Need 5% APY for 10 years with Liquidity

[Hydroman]

I have $300K which I am willing to draw down to zero over a period of 10 years with a starting withdrawal amount of $30K to be increased by 3% per year. I have estimated that I will need a 5% per year return on the principle for the funds to last 10 years. I am looking for recommendations on where to park the $300K where I can maintain a 5% return over a 10 year period with liquidity. A guaranteed return would be nice, but I expect I will need to assume some minimal risk/volatility to achieve the return necessary for the funds to last 10 years at my planned withdrawal rate. Just running some scenarios right now and I will appreciate any input the members of the forum may be able to provide.

Thanks.

Well, I think if you look at these CD's, you could structure a ladder of CD's from 6 mos to 10 years maturity that would do pretty much what you want and give you 5.2% Yield.

https://www.emigrantdirect.com/Emigr.../CDLanding.jsp

[Ed_The_Gypsy]

I second C-T.

You can get what you need from a CD ladder. Keep one year's worth in a money market fund for access. Dump the CDs into the MMF as they mature.

[JohnEyles]

Originally Posted by Hydroman

I have $300K which I am willing to draw down to zero over a period of 10 years with a starting withdrawal amount of $30K to be increased by 3% per year. ...

A guaranteed return would be nice, but I expect I will need to assume some minimal risk/volatility to achieve the return necessary for the funds to last 10 years at my planned withdrawal rate.

If you are willing to settle for a 4% per year increase instead of 3%, you can get this
return, guaranteed, from a Vanguard/AIG immediate annuity (I've assumed you're a
very young woman living in a long-longevity state, but for a fixed 10-yr payout the
demographics shouldn't matter much):

http://www.aigretirementgold.com/vli...=RequestaQuote

Primary Annuitant -- Birth date: 01/01/1980 Sex: F
Quote Expiration Date: 12/17/2006
Benefit Commencement Date: 02/01/2007
State of Residence: MA
Payments per Year: 1
Total Premium Amount: $300,000.00

Initial Payment Amount for Fixed Period Certain Only Annuity with 10 Years
Certain with 4% graded payment option: $30,073.08

The only risk you will assume is that AIG goes belly-up. For a lifetime annuity, this is
a reasonable concern. For 10 years, it's probably tinfoil-hat time ...

Of course, you will have to deal with the abuse you receive from people telling you
that you are a moron for buying an immediate annuity. I won't tell anyone if you
don't tell anyone ...

[JohnEyles]

'Course the liquidity ain't there with the annuity ...

[FinanceDude]

I wouldn't do the annuity, stick to CD's in this environment. Why do you need the liquidity, unforeseen expenses??

[FIRE'd@51]

Bear in mind that the FDIC only insures 100K per depositor, so you may not want to put the entire 300K at the same institution.

[REWahoo]

Originally Posted by FIRE'd@51

Bear in mind that the FDIC only insures 100K per depositor, so you may not want to put the entire 300K at the same institution.

Maybe...or maybe not.

The FDIC insurance limit for IRAs is $250k. Plus there are many variations on the FDIC guarantee which will insure much more than the advertised $100k limit for non-IRAs depending on how you set your accounts up with the insured institution. You can check out your options using the FDIC's Electronic Deposit Insurance Estimator (EDIE) located here.

[sendbaht]

Buy a Ford or GM bond. IT should pay you roughly 30k a year and they will give you your money back. Yes, they are rated B and BB but they will STILL be in business in 10 years.

[Rich_in_Tampa]

I like laddered CDs as noted.

But there is something to be said for at least looking for a 10 year immediate annuity in this context; if interest rates rise a bit they may get you 4.5% or so, shield you from a downturn in interest rates, etc. at the expense of losing access to your funds other than the payments.

[Martha]

My spouse buys short term treasury bills through treasury direct. Something else to look at, especially if you are in a high tax state like we are as treasury note, bills and bonds are exempt from state tax.

