Wellesley vs Annuity

[twaddle]

Ah, so even the great CFB has losses! And sometimes he wants to take advantage of losses for tax planning. Hard to do with a balanced fund.

And by putting the tax-inefficient bonds in your tax-sheltered accounts, you (drum roll, please) avoid taxes!

So, if one wanted the same returns and same low-volatility as Wellesley without the tax hit, one should hold the two components separately. If you happen to need to all of the income Wellesley throws off, you can get it by rebalancing the stock/bond allocation. Cap gains are taxed at a lower rate. Or you can invest in higher dividend payers. And you can throw some TIPS in that bond bucket, while you're at it. In general, you can do the same thing with much more flexibility to suit your particular needs.

[cute fuzzy bunny]

For what you want its a perfectly good choice. You'll probably make 1-3% per year more than TIPS or the average CPI adjusted annuity product over the long haul, and you're not really exposing yourself to much more risk to get that premium.

And then there that good part about being able to write a big check for something should the need ever arise.

VASIX is another choice if you want less risk since the AA fund component will swap out of equities and into bonds when the quant computer says to. That could back the fund into a 5/95 fund under some circumstances, or up to a 30/70 under favorable conditions for equities. Expenses are a bit higher.

On the flip side, VTINX has a bit more risk but a lot more diversity, slightly higher expenses and slightly lower yield than wellesley.

[cute fuzzy bunny]

Quote:

Originally Posted by twaddle And sometimes he wants to take advantage of losses for tax planning.

Yep, in my last year of working when I made over a million dollars and had roughly three million dollars in capital gains, I thought a little loss selling would be handy. Sort of not the traditional problem an early retiree finds themselves in.

Quote:

And by putting the tax-inefficient bonds in your tax-sheltered accounts, you (drum roll, please) avoid taxes!

And yep, in a traditional 45 year accumulate, 25 year unwind retirement scenario, the books say to put your bonds in a sheltered account. Pretty sure thats not quite so sure a situation for an early retiree.

This IS the "early retirement" forum, not the "investing for 30 year olds" forum, right?

Quote:

So, if one wanted the same returns and same low-volatility as Wellesley without the tax hit, one should hold the two components separately. If you happen to need to all of the income Wellesley throws off, you can get it by rebalancing the stock/bond allocation. Cap gains are taxed at a lower rate. Or you can invest in higher dividend payers. And you can throw some TIPS in that bond bucket, while you're at it. In general, you can do the same thing with much more flexibility to suit your particular needs.

Wow! That sounds like a lot of work to get basically the same thing I'm getting right now from one cheap fund!

And heres the fun part. The fund is also a good idea for the OP, since I took the time to read their question rather than just pitching into a thread to try and start a fight.

I actually took you off my ignore list a couple of days ago. That was a mistake... :

[unclemick]

Psssst - Wellesley!

Have we got a classic in the making here?? - to take it's place beside: SWR, when to take SS, or - drum roll please - to mortgage or not to mortgage.

Just the word Wellesley makes me feel warm and smarmy and valuey and Ben Grahamesque all over.

heh heh heh - I just checked - the Norwegian widow is down to only 5(from 7) of their top ten stock holdings. Maybe add G.E. and U S Bancorp on my Christmas list for Santa.

[twaddle]

Well, this early retiree still likes his bonds tax sheltered. And I will change the allocation and type of bonds depending on my tax situation in any given year, room in tax-sheltered accounts, income needs, etc.

It's really not that hard to manage. I can understand somebody wanting a balanced fund for simplicity, but I would think that almost everyone could benefit from the added flexibility of holding separate stock and bond allocations.

[unclemick]

Quote:

Originally Posted by twaddle It's really not that hard to manage. I can understand somebody wanting a balanced fund for simplicity, but I would think that almost everyone could benefit from the added flexibility of holding separate stock and bond allocations.

On balance over forty years - that's a screaming NO! Hindsight being 20/20 - overall an impersonal computer rebalancing sliding assets based on age(had such a thing been around in 1966) like Target Retirement would have me retired in the Bahamas instead of the suburbs of Kansas City.

Still have 15% in individual stocks in the quest for the yellow brick road. It's da hormones don't cha know!

heh heh heh - your mileage may vary.

[haha]

Quote:

Originally Posted by cute fuzzy bunny I sort of screw up that tax management thing by not losing any money in the first place. You might give that a whirl sometime...

Quote:

Originally Posted by twaddle Teach me! Wait a minute; aren't you the guy who used to brag about his multi-year loss carry-forwards?

Yahoo! Finally the fights are back on TV!

Old Dudes like me enjoy watching you young whippersnappers duke it out from time to time. Brings back fond memories.

