Folks Approaching 70 with NO (0) Stock Exposure - How to Secure Guarenteed Income?

[pb4uski]

Perhaps, but OTOH, with 10 equal rungs the weighted average maturty would only be 5 years... by comparion the weighted average maturity of BND is 8.8 years and of Vanguard's Intermediate Term Treasury Fund is 6.1 years.

Right now, I'm short at 3.3 years but that was intentional while rates were rising. When it appears that rates have plateaued then that would be the time to extend.

But if someone wants to use these target maturity ETFs to try to replicate a long term bond fund but with more control over cash flow, a 10 year ladder wouldn't be a big mistake, even if rates rise a bit, plateau for a while and then recede.

It depends on how fine you are trying to tune things.

 

[Out-to-Lunch]

For Treasuries and TIPS, I'm struggling to "get" the benefit of the iBond product over just buying Treasuries and TIPs that mature in a given year but I still am mulling it over.

From reading that blurb cited above, I am still not quite sure about the phantom income problem. The Allan Roth quote is

Finally, it solves the issue of phantom income tax because distributions include both the Consumer Product Index and coupon payments. Buying the TIPS outside of funds incurs taxes on the CPI component that is accrued but not paid out in cash. Bid-ask spreads seemed to average around 0.08%, and Veraa stated that these should come down over time as more trading occurs.

I don't quite follow.


I know that you (and I) hold our TIPS ladders in a tax-preferenced account, so I suppose I don't care. But if these funds solve the phantom income problem in a way that makes it make sense to hold them in a taxable account, then that is a game-changer for many.

 

[target2019]

Are you trying to preserve this 2M for 25 years?

If long term inflation will average 2.2%, I'd use 3% in the calculation.

You want the maximum safe return (no stocks). You also mention guaranteed income. That is quite a set of requirements.

I would probably start with your last requirement - Guaranteed Income - and then eliminate options that can't deliver that for 25 years.

I suppose you want to build-in an inflation factor.

50% is in an IRA, and you'll take RMDs very soon. So I would focus on that pressure point now.

You're also dodging a hard number for what discretionary income you want guaranteed.

IMO we can avoid a lot of paralysis in the analysis by simply stating up front, when do I want/need the income, and how many dollars might that be.

We have all needs met by SS and pension. We're using 50-60% equity, bond funds, and MMF.

You may want to consider survivorship issues. At this time I can engineer a portfolio, but how does it get managed when I'm gone in a few years.

Definitely a great list of factors and questions in the OP.

 

[ShokWaveRider]

Definitely a great list of factors and questions in the OP.

OP Here, I agree. Here are my comments to your comments. And thanks for taking the time to do so.

- Are you trying to preserve this 2M for 25 years? Yes and No, we have no heirs BUT, I would like to account for some potential LTC/CCRC surprises

- You want the maximum safe return (no stocks). You also mention guaranteed income. That is quite a set of requirements. Safe Return is the priority

- I suppose you want to build-in an inflation factor. I will but it was not a consideration for this post, as we could create our own COLA as needed

- 50% is in an IRA, and you'll take RMDs very soon. So I would focus on that pressure point now. Why & How, we have no ROTHs and earn too much to make it viable at the moment, it is what it is

- You're also dodging a hard number for what discretionary income you want guaranteed. No, Not dodging, we will utilize whatever the nest egg can generate ensuring a safe return, or it will be reinvested.

- You may want to consider survivorship issues. At this time I can engineer a portfolio, but how does it get managed when I'm gone in a few years. No, not really, we have charities we are leaving the "leftovers" to. My only concern is DW is taken care of when I cark it. Hense the Safe Return part.

 

[ShokWaveRider]

Perhaps, but OTOH, with 10 equal rungs the weighted average maturty would only be 5 years... by comparion the weighted average maturity of BND is 8.8 years and of Vanguard's Intermediate Term Treasury Fund is 6.1 years.

Right now, I'm short at 3.3 years but that was intentional while rates were rising. When it appears that rates have plateaued then that would be the time to extend.

But if someone wants to use these target maturity ETFs to try to replicate a long term bond fund but with more control over cash flow, a 10 year ladder wouldn't be a big mistake, even if rates rise a bit, plateau for a while and then recede.

It depends on how fine you are trying to tune things.

Can you please help me understanding getting income from ETFs? When I look at the returns, they seem low compared to CDs give the same time frame. I think perhaps I simply do not understand them, or how they fit. As far as managing the accounts, I do that now, like you it keeps me busy, even of only at maturity time.