[retire@40]

Originally Posted by sendbaht

Buy a Ford or GM bond. IT should pay you roughly 30k a year and they will give you your money back. Yes, they are rated B and BB but they will STILL be in business in 10 years.

That post has naive written all over it.

[FinanceDude]

Originally Posted by sendbaht

Buy a Ford or GM bond. IT should pay you roughly 30k a year and they will give you your money back. Yes, they are rated B and BB but they will STILL be in business in 10 years.

Can I have that in writing??

[brewer12345]

Originally Posted by Martha

My spouse buys short term treasury bills through treasury direct. Something else to look at, especially if you are in a high tax state like we are as treasury note, bills and bonds are exempt from state tax.

I would secoind this notion. Treasuries would be a great idea. TIPS would be an even better idea for the out years (5+ years out).

[Hydroman]

I wish to thank everyone for their advice. I will probably go with a combination of CDs and treasuries if I go with this scenario.

I should explain a bit about what I am thinking. Depending on when I ER, I will have 300K in liquid "after tax" funds and close to $700K tied up in a roll-over IRA and Roth IRA. It will be 7 years until I can start the IRA withdrawals and 10 years before SSI kicks-in at 62. If I find a way to make the $300K last for 10 years, I can keep the majority of the IRA funds invested in equity mutual funds for maximum tax free growth (primary motivation) and also avoid the hassle of setting up a 72(t) early withdrawal scheme. If it get really lucky I may even delay SSI.

[jdw_fire]

Originally Posted by Hydroman

I have $300K which I am willing to draw down to zero over a period of 10 years with a starting withdrawal amount of $30K to be increased by 3% per year. I have estimated that I will need a 5% per year return on the principle for the funds to last 10 years. I am looking for recommendations on where to park the $300K where I can maintain a 5% return over a 10 year period with liquidity. A guaranteed return would be nice, but I expect I will need to assume some minimal risk/volatility to achieve the return necessary for the funds to last 10 years at my planned withdrawal rate. Just running some scenarios right now and I will appreciate any input the members of the forum may be able to provide.

Thanks.

When I put this in the spreadsheet the 5% return will allow you to start with a $30K WD and have annual increases of 5% not 3% (those 5% increases exactly exhausts the $300K taking the WD at the beginning of each year). So you can go with 9 CDs, one for each year for the next 9 years.

[Hydroman]

Originally Posted by jdw_fire

When I put this in the spreadsheet the 5% return will allow you to start with a $30K WD and have annual increases of 5% not 3% (those 5% increases exactly exhausts the $300K taking the WD at the beginning of each year). So you can go with 9 CDs, one for each year for the next 9 years.

Yes, you are right. But I was planning for a small bit of cushion. Thanks.

[Mysto]

Hydroman

I have done what you are planning to do. I have actually set up for 11 years but other than that it is the same. I used a cd ladder. The bad news is that interest rates have fallen since I set up mine (I have a mean return of 6%) and I have only found a couple of places that give cds for longer periods than 5 years and they have terrible penalties for early withdrawal (it's ok if you want to keep them there but if interest rates go to the ceiling you are screwed - every investment has a risk so I accepted this one) But you do get a guaranteed return with a 1 year increment ladder. By dumping the expired cd funds each year into a high yield mm fund you increase your return as well.

Check bankdeals.blogspot.com for best cd rates. There are some 6% rates still going around from time to time. Intervest bank offers cd rates for 6-10 years but the penalty is 1/2 the TOTAL interest for early withdrawal. You might want to consider broker cds or bonds for the longer durations.

Firecalc says for my scenario I have increased the survivorability of my portfolio with this method and I know that I will leave my stock funds alone and sleep well even during a market downturn. In addition as you spend down your taxable cd account you decrease your tax exposure with this method, something you don't get with withdrawals from the tax deferred accounts.

Good Luck.