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If you needed to guarantee income for 60 yrs.
Old 02-26-2012, 11:10 AM   #1
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If you needed to guarantee income for 60 yrs.

If there were a situation where you needed to guarantee income for someone for up to 60 years, would any of you consider the following.

Investing say 70% in very high quality companies paying at least a 2.5% dividend income with some added stable MLP's and utilities to boost up the div to at least 3.5%, and then a mix of bonds, tips, reits for the remaining 30%. The stocks would still follow an asset mix to get diversification.

Withdrawal would be in and around 2.5%, so you will still have aprox 1% to reinvest from dividends, plus any asset appreciation, to help keep up with inflation.

I am aware of companies cutting dividends during difficult times, and if that happened some drawing of principal might be necessary, but probably not as a cash reserve would also always be available say in CD's for such times. I am aware that without dividend reinvestment, your gains over all would probably lower. But understand, I am looking for a plan to try and insure income for a very long time.

Has anyone pursued this route?
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Old 02-26-2012, 12:00 PM   #2
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I am pursuing a similar route.

I own a mixture of individual stocks, MPLs, REITs, rental RE, plus some inflation-protected bonds and CDs. My target yield is in the 3-3.5% range (currently only 2.9%) with a target withdrawal rate in the sub 3% range.

I do believe that this strategy is the best to fund long retirements, but I would never consider this income guaranteed, especially over a 60-year period. Guaranteed income for me would be a pension or an annuity although I would question the value of even those guarantees over a 60-year period.
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Old 02-26-2012, 01:15 PM   #3
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Well yes, I agree the word "guarantee" is a strong word, and perhaps the wrong choice. In re-thinking it, I would say "more apt to sustain" a very long period. When it comes to stocks, I realize there are no guarantees. I'm just trying to come up with a formula that has the best longevity (with some growth) possibilities. I am just looking for something that can sustain time and income, as opposed to obtaining the highest growth rate.

The other choice I have would be along the lines of seeking alpha, and designating a portion of capital, say $500,000 towards seeking alpha (min 5-6% income, $500,000 in more secure large cap growth div stocks, $500,000 in bond mixture, and the remaining $500,000 in a traditional mix of ETF's (less large caps-have that well covered) This is more risky, but has better upside potential, but greater downside potential with the seeking alpha portion.
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Old 02-26-2012, 01:22 PM   #4
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My take is that even if the strategy you mention is good NOW, it won't be at some time in the future (sectors fall out of favor and others emerge, etc.). My point is that there is probably no "set it and forget it" strategy that works for 60 years. It will require management for the next 60 years. Personally, I don't think I would be up to that (not to worry, I don't have 60 more years). YMMV
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Old 02-26-2012, 01:57 PM   #5
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You can still diversify in sectors with dividend stocks. Then throw in a mix of utilities, MLP's, Reits, BDO's, Bonds, and leave $500,000 to grow for 33 yrs. (retirement age) in well deversified ETF's. At 6% growth (reinvested) you would have aprox. $3,500,000 and at 7% over $4,500,000. Which is the amount financial advisors say you will need in 30-35 yrs.

Trick would be is to get the $1,500,000 to last you 33yrs. without any other income. A 2.5% withdrawal would be $37,500 a year (for a single person)
and at a 3% withdrawal would net $45,000 a yr.

A yearly visit to fee based financial adviser could help keep objectives on track and re-balancing done when needed.

Tell me where my thinking is wrong.
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Old 02-26-2012, 02:12 PM   #6
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You are looking for 2.5% withdrawal, 3.5% yield, and 6-7% annualized growth? Sure, that can be done, but a bit challenging at current high asset prices. What about taxes?

It is impossible to say if it can be done for 60 years. Too many things will happen that cannot be planned for, such a significant tax policy change.
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Old 02-26-2012, 03:32 PM   #7
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No, I am saying a 6 or 7% growth (any div's included) in a $500,000 diversified portfolio of low cost ETF's at Vanguard, that you let ride for 33 years and rebalanced when nec. All money reinvested yearly and possibly any tax consequences from re-balancing only taken from this account. This is bucket 5 that you let ride.

