Slightly off topic - investing large sum

[brewer12345]

Out of curiosity, what is the commission payout you would get if you sold a 72 year old couple a $100K EIA?

Depends on the surrender period, the company, etc. Gross commission could easily be 10% or higher.

 

[dgoldenz]

Depends on the surrender period, the company, etc. Gross commission could easily be 10% or higher.

What companies are paying over 10% commission? Almost every annuity pays 8% or less. Fixed annuities usually pay 1-4% depending on how many years it is.

 

[clifp]

Ok to put this thread back on topic.
If the couple is looking for income a Vanguard bond fund is probably the easiest and simplest option, like the VFICX (4.07% yield). If they are very concerned with capital preservation a CD ladder ladder can be constructed with 2.5-3% average yield. Alternatively they can buy a 12-24 individual bonds and get reasonable diversification and additional 1 to 1.5% yield, but it would require some more research and entails default risk.

 

[lakehawk]

A relative has recently sold a property and now has $600k to invest. They are in their early '70s, so they want to be fairly conservative and go with some sort of bond ladder. I fully understand the concept of bond ladders, but my questions are more administrative in nature.

They want the portfolio to spin off cash at least annually, and preserve most of the principal. So far I've advised on a bond ladder with something maturing every year, they spend the earnings and reinvest the principal only.

Now for the questions:

1) Where can they buy individual bonds directly? Vanguard?

2) They are in a low tax bracket (other than this year due to this transaction), so I've so far steered them away from tax free bonds. Any other recommendations?

3) What's the best way to minimize transaction fees?

4) Would you buy several bonds of different debtors to minimize default risk? For example, if they buy $50k tranches x 12 tranches, then they could buy multiple issues within the $50k...is that a good idea?

Thanks,

Dave

You may want to consider a short term annuity (2,5, or 7 years). If you have a military background, try usaa.com

 

[REWahoo]

You may want to consider a short term annuity (2,5, or 7 years). If you have a military background, try usaa.com

Yes a SPIA, not an EIA.

 

[brewer12345]

I believe that lakehawk is suggesting a fixed deferred annuity, not a SPIA. Fixed deferred annuities look a lot like a CD in an insurance wrapper, but do not have FDIC backing. Not a terrible choice with the right insurer, but one must read the fine print carefully (as always).

 

[Finance Dave]

Hmmm... So this person wants nothing but bonds? What if we enter an inflationary spiral?

If you hold a bond to maturity, there is zero inflation risk to a bond, right?

 

[REWahoo]

I believe that lakehawk is suggesting a fixed deferred annuity, not a SPIA.

Ahhh... What USAA calls an "Extended Guarantee Savings Annuity"

Where is the creativity in a name like that? A more progressive insurance company would call it the "Extended Guarantee Motherhood Apple Pie Stars and Stripes Savings Annuity".

 

[brewer12345]

If you hold a bond to maturity, there is zero inflation risk to a bond, right?

Bzzzttt! Wrong. Fixed rate bonds have significant inflation risk regardless of whether you own a fund or individual bonds. Makes no difference. If you want to avoid inflation risk, stay real short, stick with TIPS, or add some commodities to the mix.

 

[clifp]

If you hold a bond to maturity, there is zero inflation risk to a bond, right?

Yes and no. Yes, unless the bond defaults you will get your money back. The real (inflation adjusted) value of the bond at maturity will decrease by an amount equal to the inflation rate. This is different than bond fund where the principal value will fluctuate depending on the interest rates.

In general you income will fluctuate more with a bond ladder (because interest rate could rise or fall when it is time to reinvest) and your principal well remain relatively stable, the reverse is true with a bond fund. For fixed investment your income will remain relatively stable but the value of the fund could change fairly dramatically, depending on quality of the bonds and the average maturity of the bond fund.

It seems to me the only certain thing about annuities is that after you die your heirs wouldn't have anything.

 

[LARS]

If you hold a bond to maturity, there is zero inflation risk to a bond, right?

If you hold a bond until maturity there is NO principal risk (obviously assumes no default). There will always BE inflation risk (or deflation gain) in a fixed interest rate instrument. If interest rates go up while you own the bond, inflation eats into your return... thus inflation risk.

 

[dgoldenz]

Yes a SPIA, not an EIA.

SPIA's are paying next to nothing right now. This isn't a few years ago where you're getting 5% interest. A period-certain SPIA is probably paying 1% or less right now.

