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Old 08-20-2014, 05:18 PM   #21
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[QUOTE=eta2020;1484140]We are facing same issue first 10 years of retirement. That is we can not access 401ks, IRAs and SSs. Those 3 things slowly kick in one after another.

We will only have access to dividend yield of brokerage account........[QUOTE]

This is why I describe those 3 items as my "reinforcements" which I can begin tapping into, in an unfettered manner, when I turn ~59.5, or about 8 years from now and 14 years from when I first ERed back in 2008.

For now, I use most of the monthly dividends from my taxable accounts, reinvesting the rest as well as any cap gain distributions.
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Old 08-20-2014, 05:21 PM   #22
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Can I ask how you arrived at the 2.3% interest figure? That's one of the things I don't like about SPIAs...it's hard to get a true ROR that doesn't include return of my own money.
Sure. It is just the internal rate of return implicit in a $395,000 cash outflow followed by 96 $4,500 cash inflows.

I used the RATE function in Excel assuming an 8 year (96 month term), a $4500 per month payment and a $395,000 cash outflow (negative pv). That gives you the monthly interest rate I'll term "mi" which is 0.188%. Then you need to annualize it by taking [(1+mi)^12]-1 which gives you 2.27% and I rounded it up to 2.3%.

However an easier version is to calculate the interest over the 8 years as ($4,500*96 months) - the $395,000 premium paid or $37,000 and divide it by 8 years to get an average interest of $4,625 a year and then divide it by the average principal outstanding (half of the $395,000), which gets you 2.34% which is close enough.

IOW, of the $432,000 you receive over the 8 years, $395,000 is just a return of your principal and the rest is interest on your outstanding principal balance just as if you loaned the $395,000 to the insurance company for 2.27% interest with an 8 year fixed payment schedule (like an 8 year mortgage).

This approach should work for all period certain SPIAs (with no life contingent features).
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Old 08-20-2014, 05:42 PM   #23
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Thanks pb4uski...i actually understand that!

So if I am comparing between a CD ladder and this SPIA I would need a ladder that generates a > 2.3% ROR. Note that I'm excluding insurance company risk for purposes of evaluation.
Is it possible in today's interest rate environment to generate 2.3% or better using a CD ladder as structured in my previous reply?
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Old 08-20-2014, 06:18 PM   #24
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Well, the first and more relevant question is whether it is really necessary to finance your first eight years that way and while in most cases I don't think so, but let's say you insisted on it.

Even an online savings account would pay 1% and would be about as risk free as you can get and have ready access to your funds so if you do explore a CD ladder, substitute online savings accounts until the CD rate exceeds the online savings account rate.

I think it would be challenging to do with a CD ladder with today's rates, but that really isn't a fair comparison since CD rates have no credit risk since they are FDIC insured but you could probably get pretty close (a little less than 2% in my estimation).

See https://personal.vanguard.com/us/funds/bonds/bonddesk

You could probably construct a high quality corporate bond portfolio that would earn close to 2.3% and give you much more flexibility albeit with some work (at least for your broker). The thing I don't like about the SPIA is the loss of control and access to your $395,000 given the minimal benefit over other fixed income alternatives.

If it were me and I were determined to do a ladder I would use online savings accounts for the first two years and Guggenheim Bulletshares for the out years. The return would be a bit lower (about 2% on average) but I could get to my money anytime I wanted to. Or a high quality diversified corporate bond ladder through your broker.

Or put three years into an online savings account and the rest into Wellesley and redeem some Wellesley each year to replenish the online savings account with any gains and skip it in years that are a loss.
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Old 08-21-2014, 09:13 AM   #25
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We are facing same issue first 10 years of retirement. That is we can not access 401ks, IRAs and SSs. Those 3 things slowly kick in one after another.
Of course you can access your tax-deferred money without penalty, you just have to be willing to do 72(t) withdrawals for a min of 5 years. But I realize that you don't actually need to do this, it's more of an emergency backstop for you (and me).
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Old 08-23-2014, 06:56 PM   #26
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This will cover us until SS at 70.5 (unless future analysis shows us better off taking SS earlier). I see no need for an annuity in our case.
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Won't one of you take Spousal SS at FRA?
That is on my radar, but I tend to view it more as bonus funds just in case SS gets cut back. In any case, I figure that I will do a more advanced SS strategy analysis to determine timing when I get closer to 62.
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Old 08-23-2014, 08:18 PM   #27
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That is on my radar, but I tend to view it more as bonus funds just in case SS gets cut back. In any case, I figure that I will do a more advanced SS strategy analysis to determine timing when I get closer to 62.
What I meant was that if two of you planned to wait until 70 for SS, you would surely have one take spousal at FRA since that is free money (assuming the law doesn't change).
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Old 08-24-2014, 05:53 PM   #28
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I'm planning to take a larger % from the portfolio until SS and DW can 72t from her IRAs. It's about 2.5% now; 5% when DW retires, then back to 3.75-4% when SS kicks in.
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Stable Value Fund vs CD Ladder
Old 07-24-2015, 06:37 PM   #29
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Stable Value Fund vs CD Ladder

Hi...As a follow-up to my initial question about a year ago, I came across an option for which I would like your opinion.