The remaining portfolio ($1,500,000) is designed to throw off at least a 3% yield, and hopefully a 2% capital appreciation-but 3% would be nicer. Your withdrawal is 2.5%. That means this portfolio needs a gain a total return of 5% over the first 33 years. There would still be a cash cushion of at least $150,000 for a couple of down years and emergencies.

Yes, I agree at today's high asset prices it makes capital appreciation much more difficult. Of course I have some money in now, but less than half. Want to settle on what to buy and wait for some opportunities to add to.
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Old 02-26-2012, 07:30 PM   #8
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Originally Posted by modhatter View Post
If there were a situation where you needed to guarantee income for someone for up to 60 years, would any of you consider the following.
As another poster has mentioned, the words "guarantee", "safety", and "insured" all equate to annuities. Or CDs.

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Originally Posted by modhatter View Post
Investing say 70% in very high quality companies paying at least a 2.5% dividend income with some added stable MLP's and utilities to boost up the div to at least 3.5%, and then a mix of bonds, tips, reits for the remaining 30%. The stocks would still follow an asset mix to get diversification.
Has anyone pursued this route?
Have you backtested this strategy for 60 years? What you're describing is the process followed by the Dividend Growth Investor blog, and probably a couple thousand other analysts.

Your logic might be tenuous in ascribing "very high quality" to a company for 60 years. That doesn't even describe IBM or GM or BofA (let alone "newbies" like Berkshire Hathaway). Those first three have all had their near-death experiences over the years-- during which they would've cut their dividends and you would've "hopefully" ditched them in favor of new "very high quality" stocks like Google or Apple.

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The other choice I have would be along the lines of seeking alpha, and designating a portion of capital, say $500,000 towards seeking alpha (min 5-6% income, $500,000 in more secure large cap growth div stocks, $500,000 in bond mixture, and the remaining $500,000 in a traditional mix of ETF's (less large caps-have that well covered) This is more risky, but has better upside potential, but greater downside potential with the seeking alpha portion.
Wow, if only there was a word to describe the practice of putting one's funds in a diverse collection of assets.

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Tell me where my thinking is wrong.
Your thinking isn't necessarily "wrong" as much as it might lack flexibility. Different tax-advantaged styles of investing have come & gone over the years just as fast as Congress has been tinkering with the tax code. It's possible to imagine all sorts of political risks, including a populist version where the 99% achieve a majority in both houses of Congress and slap a 90% tax rate on all dividend-paying stocks.

I think the only scenario in which you can achieve 60 years of highly reliable income is to insure it among a bunch of annuities companies who have every expectation of making a profit from the pool of customers like you. Otherwise it's going to take diversification and monitoring and rebalancing.
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Old 02-26-2012, 08:59 PM   #9
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Ok, so obviously no one agrees with me. So what would you do? Just put together a diversified 60/40 portfolio of indexes and etf's, bonds and Reits
with a 2.5-3% withdrawal and hope for the best in the longevity arena?

Buying short term bonds isn't going to put any money in your pocket now for living expenses. Reits are sky high. Tips would be foolish now. What do you do for the 40% income portion.
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Old 02-26-2012, 10:03 PM   #10
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Originally Posted by modhatter View Post
Ok, so obviously no one agrees with me. So what would you do? Just put together a diversified 60/40 portfolio of indexes and etf's, bonds and Reits
with a 2.5-3% withdrawal and hope for the best in the longevity arena?

Buying short term bonds isn't going to put any money in your pocket now for living expenses. Reits are sky high. Tips would be foolish now. What do you do for the 40% income portion.
I guess I am just wondering why you need a 60 year withdrawal period. Are you retiring at 30? Planning to live to 110? Married to someone 30 years your junior?
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Old 02-26-2012, 10:13 PM   #11
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No, my son is 32 and semi-disabled. Don't ask me to explain, but he is not eligible for any gov. SSI or SDI. He may be able to do some kind of work in the future, but that is a maybe. I just didn't want to go into it. I am 69 yr. old, but in remission so don't expect a long life. Don't want to talk about that though.
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Old 02-26-2012, 10:25 PM   #12
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No, my son is 32 and semi-disabled. Don't ask me to explain, but he is not eligible for any gov. SSI or SDI. He may be able to do some kind of work in the future, but that is a maybe. I just didn't want to go into it. I am 69 yr. old, but in remission so don't expect a long life. Don't want to talk about that though.
Fair enough.

