Do It Yourself Fixed Annuity alternative

[brewer12345]

The article says you can take CD distributions from the account as long as it keeps the CD balance no lower than the original value of the CD.

I think you are mixing up an EIA/FIA (what the article is talking about) with a SPIA.

 

[pb4uski]

I think you are mixing up an EIA/FIA (what the article is talking about) with a SPIA.

+1 totally different animals.

 

[nun]

Of course, if we both die in the tenth year, the SPIA has no residual value, while the CD/stock AA will have $100,000 plus the stocks.

Its always interesting how much people invest for themselves and how much for their heirs. Many financial advisers say to invest for yourself first, get the retirement saving sorted before you save for your children's college etc. It seems that the choice of an SPIA over a DIY annuity is similar; either spend your principal to guarantee income or keep the principal available and hope you generate some income.

 

[obgyn65]

This sounds like too much work. I would prefer to give some money to an insurance company after I reach the age of 70, buy an SPIA, and forget about it. The insurance company carries the risk, not me. I know some here will disagree.

Though I am almost never a fan of commercial annuity products, Lynn and I are on the verge of re-allocating some of our cash reserves to a Do-It-Yourself immediate annuity strategy. No insurance companies are involved.
.

 

[Gatordoc50]

There may be a sweet spot for this idea. As the risk-less rate rises so does the stock allocation but at what point do you forego stocks altogether and just stick with risk-less assets.

 

[nun]

There may be a sweet spot for this idea. As the risk-less rate rises so does the stock allocation but at what point do you forego stocks altogether and just stick with risk-less assets.

Ahh the good old days of living off CD interest. That number is going to depend on how much you need to generate from your portfolio.

 

[brewer12345]

Ahh the good old days of living off CD interest. That number is going to depend on how much you need to generate from your portfolio.

I think the important thing to watch will be real interest rates rather than nominal. A 5% CD rate may sound juicy unless inflation is bouncing between 4 and 6%. This was the original idea as to the attractiveness of TIPS: lock in a real rate. If I saw 10 to 20 year TIPS at 3% or better real I would be buying quite a lot of them. CDs at some nominal rate would require some careful estimation of what future inflation rates might be before I were willing to lock in. Since the feddle gubmint has not locked in much of its debt at low rates for long term, the temptation to allow inflation to take care of that pesky debt problem is high enough that I am extremely loathe to lock in for the long term. My 2021 Pen Fed CD is at 5% and I can surrender early any time I like, Every other piece of fixed income I have is considerably shorter maturity.

 

[Gatordoc50]

I think the important thing to watch will be real interest rates rather than nominal. A 5% CD rate may sound juicy unless inflation is bouncing between 4 and 6%. This was the original idea as to the attractiveness of TIPS: lock in a real rate. If I saw 10 to 20 year TIPS at 3% or better real I would be buying quite a lot of them. CDs at some nominal rate would require some careful estimation of what future inflation rates might be before I were willing to lock in. Since the feddle gubmint has not locked in much of its debt at low rates for long term, the temptation to allow inflation to take care of that pesky debt problem is high enough that I am extremely loathe to lock in for the long term. My 2021 Pen Fed CD is at 5% and I can surrender early any time I like, Every other piece of fixed income I have is considerably shorter maturity.

I've been doing a lot or research on TIPS and you are right. A 3% real return would be hard to pass up. The conclusion I have made about TIPS are they are good if there is unexpected inflation. Otherwise, expected inflation is priced into regular Treasuries and CDs. For long terms with more uncertainty, TIPS are great especially if you can get a decent coupon.

 

[Independent]

The article says you can take CD distributions from the account as long as it keeps the CD balance no lower than the original value of the CD.

arrrgh!

I wrote an earlier response to this, and made a rather serious error. Now I find that I can't edit it this morning, so I'll re-write, and hopefully correct it, here:

At the end of the ten year period, after I know what the stock market did during the first 10 years, I can take out some money.

Because my CD has grown back to the original $100,000, I can spend my entire stock portfolio.

Suppose my original split was $27,000 in stocks and $73,000 to the CD. If my stocks doubled, I can spend the whole $54,000. If they don't go anywhere, I can still spend $27,000. And they may do great and triple and I'll be able to spend $81,000.

But ... I don't know what the market is going to do. I can't really anticipate any amount that I can withdraw at the beginning. I could do something like 1/10 the balance after one year, 1/9 the balance after two, etc. This would provide income, but I wouldn't call it "rock solid".

OTOH, if we can get $458/mo in an SPIA, that would be a stable predictable income. We would get almost $55,000 in the first 10 years.

Of course, if we both die in the tenth year, the SPIA has no residual value, while the CD/stock AA will have $100,000 (assuming I spend the stocks along the way).

 

[Rich_by_the_Bay]

arrrgh!

I wrote an earlier response to this, and made a rather serious error. Now I find that I can't edit it this morning, so I'll re-write, and hopefully correct it, here:

At the end of the ten year period, after I know what the stock market did during the first 10 years, I can take out some money.

Because my CD has grown back to the original $100,000, I can spend my entire stock portfolio.

Suppose my original split was $27,000 in stocks and $73,000 to the CD. If my stocks doubled, I can spend the whole $54,000. If they don't go anywhere, I can still spend $27,000. And they may do great and triple and I'll be able to spend $81,000.

But ... I don't know what the market is going to do. I can't really anticipate any amount that I can withdraw at the beginning. I could do something like 1/10 the balance after one year, 1/9 the balance after two, etc. This would provide income, but I wouldn't call it "rock solid".

