annuity as "cash".

I suppose we could debate the meaning of "cash". I'm thinking that, given the three possible labels, an emergency fund is "cash". I could be wrong on that assumption.

This brings up my first thought on reading the thread (which I didn't post) - "Why do you want to apply one of these three labels to every one of her assets?"

That always seems too vague, but it's really the first question for any labeling scheme.
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