Realistically, I think all you can do is set up a sensible portfolio and ensure that the withdrawal rate is modest out of the gate (3% or less). One way to hedge the risk in the out years might be longevity insurance (AKA a deferred annuity) with a very strong insurer.
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Old 02-28-2012, 05:14 PM   #13
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Ok, so obviously no one agrees with me. So what would you do? Just put together a diversified 60/40 portfolio of indexes and etf's, bonds and Reits with a 2.5-3% withdrawal and hope for the best in the longevity arena?

Buying short term bonds isn't going to put any money in your pocket now for living expenses. Reits are sky high. Tips would be foolish now. What do you do for the 40% income portion.
I would keep it really, really, simple, and maximize diversification, the only "free lunch" in investing. Though deferring capital gains comes close. I would invest on a "total return" basis, rather than a "dividends and interest" basis. The bulk of the portfolio would be in equities, and from five to ten year's of your planned withdrawal rate would be in short-term bonds and money market funds.

My equities would be invested in Vanguard Total World Stock ETF (VT) because you don't know what countries will be up, and what countries will be down over the next 60 years. I certainly can not plan on picking the "winning" active investors over that time period, and no set of sectors I pick now is likely to out perform over 60 years. This equity fund is where all the growth would come from.

I would also have a short-term bond index fund, a MM fund, and an allocation formula to use these as a "bucket" during crashes. That is just crash insurance. If it keeps up with inflation, that is a bonus.

The expensive part will be finding a Trustee you can trust for the next 60 years who will not charge you an arm and a leg. Then figuring out how to write a trust document the Trustee can live with, which ties their hands, but not too much. As you propose, I would use a low withdrawal rate. I probably would NOT try to adjust withdrawals based on the initial portfolio value plus inflation for 60 years. I would tie it more closely to the portfolio's actual results. Though I would probably try to smooth the results, and not simply say withdraw N% of current portfolio value per year. Working current life expectancy into the formula might be useful. My trust document would allow the trustee to get out of my initial investments, and instead select comparably diversified alternatives, so long as the alternatives charged lower fees. You will probably also need some sort of emergency or special needs withdrawal clause. For all of that, you should consult a good lawyer familiar with similar cases.

In the belt-and-suspenders department, I might also buy an inflation adjusted immediate and/or deferred annuity for my child. It would not be a "good" investment compared to managing money myself. However, compared to money held in a trust, it might be reasonable. It would also save me from putting ALL my money in one basket. It sounds like your child would have a hard time taking your Trustee to court if something went wrong. Especially, if the trust was their only source of funds.

Good luck. It is a hard problem.
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Old 02-28-2012, 06:05 PM   #14
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No, my son is 32 and semi-disabled. Don't ask me to explain, but he is not eligible for any gov. SSI or SDI. He may be able to do some kind of work in the future, but that is a maybe. I just didn't want to go into it. I am 69 yr. old, but in remission so don't expect a long life. Don't want to talk about that though.
I honestly hate to say it, but START WITH AN ATTORNEY. Then be certain any trust agreements have some reasonable chance of survival for 60 years. Our kids had trusts from their grandparents and it was a financial NIGHTMARE. The funds were lousy and the fees were extreme. The only reason the kids got anything out of them was because they came due at age 21. Had they been "designed" to go for 60 years, they would have gone dry long before then. By the way, it was our experience that the gummint is not your friend in this endeavor. The laws and "rules" are set up in favor of those who administer the funds. I think I'd be tempted to use annuities (perhaps there is a way to phase them in over time to cover inflation.) This is a tuff one.

If there is a younger close relative who would be trustworthy, there may be a way to appoint that person as trustee rather than a trust company. Perhaps a sibling of your son or perhaps a cousin, etc. would be able to handle this responsibility in your absence.