My 401(k) plan through Fidelity offers a Stable Value fund as an investment choice. Its 1/3/5 year returns were 1.86%/1.82%/2.10%, and its ER is 0.32%.

Instead of the CD ladder, my thought is to put the monies intended for the ladder into the Stable Value fund. The fund has restrictions on withdrawals, but those pertain to transfers to "competing" funds. I would only withdraw out of the fund for use in spending. With rising (maybe?) interest rates in the future, the fund seems like a better choice than locking up short-term money in CDs.

Given a planned retirement date in the next 6-8 months, high market valuations, and interest rate rises coming (maybe), I am just a bit nervous about sequence of returns risk, I guess.

Would love to hear your thoughts.
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Old 07-24-2015, 07:12 PM   #30
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Absolutely. 1.82% with low credit risk and no interest rate risk is about as close to a slam-dunk as you can get.
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Old 07-24-2015, 07:18 PM   #31
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I have a Fidelity fund at work too. What stable value fund are you considering? I:d like to see if it is on offer in my plan?
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Old 07-24-2015, 07:39 PM   #32
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Hi...As a follow-up to my initial question about a year ago, I came across an option for which I would like your opinion.

My 401(k) plan through Fidelity offers a Stable Value fund as an investment choice. Its 1/3/5 year returns were 1.86%/1.82%/2.10%, and its ER is 0.32%.

Instead of the CD ladder, my thought is to put the monies intended for the ladder into the Stable Value fund. The fund has restrictions on withdrawals, but those pertain to transfers to "competing" funds. I would only withdraw out of the fund for use in spending. With rising (maybe?) interest rates in the future, the fund seems like a better choice than locking up short-term money in CDs.

Given a planned retirement date in the next 6-8 months, high market valuations, and interest rate rises coming (maybe), I am just a bit nervous about sequence of returns risk, I guess.

Would love to hear your thoughts.
Wow, yours is so much better than mine! (mine is 0.83%/0.70%/1.12%)
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Old 07-24-2015, 10:13 PM   #33
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I would call vanguards annuity desk. They sell annuities and cut out the salemen. You get the same rate they give the big boys. Its thru a company called Income Solutions.
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Old 07-24-2015, 10:52 PM   #34
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I have a Fidelity fund at work too. What stable value fund are you considering? I:d like to see if it is on offer in my plan?
Hi GreenER,

The Stable Value Fund offered through my Fidelity 401(k) is BNY Mellon Stable Value.
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Old 07-25-2015, 01:27 PM   #35
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I'm confused on how anything but the interest on a CD ladder (or the implied interest on a period certain SPIA) actually can be considered "guaranteed income". I obviously need to read more on the subject. To cover $50k in expense at 1.8% you'd need to invest $2.8mm --- unless what we are really talking about is "guaranteed source of funds" in which case the $200k bond / cd ladder works.
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Old 07-25-2015, 03:28 PM   #36
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I don't think it's appropriate to compare stable value funds which are made up of equities and bonds to CDs. CDs are completely safe capital and stable value funds can lose money in a market correction. I know stable value funds and dividend based funds have rallied as CD and bond rates neared zero but the underlying risk must be considered.


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Old 07-25-2015, 05:44 PM   #37
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...To cover $50k in expense at 1.8% you'd need to invest $2.8mm --- unless what we are really talking about is "guaranteed source of funds" in which case the $200k bond / cd ladder works.
Your latter assumption is correct, Live and Learn. Once I retire I'll be in withdrawal mode, so looking for a stable source of withdrawals.
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Old 07-25-2015, 06:03 PM   #38
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I don't think it's appropriate to compare stable value funds which are made up of equities and bonds to CDs. CDs are completely safe capital and stable value funds can lose money in a market correction. I know stable value funds and dividend based funds have rallied as CD and bond rates neared zero but the underlying risk must be considered.
There are no equities in the Stable Value Fund I am considering. It is comprised of 100% cash and cash equivalents, with an average duration of 3.15 years, and a credit quality of mostly AAA and AA.

The risk with this fund, IMO, is that the stability is guaranteed by contracts written by insurance companies. Therefore there is the risk that the insurers could have solvency issues.
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Old 07-25-2015, 08:21 PM   #39
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I don't think it's appropriate to compare stable value funds which are made up of equities and bonds to CDs. CDs are completely safe capital and stable value funds can lose money in a market correction. I know stable value funds and dividend based funds have rallied as CD and bond rates neared zero but the underlying risk must be considered.


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I disagree. I'm not sure what sort of funds you are thinking of but what you describe are NOT stable value funds. See Stable value fund - Bogleheads

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Stable value funds are capital preservation investment options available in 401(k) plans and other types of savings plans. The funds are comprised of high quality, diversified fixed income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. Stable value funds are designed to preserve capital while providing steady, positive returns. Stable value funds are conservative and are considered one of the lowest risk investment options offered in 401(k) plans.
Essentially a CD substitute.
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Old 07-27-2015, 11:48 AM   #40
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thanks for correction pb4uski, you are right what I looked at was income replacement and stable value bond funds and they include equities and bonds, so they are using stable value as a marketing term not a fund definition. Can you point me to the funds you mean by this definition, thru Vanguard or Fido?
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