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Is 4.388% attractive to you?
Old 07-15-2013, 11:46 AM   #1
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Is 4.388% attractive to you?

As I get closer to ER I'm looking at my fixed income portfolio. I recently moved some intermediate bonds and REIT money that had nice gains into a stable value fund with a 2.6% annual return to give me a 5 year "safe" income buffer.

Now I'm looking at my AA for the longer term. So would you put some fixed income money into an investment that would guarantee you 4.388% on money you invested this year for as long as you live?
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Old 07-15-2013, 11:48 AM   #2
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It depends on how safe my principal would be, but assuming the principal would be safe it sounds attractive.

I wish I had access to your stable value fund.
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Old 07-15-2013, 11:52 AM   #3
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Can you recover the principal at any time or at least at a defined maturity date?
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Old 07-15-2013, 12:03 PM   #4
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Can you recover the principal at any time or at least at a defined maturity date?
Good question, you went right to the heart of it........the answer is no because it's a deferred annuity.
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Old 07-15-2013, 12:03 PM   #5
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An annuity won't do much better than that, depending on your age, but you won't get your money back. What if inflation averaged 5%?
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Old 07-15-2013, 12:17 PM   #6
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would guarantee you 4.388% on money you invested this year for as long as you live?
Since I plan to live a long time, I would definitely not consider it.
Living through the Carter inflation years was a sobering and highly educational experience.
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Old 07-15-2013, 12:37 PM   #7
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Good question, you went right to the heart of it........the answer is no because it's a deferred annuity.
The 30-yr treasury bond currently yields ~3.65% so for an extra 74 basis points you are giving away your principal and buying some insurance against reinvestment risk 30 years down the road, which seems low at this point (the long term average yield for the 30 year treasury bond is ~ 7%). Plus you are probably taking more credit risk by entrusting your money to a private insurer instead of the Federal government. So on the face of it, it seems like a pretty expensive deal to me.

However, you have to look at it in the context of your overall financial picture. If you have the potential to get decent inflation protection elsewhere and if this represents only a small fraction of your portfolio then I say "maybe".
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Old 07-15-2013, 12:40 PM   #8
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Can you recover the principal at any time or at least at a defined maturity date?
Actually this deferred annuity is with TIAA-CREF and has a 3% guaranteed minimum and is paying interest of 4.388% on 2013 contributions. I can get my money out after age 55 in a series of 10 equal annual payments or choose to buy an annuity. The annual annuity payments are calculated using a minimum interest rate of 3% plus an additional rate that varies each year according to current bond/interest rate environment. So this year the additional interest rate is 1.388%, but if inflation kicked in that additional rate would go up too. Here are the accumulation and payout guaranteed interest rates. They don't include the additional rates that are declared each year. So if the interest rate on the 30 year Treasuries goes up the annuity payout will also go up.

https://www.tiaa-cref.org/public/per...iles/4026.html
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Old 07-15-2013, 01:05 PM   #9
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Actually this deferred annuity is with TIAA-CREF and has a 3% guaranteed minimum and is paying interest of 4.388% on 2013 contributions. I can get my money out after age 55 in a series of 10 equal annual payments or choose to buy an annuity. The annual annuity payments are calculated using a minimum interest rate of 3% plus an additional rate that varies each year according to current bond/interest rate environment. So this year the additional interest rate is 1.388%, but if inflation kicked in that additional rate would go up too.
Just checking for understanding.

Is there any other fees for managing the account, etc that would be
subtracted from the annual payment or interest earned?
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Old 07-15-2013, 01:24 PM   #10
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Just checking for understanding.

Is there any other fees for managing the account, etc that would be
subtracted from the annual payment or interest earned?
None that I can find. Their variablle annuities have fees of around 0.5%. But the traditional and fixed deferred annuities don't show any feed.
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Old 07-15-2013, 03:10 PM   #11
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I am also in a TIAA-CREF retirement plan -- and I think I understand it pretty well. I have some money in the TIAA portion but as I read it new money is earning only 3%. I looked at the site you mentioned and don't understand how you think it says it guarantees 4.388 percent for as long as you live. Am I missing something?
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Old 07-15-2013, 03:18 PM   #12
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The 30-yr treasury bond currently yields ~3.65% so for an extra 74 basis points you are giving away your principal and buying some insurance against reinvestment risk 30 years down the road, which seems low at this point (the long term average yield for the 30 year treasury bond is ~ 7%). Plus you are probably taking more credit risk by entrusting your money to a private insurer instead of the Federal government. So on the face of it, it seems like a pretty expensive deal to me.

