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Guaranteed vs Market
Old 10-14-2010, 10:17 AM   #1
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Guaranteed vs Market

Retiring next month. If you had a choice between a fixed income security paying a guaranteed 5% indefinitely with with close to 100% safety or taking the money and putting it into a mutual fund, what would you do?

looking for relatively safe long term income.
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Old 10-14-2010, 10:18 AM   #2
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Retiring next month. If you had a choice between a fixed income security paying a guaranteed 5% indefinitely with with close to 100% safety ...
Where can I get one of those? Are we talking an annuity here?
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Old 10-14-2010, 10:20 AM   #3
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No. Its a fixed income security available only to Prudential retirees.
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Old 10-14-2010, 10:24 AM   #4
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Is th fixed income security an 'all or nothing' option? Would it be possible to split your money, say half in the fixed income and half invested in the market?
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Old 10-14-2010, 10:27 AM   #5
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Absolutely. I'd jsut withdraw some dollar amount and put that into the market.
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Old 10-14-2010, 10:27 AM   #6
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it allows 5 withdrawals annually.
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Old 10-14-2010, 10:29 AM   #7
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In the current market it is probably a good deal for your base retirement spending. However you have to save about 20-25 percent of the income to provide inflation protection. In other words you have a SWR of 3.75-4% of the principle and reinvest the other 1-1.25 percent. I'm sure one of the spreadsheet experts here (I'm not) can tell you how much inflation that would protect against
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Old 10-14-2010, 10:36 AM   #8
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I'm sure one of the spreadsheet experts here (I'm not) can tell you how much inflation that would protect against
What inflation? The govt doesn't seem to think there is any or will be any inflation anytime soon...........
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Old 10-14-2010, 10:44 AM   #9
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Retiring next month. If you had a choice between a fixed income security paying a guaranteed 5% indefinitely with with close to 100% safety or taking the money and putting it into a mutual fund, what would you do?
looking for relatively safe long term income.
I don't know if you're doing it intentionally, but you're using "code words" that pretty much restrict your options. You're also chumming for annuity sales sharks.

"Relatively safe long term income" could be interpreted to mean "low-volatility insured products" like an annuity or a CD. Maybe an I bond or a TIPS portfolio.

If that's what you have in mind then you should use the Prudential investment to "annuitize" your minimal survival income... maybe 25%-50% of your expenses. The "good" thing is that you'll have a baseline income, the "bad" thing is that you're depending on Prudential to pay for it. Maybe you'd feel better if it was insured by PBGC or some other agency who'd pony up to replace the coverage if Pru went under.

Once you've decided how much you're willing to entrust to Pru then you could decide on the rest of your portfolio's asset allocation by calling this one the equivalent of a junk bond or a corporate bond-- whatever seems appropriate. Then tailor the rest of your ER portfolio appropriately.

If by "relatively safe long term income" you mean "Vanguard's Wellesley fund", then you have a bit more of a tolerance for volatility and, with the Prudential investment anchoring your portfolio, you could invest more in equities... maybe put the rest of your portfolio in a total stock market index fund.

But with the words you're using it's hard to recommend more than annuities, bonds, & CDs.

If you really want to dig into it then you could run sample ER portfolios through FIRECalc or FinancialEngines.com by assuming that 20% of your portfolio is the Prudential investment, then 40%, 60%, and so on with the rest of the portfolio invested in equities. At some point you'll max out the portfolio's survivability, and at that asset allocation you could decide if that suits your appetite for volatility & risk of losing principal.
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Old 10-14-2010, 10:54 AM   #10
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Perhaps I'm naive, but I feel that the Pru fixed income is truly nearly 100% safe. My understanding is that's a portfolio of long term government securities built up over 40 + years.

And yes, my idea of relatively safe is Wellesley.

Still looking for advice. If interest rates ( i.e. inflation ) rise, the guaranteed return from Pru may seem paltry. Other funds would theoretically increase the "return" somewhat. Still, Pru has a major piece of mind factor.
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Old 10-14-2010, 11:57 AM   #11
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it allows 5 withdrawals annually.
Unless I misunderstand, given the current rate environment, 5% is extremely attractive so why wouldn't you put a significant amount with Pru GIVEN you can withdraw if rates change.