 

[Finance Dave]

Bzzzttt! Wrong. Fixed rate bonds have significant inflation risk regardless of whether you own a fund or individual bonds. Makes no difference. If you want to avoid inflation risk, stay real short, stick with TIPS, or add some commodities to the mix.

I mis-spoke...what I meant to say is that if you hold a bond to maturity, you are guaranteed the face value (unless the issuer defaults), so there is no price risk associated with changes in interest rates...right?

I thought they called that interest rate risk, but perhaps I should have called it "price" risk?

 

[Finance Dave]

If you hold a bond until maturity there is NO principal risk (obviously assumes no default). There will always BE inflation risk (or deflation gain) in a fixed interest rate instrument. If interest rates go up while you own the bond, inflation eats into your return... thus inflation risk.

Yes, see my post above...I did not articulate this correctly.

Thanks LARS

 

[Finance Dave]

Thanks everyone for the input...we are still analyzing this and it will take some time.

He has the money in his bank now. For the short term, he has the money in an online savings account paying about 1.3%. I've advised him to keep it there until his tax accountant figures how much tax he'll owe on the sale (I tried to read the IRS rules, but they are too complex so I suggested he get a professional advisor to look at it).

Once he files his tax return and pays the taxes (this was a rental property, not a primary residence), we'll invest the remaining amount.

I'm actually going to sit with him for 1/2 a day next week to discuss his goals (this is my dad), risk tolerance, what he wants out of the money, etc....then we'll devise a plan.

I'm leaning towards spreading it amongst TIPS and long-term Treasury Bonds at this point, but I have asked him to show me the remainder of his investments...I want to make sure he's got about 15-25% equities to protect against inflation risk....he has other investments with a broker but I've not seen how those are invested.

I'll report back on what we do...but it may be a few months yet.

Edit: By the way, I did advise him to split the money in online savings banks to stay within the FDIC limits of $250k...so no worries there...he will be opening the accounts as joint so double the coverage..he is married.

Dave

 

[brewer12345]

I mis-spoke...what I meant to say is that if you hold a bond to maturity, you are guaranteed the face value (unless the issuer defaults), so there is no price risk associated with changes in interest rates...right?

I thought they called that interest rate risk, but perhaps I should have called it "price" risk?

Here is the problem: retail investors frequently fall into the fallacy that as long as they (eventually) get their nominal face amount back, its all good. In fact, this ignores the damage that inflation does to your nest egg. Being in a situation in 10 years where teh value of your investments is badly eroded by inflation to the point where you no longer have enough money is not a happy think. So I usually try to discourage people from falling into the mental trap of thinking that holding to maturity solves the problem and deals with the risk (it does not).

As for your proposed portfolio allocation, what does "long term" mean? I would strongly suggest that you stay under 10 years in maturity, and shorter than that if he can tolerate the yield. Not worth the risk to go out on the yield curve, especially at such low rates.

 

[Finance Dave]

Thanks brewer. No worries about the inflation risk, I understand that...which is why I mentioned that we want to keep a portion of his portfolio in equities and maybe TIPS.

As for long-term..he's in his mid '70s...so he'll need this setup to last 10-15 years depending on longevity. You make a good point though...if we put him in a 30 year bond, and he dies in 10 years, we may have to liquidate when prices have moved...at a price we may not want to accept.

I just hate the fact that shorter maturities pay so darn little...I suppose we cross our fingers that we can reinvest at higher rates in a few years.

 

[kencc]

We are still in a 30 year bull market in bonds which may influence decisions on setting up a portfolio. However prior to that from about 1946 to 1981 there was a 35 year bear market when some bonds showed substantial capital losses and presumably an all-bond portfolio should take this into account. I have yet to find a good analysis of a recommended strategy to follow for a bond heavy portfolio that might allow for the possibility of a bond bear market of similar magnitude reoccurring. I assume it's probably TIPS; short term bonds and a small proportion of equity-like inflation assets but I'm not sure how that would have performed over the 1946/81 period or similar worst-case scenarios.

 

[REWahoo]

I see we have another annuity/insurance sales professional on board. Welcome to the forum, John.

 

[dgoldenz]

As a retiree who owns a index annuity and a fixed annuity in combination with other investment accounts I love these products. As well, my son is a CFP who has uses all these products but focuses on invesments mainly 401k assets.