What you are attempting to do is a wonderful thing. Be sure to put the time and effort into designing it as you won't be here to monitor it. That's a tall order, because there are just too many people who will try to take a piece of the pie before your son gets his share. I hope you can work this out and find peace with it.
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Old 02-28-2012, 09:03 PM   #15
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I honestly hate to say it, but START WITH AN ATTORNEY. Then be certain any trust agreements have some reasonable chance of survival for 60 years. Our kids had trusts from their grandparents and it was a financial NIGHTMARE. The funds were lousy and the fees were extreme. The only reason the kids got anything out of them was because they came due at age 21. Had they been "designed" to go for 60 years, they would have gone dry long before then.
I second this. Get an attorney who knows what they are doing. My FIL has his trust set up by some clueless GP attorney, and it became a nightmare. We spent a fortune straightening it out when he died.
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Old 02-28-2012, 09:53 PM   #16
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In the belt-and-suspenders department, I might also buy an inflation adjusted immediate and/or deferred annuity for my child.
And more than one of these from different insurance companies. You may wish to think about laddering them as well. Otar writes about this.

60 years is a long time. Especially if you think about what has happened in non-US countries over 60-year time spans. Bernstein has written about this.
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Old 02-29-2012, 08:59 AM   #17
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I figured out your situation. I would consider Wellesly, honestly. Set up a distribution at 3% per year and you should be set. Or a brace of annuities foe security. Your biggest problem is going to be finding a trustworthy administrator/trustee.
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Old 03-03-2012, 01:45 PM   #18
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Thanks for all the recommendations. The various possibilities are spinning around in my head constantly. A trustee charges average 1% (and up), and that concerns me, as I wanted to keep his withdrawal at around 2.5% to better enable longevity. I have spoken to a few. He is not so handicapped that if I set up a fund at say Vanguard, and taught him about the need for re balancing he couldn't understand the principal . Vanguard would do that for free with a large enough portfolio. My problem is - I know how easily he could be swayed by people telling him what he should do. So if an adviser tries to direct him into some expensive mutual funds, he would probably trust his advice. He is not a spender himself. He rarely leaves the house. It is not his spending habits that I worry about as much as someone else prying on him.

On the other hand, a trustee who is an individual would probably not outlive him. If it was from a large company like Vanguard, Fidelity, etc., I still face the same problem of someone possibly directing him into such funds - but not as likely. Or someone else on the outside convincing him to buy them a house. I have a living trust, but in order to set up restrictions, I must hire a trustee. If I pay a trustee, he will probably run out of money.

He is an only child, so he does not have any siblings. My sister would be too old, and knows squat about finances. Trusting an individual attorney scares the bageebees out of me. An attorney directed me to someone who specializes in this, but his fees were so high, there would be very little left for my son. So, I continue in perpetual fear of making the wrong call.
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Old 03-03-2012, 01:47 PM   #19
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modhatter, given the situation as you describe it, I would seriously consider a SPIA (or series of SPIAs) for your son. That way there is no investing to be done, the checks just keep arriving every month.
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Old 03-03-2012, 05:43 PM   #20
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modhatter, given the situation as you describe it, I would seriously consider a SPIA (or series of SPIAs) for your son. That way there is no investing to be done, the checks just keep arriving every month.
Concur. I used to sell SPIAs to fund lawsuit settlements. There were several advantages- unlike getting a lump sum and investing it whree the interest would be taxable income, the SPIA was purchased by the insurance company funding the settlemet, under the court directives. Many of these people were quite severely injured in traffic crashes, and everyone concerned wanted to guard against the exact situations that worry modhatter.

I cannot remember if it could be set up so that the beneficiary could not sell the payments ahead for a lump sum. If you can, this is something you want to do-lock down the thing so he doesn't decide to cash out and take a great honeymoon to the Bahamas.

Incidentally, these guys (most were male motorcyle crash victims) got well set, as I sold these things at a huge peak in interest rates, and mostly bought inflation protection although that was the plaintiff's attorney's call. A guy with a regular protected income is well set for female companionship as well as most other things he might want.

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