However, you have to look at it in the context of your overall financial picture. If you have the potential to get decent inflation protection elsewhere and if this represents only a small fraction of your portfolio then I say "maybe".
If it is a deferred annuity you are not giving away your principal. If a SPIA yes but not so for a deferred annuity.
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Old 07-15-2013, 03:23 PM   #13
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Good question, you went right to the heart of it........the answer is no because it's a deferred annuity.
Most deferred annuities allow you to get out your money at any time you want but subject to a surrender change.
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Old 07-15-2013, 03:28 PM   #14
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Nope, I wouldn't be interested in locking in 4.388% fixed for the rest of my life.

Ref: US annual inflation rates in the chart below. 5% looks okay as a long-term average if we eyeball this chart, but those "mountains" are scary. If/when inflation goes much higher, even for just a few years, it could take a very long time for assets at 4-5% (nominal) return to recover their buying power.



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Old 07-15-2013, 03:37 PM   #15
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If it is a deferred annuity you are not giving away your principal. If a SPIA yes but not so for a deferred annuity.
Wouldn't he have to give up the principal in order to have "an investment that would guarantee you 4.388% on money you invested this year for as long as you live?" I based my reasoning on the assumption that he would not surrender the contract or it would defeat the stated purpose.
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Old 07-15-2013, 08:53 PM   #16
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Can you recover the principal at any time or at least at a defined maturity date?
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Good question, you went right to the heart of it........the answer is no because it's a deferred annuity.
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....you are giving away your principal ...
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Originally Posted by pb4uski View Post
If it is a deferred annuity you are not giving away your principal. If a SPIA yes but not so for a deferred annuity.
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Originally Posted by FIREd View Post
Wouldn't he have to give up the principal in order to have "an investment that would guarantee you 4.388% on money you invested this year for as long as you live?" I based my reasoning on the assumption that he would not surrender the contract or it would defeat the stated purpose.
The OP told you it was a deferred annuity. You indicated that one problem is that the OP would be "giving away your principal". That is not true, most deferred annuities you can access you money at any time but subject to a surrender charge.

I think the OP clarified that the 4.388% only applied to 2013 contributions. It is not for as long as you live. It would be reset as interest rates change. The OP clarified that in post #8 that the rate would change as interest rates change but would always be at least 3%.
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Old 07-15-2013, 09:20 PM   #17
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If you are risk-averse, it's hard to imagine much better than a sure-thing 4.388% return.
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Old 07-15-2013, 10:56 PM   #18
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If you are risk-averse, it's hard to imagine much better than a sure-thing 4.388% return.
Except maybe a guaranteed real return (pegged to the inflation rate)? I'd think the average risk-averse investor would be happier with 2% real than with 4.4% nominal. That's been possible for most of the history of TIPS, though it's not possible today. It might be possible again in the future, which might be worth waiting for.

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Old 07-16-2013, 08:41 AM   #19
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If you are risk-averse, it's hard to imagine much better than a sure-thing 4.388% return.
Real return, yes! Nominal return, not so much. If you invested in an annuity at 4.388%, and inflation went up to 10%, it wouldn't look so good!

That's why my response to the original question would be: that's a nice rate for a secure investment with a maturity of 1-5 years (e.g. A CD or GIC). I do not expect inflation to be higher than the historical 3.3% during that time. Anything beyond that, I want more potential upside.
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Old 07-16-2013, 10:03 AM   #20
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The OP told you it was a deferred annuity. You indicated that one problem is that the OP would be "giving away your principal". That is not true, most deferred annuities you can access you money at any time but subject to a surrender charge.

I think the OP clarified that the 4.388% only applied to 2013 contributions. It is not for as long as you live. It would be reset as interest rates change. The OP clarified that in post #8 that the rate would change as interest rates change but would always be at least 3%.
OK, but then the surrender charge would need to be factored into the calculation.

Looking at your second paragraph - how the heck would anyone evaluate this? It's a moving target.

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