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Generating Retirement Income from Bonds
Old 12-07-2015, 06:31 PM   #1
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Generating Retirement Income from Bonds

I would like some direction from those already retired well before SS kicks in.
I will be shutting down my business (Oilfield Equipment Supplier) in the 1st quarter of 2016 due to the lack of business. This sector of manufacturing will likely not get busy again for several years. I will be 60 yrs in A few months and would like to plan the best way to fund retirement for the DW (53yrs)and I. 50% of our assets are in Vanguard Balanced Funds and Target Date 2025, we have 400k in an annuity and the rest in cash (2 mil).
The question is whether I should Trigger the annuity for regular monthly income now or wait.
The other question is: Would you recommend putting the 2 mil in a Vanguard Muni Fund, or the Vanguard Corporate Bond fund that is taxable. And finally, how does any of this affect my ACA Insurance premiums?

Neither of us have a pension, just SS at age 66,

Any direction or advice is appreciated.


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Old 12-07-2015, 07:30 PM   #2
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I would put 60% in stocks and 40% in bonds at your age. You can diversify it over several funds that follow the Dow, the S&P, and the bond market.
If your withdrawal rate (your income) is less than 4X the poverty level ($16000), you'd still get some form of discount via ACA premiums. If your annuity will grow faster than your stock/bond portfolio, then get it later. If you think your stock/bond portfolio will grown faster and generate more income than your annuity, then withdraw from your annuity after you retire.


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Old 12-07-2015, 09:09 PM   #3
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I agreee with cyber888 but would spread out your investment in stocks and bonds over a year. You might want to consider having a 60/30/10 AA because interest rates are going to stay low as comparred to history. All of these folks not showing up as employed is going to be a continued drag on the economy - imo.
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Old 12-07-2015, 11:35 PM   #4
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Contact Vanguard and ask them to do a financial plan for you. We retired at 56 and just turned 60 and target a 60/34/6 AA. However, I would count the annuity as part of the 34% of fixed income.

If you are going to invest in bonds, be cautious about taking on to much interest rate risk.
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Old 12-08-2015, 10:00 AM   #5
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The question is whether I should Trigger the annuity for regular monthly income now or wait.
If you mean "start a life income, with no surrender value", I'd wait.
At current interest rates, deferring SS is a much better way to buy a lifetime income. You've got enough assets to make that work.

OTOH, you may mean "take regular monthly partial withdrawals from the annuity". That probably depends on your tax situation.

If I read your post correctly, you have $4.8 million in financial assets. You didn't say how much income you want from that.

If you are deep into bonds, how will you protect yourself from inflation? If you absolutely don't want stocks, consider TIPS.
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Old 12-08-2015, 12:37 PM   #6
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We have tracked our expenses for the last 9 months and it looks like we spend an average of 11k per month. That covers everything. We will need to start some kind of regular cash flow from our investments in a few months. I just thought a bond fund might produce most of the income and then trigger the annuity.



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Old 12-08-2015, 12:40 PM   #7
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I do want to keep 40 - 50 % in mutual funds, it is already in Vanguard Balanced fund and Target 2025


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Old 12-08-2015, 12:51 PM   #8
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I'm a 60/40 total return investor and pay little attention to the income my portfolio generates since it is only a small piece of the total.

See this paper.

Quote:
We conclude that moving from an income or “yield” focus to a total-return approach may be the better solution.
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spia now or later
Old 12-08-2015, 01:28 PM   #9
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spia now or later

On a different note - I've been looking at SPIA for myself and early retirement. I used immediate annuities.com and vanguard's site. For each year I put off buying the spia it gave .04% more income (i.e. 5.27% at age 50 (no inflation adjustment), 5.31% at age 51). Having it in a "safe" savings account gets me 2.2% per year. So I tried to calculate how long it would take the extra .04% per year for life of income to make up for 1 year of "missed" income. It suggests getting the spia sooner rather than later.
ie - if I have $100,000 earning 2.2% a year and I immediately convert it to a spia at age 50 I would have 5270$ per year income. If I wait a year I'd have 40$ more (i.e. 5310$). Meanwhile, while waiting a year it'd earn 2200$. So it would take >50 years to make up for the year's lost income of 5270-2200=3070$.

So if your $400,000 in annuities is earning <4% it would likely make sense to convert it to income sooner. (of course, if you wait long enough - maybe age 70+) then presumably the mortality credit would increase income enough to make up for the "lost" years sooner. But for early retirement, waiting doesn't pay if you're going to have it sit in a "safe" investment given low interest rates today...
Feel free anyone to correct my math or look up quotes - I was surprised by results and maybe I misunderstood them...
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Old 12-08-2015, 02:05 PM   #10
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Be careful newtoseattle... you are comparing apples and oranges.

The 5.x% is what is called the payout rate.. it is a combination of interest on your money and a return of your money (premium).

It is inappropriate to compare the payout rate to your 2.2% interest earnings rate. It is also hard to know the interest rate implicit in a SPIA because you don't know how long you will live but there are two ways to get a sense of what the interest rate implicit in the SPIA is.

First, look to interest rates implicit in 15 or 20 year period certain annuities as a proxy. The payout rate for a 15 year period certain annuity is 8.38% and the implicit interest rate is 3.16%. The payout rate for a 20 year period certain annuity is 6.84% and the implicit interest rate is 2.47%.

Another way to look at it is of the 5.28% payout your receive each year in the SPIA, ~ 2.92% is a return of principal (100% divided by a 34.4 year remaining lifetime for a 50 yo) and 2.36% is interest.