The payout on this annuity would be less than 2% on the life of the product, just so happens that they pay commission in the first year only. While most asset managers charge you 1-1.5% on an annual basis!! My only advise to choosing an annuity is to get rates from multiple carriers.. when I was shopping the market for my annuities I used an online site who helped me make a great decision annuityratesnow.com

I didn't lose 40% in my annuities when the market crashed just like the article you linked to mentioned in a post.

Given that this website has a 2010 copyright on it, it looks like you are just trying to add backlinks to your/their website for SEO purposes. Just an observation. I am sure that will get deleted soon.

I also don't know of any indexed annuities that only pay 2% commission. A fixed annuity could pay 2%, that I could believe. If they were all that low, nobody would want to sell them. It takes a lot of time and effort to gain annuity clients and 2% would not make it worthwhile.

 

[calmloki]

Psst. Real estate. Can't lose. Works for me, contact me and I might let you in on some of the properties I've made up to 10, 20, 60% or more on in the last several decades.

Just wanted to get in on the fun.

You all are pretty sensitive to sales - not saying you are wrong, but isn't it possible that there might be a worthwhile annuity or time for an annuity? and couldn't someone who had an annuity post a link found via a web search if they wanted to post a link?

Not that I would click on a link to see or come anywhere near a salesman for anything - they are loathsome. But really, there's never been a better time (for you, for me) to buy (my) real estate.

 

[brewer12345]

Psst. Real estate. Can't lose. Works for me, contact me and I might let you in on some of the properties I've made up to 10, 20, 60% or more on in the last several decades.

Just wanted to get in on the fun.

You all are pretty sensitive to sales - not saying you are wrong, but isn't it possible that there might be a worthwhile annuity or time for an annuity? and couldn't someone who had an annuity post a link found via a web search if they wanted to post a link?

Not that I would click on a link to see or come anywhere near a salesman for anything - they are loathsome. But really, there's never been a better time (for you, for me) to buy (my) real estate.

Are there sme annuities that might be OK? Sure, for some situations, certain products are fine and may be the best choice. But these products are over sold, many are a ripoff, and others are so complex you would need a team of lawyers to do proper due diligence.

 

[Finance Dave]

update....

I met with my dad last week. Although we have not made any firm decisions, I did give him a couple risk tolerance quizzes, turns out he's in a moderate risk category. Still, given his age of 74, we're going to keep him pretty conservatively invested.

In looking at his "other" investments, which I had never before seen, it seems most of his portfolio was in bonds. While this seems at first glance to be "moderate" risk, many of these are junk bonds or ones that have underlying derivatives, thus quite risky. Also some of them were long-term bonds, which have moved a lot. As we all know, the S&P was down about 55% at it's worst....my dad's portfolio was down about 30%. Obviously not as bad as 100% equities, but he's losing sleep at night.

Fortunately, since March 9th, things have recovered somewhat, so he's only down about 19% now, and he's mentally ready to make a shift to safer investments.

The universe of potential products at this point is:
TIPS
laddered CDs
money markets (not funds, but accounts)
Bonds or bond funds (possibly laddered), although shorter term and higher quality than what he's in

Fortunately he's saved quite a bit, and has a low annual budget. As a result, if we can get him 4%/year, he'll be thrilled. While this may not be easy in the short-term, I think it's doable in the medium term once yields pick up a bit.

For now we wait on his 2009 tax return...and I nail down detailed funds and optimal mix of the above.

Current investments before any changes
60% bonds - his "advisor" has him in 41 different accounts (ouch)
40% cash - This is the money from the real estate sale

Future investments
Who knows...but I'm guessing something like
10% stock funds (slight bit of growth potential)
10-20% Short to intermediate term high quality bonds or bond fund
40% laddered CDs (stick with short maturities for now)
30% TIPS

Oh and lastly...he's paying his current advisor $6,000/year in management fees alone. We may pull the advisor, manage it ourselves, and thus save that amount/year.

 

[brewer12345]

Wow, $6k a year plus probably some sort of commission. Nice.

Check out Pen Fed CDs while they are running their January special. The 5 year CD rates are pretty decent and you can always cash them in early for a 6 month interest penalty.

 

[dgoldenz]

Wow, $6k a year plus probably some sort of commission. Nice.

Check out Pen Fed CDs while they are running their January special. The 5 year CD rates are pretty decent and you can always cash them in early for a 6 month interest penalty.

$6k plus wrap fees I am sure....that's a pretty spicy meatball. I don't know how long he wants to tie up his money, but even some of the fixed annuities right now could get him 4% if he's looking at 6-10 years. Most fixed annuities have a 10% annual free withdrawal provision.