[WilliamG]

Twaddle said:
"Well, this early retiree still likes his bonds tax sheltered. And I will change the allocation and type of bonds depending on my tax situation in any given year, room in tax-sheltered accounts, income needs, etc."

Not much choice for us, since we burned thru most of our non-deferred money in first years of retirement. Still have some juicy 3.4-3.6 real IBonds.

"It's really not that hard to manage. I can understand somebody wanting a balanced fund for simplicity, but I would think that almost everyone could benefit from the added flexibility of holding separate stock and bond allocations."

We like the flexibility of holding separate stock and bond investments and passive (indexing) management. We also like the rebalancing and active management of Wellesley. That's why we do both.

[Running_Man]

Quote:

Originally Posted by cute fuzzy bunny I have plenty of Wellesley and like it fine for what it is and what I expect it will be. A thrower off of >4% in dividends with growth thats generally similar to inflation, producing a reliable income stream with limited volatility and risk of loss of principal. Over most 20 year slices of the funds history, the per share price has doubled, practically matching average inflation (ok, its a little short of inflation), and the current yield is about as low as its been. The fund hasnt done as well in the last 6 years due to falling bond yields. Which is the same frickin problem you'll be having with any bond fund. I aint gonna get into the tit for tat over wellesley vs an annuity like we did with the "house is a bond" argument where people simply cant set aside the technical fundamentals in exchange for a simple perspective of function. In this case both produce reliable income streams, both have some perceptible risk, one lets you keep all of your money in case you need a lump sum for something like LTC, the other one assures payment for life as long as the insurance company doesnt go broke. In this instance I'd prefer wellesley to a weak paying CPI adjusted annuity OR a better paying non CPI adjusted annuity. I doubt we'll see yields lower than what they are right now. Exposure on both the equity and bond side to the financial markets is a bit concerning but I doubt it will create a double digit annual drop in the price and historically the fund is resilient and rebounds from a loss year with a big gain. For a long haul investment for an early retiree, I can think of few safer, better options that create income and a good shot at offsetting inflation. And yep, it performs just like a similar index mix, at a ridiculously cheap price point with autobalancing and full fund management. I could probably knock of .01-.03% of the .14% ER by buying ETF's and rebalancing myself. Why bother... Will it be the best option in the future? I dunno. Same answer for any other investment. For those who are feeling a bit more intrepid, a 50/50 mix of wellesley and wellington brings you to a roughly 50/50 stock/bond mix with a ~3.8-3.9% yield and better odds of long term capital appreciation.

CFB I have actually never considered this fund, based on your knowledge of their holdings if long term treasury (10 year) reversed to 6.5% and the stock market fell 40 percent what would you estimate the loss on this fund at, if you are willing to put a WAG at it?

[cute fuzzy bunny]

My WAG is that would be a pretty sucky day for anyone who doesnt have everything stuffed into their mattress.

[twaddle]

Quote:

Originally Posted by WilliamG We like the flexibility of holding separate stock and bond investments and passive (indexing) management. We also like the rebalancing and active management of Wellesley. That's why we do both.

If you're looking for that particular allocation, and you're mostly in tax-advantaged accounts, then Wellesley is an excellent choice.

But *only* if you're specifically looking for 40% large-cap value + 60% nominal bonds in a simple-to-manage package. Personally, I don't see any evidence of added-value from the active management.

Some people like small-cap value better than large-cap value. Some people like TIPS mixed with their nominal bonds. Some people can benefit from tax-loss harvesting. Some people like a variable allocation to stocks and bonds (even those like unclemick, who like the more-bonds-as-you-age paradigm).

For those people who want or need greater flexibility, I'm not sure what Wellesley brings to the party. It sure is popular, though.

[ats5g]

William,

Perhaps a better question is should one ever annuitize money vs. keeping it in a balanced portfolio of stocks and bonds like Wellesley? There are some links in this diehards conversation. For most early retirees, I don't think annuitizing much money makes sense because the increase in payout % vs. your SWR is slim. But as you get older, like 65+, it gets tougher and tougher to beat the fixed and inflation adjusted SPIA.

Just for some examples, I did Firecalc with a 35% LV, 60% LT corp, 5% Tbill allocation [like Wellesley], and varied the ages and withdrawal periods [all ending at age 100]. I also got various quotes for inflation adjusted annuities from Principal through the ELM Group.

For someone who is 55, withdrawing for 45 years, a 95% chance of portfolio survival is at the 3.62% withdrawal rate. The 100% J&S real annuity pays 3.86%.

For someone who is 60, withdrawing for 40 years, a 95% chance of portfolio survival is at the 3.73% withdrawal rate. The 100% J&S real annuity pays 4.29%.

For someone who is 65, withdrawing for 35 years, a 95% chance of portfolio survival is at the 4.01% withdrawal rate. The 100% J&S real annuity pays 4.86%.