OTOH, if we can get $458/mo in an SPIA, that would be a stable predictable income. We would get almost $55,000 in the first 10 years.

Of course, if we both die in the tenth year, the SPIA has no residual value, while the CD/stock AA will have $100,000 (assuming I spend the stocks along the way).

It is the CD interest distributions that I would consider rock-solid. The stock fund may not be rock-solid but it has a very high likelihood of beating the CD over a 10 year incubation. At maturity, I might use it to by another larger round of DYI SPIA. Unless I needed a new car. Dealer's choice.

 

[Meadbh]

Rich, I'm still confused. The CD is a 10 year term. How do you get income from it in the meantime?

 

[brewer12345]

Rich, I'm still confused. The CD is a 10 year term. How do you get income from it in the meantime?

Step 1: Underpants.
Step 3: Profit.

 

[Independent]

Rich, I'm still confused. The CD is a 10 year term. How do you get income from it in the meantime?

Yes, we're back to the original situation. The CD pays 3.25% and grows $72,629 to $100,000 only if all the interest is left to accrue inside the CD.

 

[Rich_by_the_Bay]

Rich, I'm still confused. The CD is a 10 year term. How do you get income from it in the meantime?

I said "CD" but should have said "Treasury Note."

From Treasury Direct: "Treasury notes are government securities that are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months."

Question from me: are the 6-month interest pmts in a Treasury note restricted to paying off the note, or can they be distributed externally?

 

[haha]

Rich, you might save yourself a lot wheel spinning by just looking at this as asset allocation.

Ha

 

[FIRE'd@51]

I said "CD" but should have said "Treasury Note."

If you wanted to get regular periodic payments say every 6 months, a treasury note would be a better choice (at least as I see it here) paying interest every 6 months. If you just want accumulation a CD would seem to be suitable.

From Treasury Direct: "Treasury notes are government securities that are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months."

Hope that helps and that my facts are right.

Rich, I believe you are still missing the point of everyone's questions. If you purchase 73K of 10-yr Treasury notes and 27K of stock AND spend the interest payments, the Treasury notes will have a value of 73K at maturity. If the stocks are worth less than 27K when the Treasury notes mature, you will have less than 100K, and will have violated your floor.

 

[FIRE'd@51]

Rich, you might save yourself a lot wheel spinning by just looking at this as asset allocation.

+1

 

[Rich_by_the_Bay]

Rich, you might save yourself a lot wheel spinning by just looking at this as asset allocation.

Ha

That wouldn't be nearly as much fun. But in the end, it's all AA, or so it seems.

As usual, the board is educating me fast.

 

[Rich_by_the_Bay]

Stay with me, I'm slowly starting to recover. Still have questions which I'll post after a refreshing beverage or two.

 

[brewer12345]

Stay with me, I'm slowly starting to recover. Still have questions which I'll post after a refreshing beverage or two.

Aha! So that is the problem.

 

[Meadbh]

Rich, I think you want to have your cake and eat it, too!

 

[dvalley]

I have nothing to offer to this discussion but I also couldn't help notice that despite being an engineer I know squat about the various investment vehicles- besides the usual 401k, IRAs and CDs.

REITs, SPIAs, EIAs, KIAs, Hyundais...my head's spinning lol

 

[Dawg52]

Stay with me, I'm slowly starting to recover. Still have questions which I'll post after a refreshing beverage or two.

Here you go. Invest in this and enjoy their products while you refresh. A win win for your portfolio and you.

TAP: Summary for Molson Coors Brewing Company Cl- Yahoo! Finance

 

[No_Such_Reality]

I don't see the equivalent of an annuity payment.

All the interest from the CDs needs to be left to compile in the CD so you have your guaranteed nest egg if the market blows up.

Taking living expenses from the much smaller stock investment is a pretty good way to blow up that portion of the investment pool.

With an annuity, you get a payout, monthly or annually.

 

[ERD50]

... To me it's a specialized set of rules for investing in SPIA-like goals with little or no obscene commissions, low cost, withdrawal penalties, tax efficiency etc.

If you had SPIA type goals would you purchase a commercial policy or create a DYI alternative such as the above?

The more I read through this thread, the more confused I am about how this would act like an SPIA, or even what the goals are. I went to immediateannuities.com and a 58 YO male can get a 6.26% payment (no payment to any beneficiaries), or 5.69% joint for a wife of same age.


1) An SPIA provides a (generally) non-inflation adjusted payment for life. So that leaves inflation as a wildcard. The payments from the plan in the OP would vary with CD rates, and also have some market volatility, so that aspect is less predictable. I guess I don't really see how this is like an SPIA?

2) As others have said, an individual can't really replicate the longevity risk pooling that an annuity company can. But that is offset to a degree by their costs and profits.


But look at what you can do with a simple DIY plan:

A 3.23% WR taken over 45 years, adjusted for inflation (so eliminating that wildcard) has been 100% successful in the past, with any AA between 50/50 and 75/20. So if 45 years is close enough to "for life" for you, that's a reasonably comparable comparison basis to an annuity.

No games with compartmentalizing of funds, just an annual rebalance (which probably doesn't matter either). And a very good chance of having enough near the end to raise the spending level, and/or leave money to heirs.

I fail to see why some variable AA plan that may be very high in allocation to CDs would be expected to outperform that? I wonder how the market component would perform when this plan has you buying stocks as CD rates went up, and selling them as CD rates go down? Seems like an odd form of market timing that would take some work to model. I'd sure like to at least understand how it performed historically before committing any $ to it.

-ERD50