However, the 2.2% is a short rate and these annuity rates are longer term rate so they are not perfectly comparable (like comparing 1 year CD rates with 15 or 20 year CD rates).

That said, please let me know where I can get that "safe" savings account return of 2.2%.
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Old 12-09-2015, 11:20 AM   #11
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My "safe" savings is the flexible premium annuity from USAA. Locks up your money, but a bit higher than a CD.
I understand that the payout from a SPIA includes return of principle. But in reading the original question they say they have 400k in an annuity and wondered when to begin to get payouts. At least from what I looked up -if they're wanting to eventually have a SPIA, sometimes taking the payouts sooner rather than later seems to pay off... Although not a strategy used by many, a non cola'd spia in early retirement is a way to bridge "safe" floor income until SS kicks in. For those of us who are risk averse, it gives some comfort to allowing the stock/bond portfolio to bounce around knowing you don't have to withdraw from it in down years...
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Old 12-09-2015, 01:37 PM   #12
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Originally Posted by newtoseattle View Post
On a different note - I've been looking at SPIA for myself and early retirement. I used immediate annuities.com and vanguard's site. For each year I put off buying the spia it gave .04% more income (i.e. 5.27% at age 50 (no inflation adjustment), 5.31% at age 51). Having it in a "safe" savings account gets me 2.2% per year. So I tried to calculate how long it would take the extra .04% per year for life of income to make up for 1 year of "missed" income. It suggests getting the spia sooner rather than later.
ie - if I have $100,000 earning 2.2% a year and I immediately convert it to a spia at age 50 I would have 5270$ per year income. If I wait a year I'd have 40$ more (i.e. 5310$). Meanwhile, while waiting a year it'd earn 2200$. So it would take >50 years to make up for the year's lost income of 5270-2200=3070$.

So if your $400,000 in annuities is earning <4% it would likely make sense to convert it to income sooner. (of course, if you wait long enough - maybe age 70+) then presumably the mortality credit would increase income enough to make up for the "lost" years sooner. But for early retirement, waiting doesn't pay if you're going to have it sit in a "safe" investment given low interest rates today...
Feel free anyone to correct my math or look up quotes - I was surprised by results and maybe I misunderstood them...
Here's another view of the math that gives essentially the same result.

Suppose you can earn 4.8% over the next year on your $100,000.

a) You could start an annuity today that will pay $5,270 per year.

b) You could take $5,270 out of your $100,000 today and spend it.
That leaves $94,730 to accumulate at 4.8%.
After a year, you will have $99,277.
If you buy the annuity then, your annual payments will be
$99,277 x .0531 = $5,271.

So (a) and (b) provide the same spending money in every year, regardless of how long you live (actually, as long as you live at least one year).

Using, this approach, your break-even interest requirement is 4.8%.

It's interesting that if you could consistently earn 4.8%, you could simply keep the money, withdraw $5,270 every year, and your money would last for 43 years. (45 years if I do monthly withdrawals).

The insurance company may be pricing the annuity with a mortality table that says you have a life expectancy of 39 years (to age 89) and a 34% probability of surviving for 45 years.
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Old 12-10-2015, 10:40 AM   #13
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I agree that something like a 60/40 portfolio is a good bet and if you need income I would probably start the annuity.

It will be hard to produce net income from a bond allocation over the next 5 or 10 years.....unless you take on lots of risk....so just hold your nose and know that the bonds will at least reduce volatility and hope that they will produce some income in the future.

Use a Vanguard planner to come up with a portfolio that will achieve your goals, but if you are spending $11k a month you should have a portfolio of at least $4M, probably more as you are retiring at a time of very low interest rates.
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Old 12-10-2015, 10:55 AM   #14
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Originally Posted by newtoseattle View Post
My "safe" savings is the flexible premium annuity from USAA. Locks up your money, but a bit higher than a CD.
I understand that the payout from a SPIA includes return of principle. But in reading the original question they say they have 400k in an annuity and wondered when to begin to get payouts. At least from what I looked up -if they're wanting to eventually have a SPIA, sometimes taking the payouts sooner rather than later seems to pay off... Although not a strategy used by many, a non cola'd spia in early retirement is a way to bridge "safe" floor income until SS kicks in. For those of us who are risk averse, it gives some comfort to allowing the stock/bond portfolio to bounce around knowing you don't have to withdraw from it in down years...
Whether to take the annuity depends on the need for income, health, the composition of the rest of the portfolio and personal preference. If the OP takes the annuity now they can be a bit more aggressive with the rest of the portfolio. To know the most appropriate asset mix we need to know the net worth, income need and preferences of the OP. A Vanguard advisor will do that for free. If the OP is conservative and has a large portfolio compared to income needs then a liability matching approach might be appropriate. If the OP needs to generate a bit more return then a portfolio with more stocks would be appropriate.
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Old 12-10-2015, 11:05 PM   #15
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I really appreciate all of the input.
Our net worth is somewhere just north of 6mil. That includes a house worth about 600k. We have no debts so everything is paid for. We still have a 15 yr old daughter that we care for and my in laws that need our help from time to time.
So the consensus is to have Vanguard structure the correct AA and withdrawal plan in order to accommodate our monthly cash flow needs. I'm not looking to knock anything out of the park, just to maintain a lifestyle that is reasonable and care for my DW after I am no longer vital. We are currently in the process of downsizing from a 4800 st ft home to approx 3000 sq ft 1 story home closer to the in laws. This will cut my taxes almost in half, in addition to not having a $3500 MUD tax every year.

I just seem to spend a lot of time looking at cash flow scenarios before the glorious day of retirement.


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