For someone who is 70, withdrawing for 30 years, a 95% chance of portfolio survival is at the 4.21% withdrawal rate. The 100% J&S real annuity pays 5.62%.

So, you can see that the spread b/w what could be termed a safe withdrawal rate and the annuity payout widens as you get older.

Though this does beg the question of why all those military/feds take those inflation adjusted annuities at early ages. Probably for the health bennies, and probably b/c they can't take the annuity as a lump sum.

- Alec

[cute fuzzy bunny]

The payouts do get better over 60, which makes a lot of sense if you hate your kids

[ats5g]

Quote:

Originally Posted by cute fuzzy bunny The payouts do get better over 60, which makes a lot of sense if you hate your kids

Hey man, I'd rather have my parents' income secure and never run out than have it run out and have them living with one of us. We spent 20+ years figuring out ways to nicely keep our distance.

Coincidently, my dad [68] and I've been talking about his looming retirement, and whether he should annuitize any of his money [all with TIAA-CREF]. I imagine that a lot of profs choke at the thought of handing over $1,000,000 and up for an annuity. Anyway, I was talking about my FIL + SMIL, who have fed gov't COLA'd pensions and a little other retirement savings, and I asked my dad if he had the fed gov't COLA'd pension to begin with, would he (1) take the pension and a little other retirement savings or (2) take a lump sum and manage all the money himself? He said most likely #1, after which I began talking about inflation adjusted immediate annuities and such.

To each his own I suppose in the inheritance game, but I figure that my parents have already given us most of it up front by helping us pay for college, grad schools, houses, medical care for kids, etc.

- Alec

[twaddle]

Quote:

Originally Posted by ats5g [all ending at age 100]

Isn't that a bit of an apples and prunes comparison? The annuity guys aren't going to assume you'll live to 100.

For example, they'll assume a 70 year-old will live to 83.

FIREcalc will give you a 7.12% SWR for that case.

[RetireeRobert]

Quote:

Originally Posted by twaddle Isn't that a bit of an apples and prunes comparison? The annuity guys aren't going to assume you'll live to 100. For example, they'll assume a 70 year-old will live to 83. FIREcalc will give you a 7.12% SWR for that case.

Not only that, but the annuity guys will keep all the dough if the 70 y.o. checks out before age 83, and they will keep all the dough if investment returns after the annuity is purchased exceed projections.

Neither of these things happen with self-managed money taken under an SWR setup.

[cute fuzzy bunny]

Quote:

Originally Posted by ats5g Hey man, I'd rather have my parents' income secure and never run out than have it run out and have them living with one of us. We spent 20+ years figuring out ways to nicely keep our distance.

Same here. My dads 75 and still working off about $300k in 8% EE bonds and his SS. So far he's taking more in than he's spending, but thats helped by paying off his mortgage and buying him a car a few years back. My way of equalizing "that problem".

Quote:

To each his own I suppose in the inheritance game, but I figure that my parents have already given us most of it up front by helping us pay for college, grad schools, houses, medical care for kids, etc.

Growing up working class, I didnt get those 'benefits', but I guess I'll get a nice inheritance. Mostly my own money back with some california real estate appreciation thrown in. Hopefully many, many years from now.

Good seeing you over here more often. Nice to have more sensible voices with good data instead of the usual twaddling.

[haha]

Quote:

Originally Posted by twaddle Isn't that a bit of an apples and prunes comparison? The annuity guys aren't going to assume you'll live to 100. For example, they'll assume a 70 year-old will live to 83. FIREcalc will give you a 7.12% SWR for that case.

However, isn't whatever they assume their problem? If you live to be 150, you still get your payments. If you go the withdrawal rate route, long before age 150 you might be on welfare- if they will allow you to have it.

Ha

[mathjak107]

immeadiate annuities will almost always pay more for longer periods of time then you can generate on your own with the same amount. they have something you don't and thats the difference. they have a big pile of dead people and their money added into their mix. you cant compete with that on your own.

[unclemick]

Well - this is fun - I think. Haven't made up my opinion on my friends at the IRS who will be 'with me' come 70 1/2 in 6 yrs and have 84.6 as their no. for me - since I'm mostly trad IRA with a tad, only a tad of Roth should I overstay my .6. Alas I come from a long line of regular diers - single, no kids, no heirs - except maybe my younger sister who 'may' still think the Pats are a good football team in 20 yrs.

Target Retirement 2015(RMD starts 2014) - young at heart. Go team! Damp that SD! Take those RMD percents! Live long and prosper!

heh heh heh - still have a warm spot for Pssst - Wellesley/ even if I went all modern MPT/computer rebalancing sliding asset mix and all that rot.