[Assuming there aren't tax issues or penalties of course.]
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Old 10-14-2010, 12:05 PM   #12
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I would personally keep enough money in the Pru Fixed income option so that the income from it would comfortably cover my basic expenses. Then I would take the rest and invest it more aggressively to 1) hedge against inflation and 2) provide additional income to pay for discretionary expenses.
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Old 10-14-2010, 12:12 PM   #13
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What inflation? The govt doesn't seem to think there is any or will be any inflation anytime soon...........
Source?
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Old 10-14-2010, 12:16 PM   #14
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the "bad" thing is that you're depending on Prudential to pay for it. Maybe you'd feel better if it was insured by PBGC or some other agency who'd pony up to replace the coverage if Pru went under.
Once you've decided how much you're willing to entrust to Pru.....
I did not see this limited to PRU in the original or revised posting. It was described as
"fixed income security paying a guaranteed 5% indefinitely with with close to 100% safety"

I agree with you, if this assumption is correct that it is simply a direct obligation of PRU. If PRU is acting as a trustee its different.
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Old 10-14-2010, 02:36 PM   #15
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I would personally keep enough money in the Pru Fixed income option so that the income from it would comfortably cover my basic expenses. Then I would take the rest and invest it more aggressively to 1) hedge against inflation and 2) provide additional income to pay for discretionary expenses.
I think this is sensible advice. It seems me there are two issues, what happens to your money of Prudential turns into the next AIG and what happens if we see double digit inflation.

If the investment is some form of insurance policy, and it is below the maximum covered by your state's insurance that would be safe enough for me.

You are allowed to make 5 withdrawals per year. This may or may not be valuable. I'd talk to plan administrators and try and figure it out how much would my $100K (or whatever) investment be worth if interest rates go to 10%.
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Old 10-14-2010, 03:06 PM   #16
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I think this is sensible advice. It seems me there are two issues, ...and what happens if we see double digit inflation.
I'l pass on the first question. But it won't take double digit inflation to make a fixed 5% worth a whole lot less than face.

Bernanke and CO. have openly admitted that they are trying to get inflation up. Statements have been floated that the current inflation rate is below price stability. Say what? Price stability is 0% inflation, by definition. And even with the disortions in the way that CPI is figured, go to the gorcery if you want a wake up on that.

So the only way we escape inflation considerably greater than today's is if try as they might, they cannot make it happen.

Ha
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Old 10-14-2010, 03:38 PM   #17
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I'l pass on the first question. But it won't take double digit inflation to make a fixed 5% worth a whole lot less than face.

Bernanke and CO. have openly admitted that they are trying to get inflation up. Statements have been floated that the current inflation rate is below price stability. Say what? Price stability is 0% inflation, by definition. And even with the disortions in the way that CPI is figured, go to the gorcery if you want a wake up on that.

So the only way we escape inflation considerably greater than today's is if try as they might, they cannot make it happen.

Ha
The exact quote is
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the statement said.

If the measure of inflation is already negative, its below the point of price stability
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Old 10-17-2010, 12:37 PM   #18
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Bernanke and CO. have openly admitted that they are trying to get inflation up. Statements have been floated that the current inflation rate is below price stability. Say what? Price stability is 0% inflation, by definition.

Ha
Though, theoretically, if the economy is growing, and the money supply is static...

Bernanke may indeed turn out to be right, being a student of the Depression and all. Then again, if you're a hammer, everything looks like a nail.
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Old 10-18-2010, 03:21 AM   #19
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Is the investment a Guaranteed Investment Contract (GIC)?? Issued by an Insurance Company?

Sound like the interest is guaranteed... is the principal guaranteed?

Try to understand what secures the debt and how much protection you have with it.

Do you own a portion of the underlying securities or the promise of the issuing company?


There is always a risk/reward trade-off.

If you are looking for low risk... compare it to something like a TIPS or Treasury ladder. This is probably the closest you will come to a guarantee on both principle and interest since they are backed by the US govt (i.e., US Taxes).
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Old 10-18-2010, 09:19 AM   #20
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Is the investment a Guaranteed Investment Contract (GIC)?? Issued by an Insurance Company?

Sound like the interest is guaranteed... is the principal guaranteed?

Try to understand what secures the debt and how much protection you have with it.

Do you own a portion of the underlying securities or the promise of the issuing company?


There is always a risk/reward trade-off.

If you are looking for low risk... compare it to something like a TIPS or Treasury ladder. This is probably the closest you will come to a guarantee on both principle and interest since they are backed by the US govt (i.e., US Taxes).
GICs issued by insurance company are "guaranteed" by the insurer, NOT FDIC. While it is true the risk is fairly low, your principal is not guaranteed.........
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