 

[frank]

My thoughts, backed by many, is that the Fed is serious in higher for longer. Until we see reduced spending by the congress, there is no hope for a peak in rates to occur. This is not likely in an election year.

Being of similar age and position, we invest primarily in T-bills, not T bonds. Stocks are not a good risk/reward at this time. T-bills are very liquid, you can sell on any day and receive the funds, just like it was cash in a MM account. We have quite a bit more to invest than many, but I keep MOST durations <1yr and in T-bills rather than CD's. CD's have market value risk if sold early, T-bills at least get sold at a very low margin cost.

One could go longer duration right now at near 5% for 20-30 years, but I think there is more likely higher T-bond rates in the next months. If you need/want monthly liquidity, then ladder out t-bills on a monthly basis for 1 to 2 years and auto roll them. Pretty easy on both Fido and Schwab to DYI buying on the secondary market. I try and buy at auction for a hair better yield.

where can you get 5% with a 20-30 year duration? never heard of that long of a term.

 

[Mulligan]

where can you get 5% with a 20-30 year duration? never heard of that long of a term.

A 20 year duration US Govt Bond is now yielding 5.08%, as of this moment.

 

[COcheesehead]

where can you get 5% with a 20-30 year duration? never heard of that long of a term.

I just did a bond screen at Fidelity. A-/A3 grade or higher. 5% yield or higher, call protected, maturing in 2043. I got 2788 results. So to answer your question, there are a lot of options.

 

[tulak]

A 20 year duration US Govt Bond is now yielding 5.08%, as of this moment.

And 20 year TIPS are yielding 2.6% real. Add 2-3% inflation and you get a 4.6-5.6% nominal yield.

 

[pb4uski]

Can you please help me understanding getting income from ETFs? When I look at the returns, they seem low compared to CDs give the same time frame. I think perhaps I simply do not understand them, or how they fit. As far as managing the accounts, I do that now, like you it keeps me busy, even of only at maturity time.

Broadly speaking, it is like buying a share in a portfolio of bonds that mature in a stated year. You receive a proportionate share of interest each month and of the maturity proceeds in December of the maturity year.

In my experience there are periods of time where CDs yield higher than Treasuries and vice versa. Currently CDs are yielding more than Treasuries so that accounts for your first observation.

According to Schwab a two-year CD is 5.35% and a 2 year UST is 5.03% . The portfolio yield of the 2025 Treasury ETF, IBTF is 5.2%.

These ETFs make monthly income distributions and a maturity distribution in December of the maturity year. Below are the distribution of IBTF the last few months. For Oct 2023, the distribution yield was about 4%

Record Date	Ex-Date	Payable Date	Total Distribution	Income	ST Cap Gains	LT Cap Gains	Return of Capital
Oct 03, 2023	Oct 02, 2023	Oct 06, 2023	$0.076575	$0.076575	$0.000000	$0.000000	$0.000000
Sep 05, 2023	Sep 01, 2023	Sep 08, 2023	$0.078905	$0.078905	$0.000000	$0.000000	$0.000000
Aug 02, 2023	Aug 01, 2023	Aug 07, 2023	$0.080112	$0.080112	$0.000000	$0.0000

The maturity distributions are generally around $25. The 2022 maturity distribution was $25.39 and the 2021 maturity distribution was $25.35.

It is like buying a discount bond. Like all ETFs, these trade at a premium or discount to NAV. These seem to consistently trade at a premium, which adversely impacts the net acquisition yield depending on the extent of the premium, but it look like 15-20 bps on average... part of the cost of convenience.

I'm more bullish on this product for corporate bonds and high yield bonds for diversification benefits and would look to buy them nearer to NAV through good-till-cancelled limit orders.

For Treasuries and TIPs, I think I would lean towards just buying brokered CDs and Treasuries and TIPs rather than these ETFs to avoid any premium or ER unless someone desparately wants easy.

 

[ShokWaveRider]

Broadly speaking, it is like buying a share in a portfolio of bonds that mature in a stated year. You receive a proportionate share of interest each month and of the maturity proceeds in December of the maturity year.

Thanks for the explanation.

 

[Car-Guy]

So "OP" it boils down to a couple in their early 70's with 2m to invest, ss coming in, no debt and they want to invest so it will last for the rest of their lives.

Let's face it, most people would kill (metaphorically speaking) to be in such a position. Also, a reality is most people that age only have ~15 years left but probably should plan for ~20.

So if you invest the 2m in CD's at 5% that will bring in 100k year. Of course that rate may only last for a few more years and drop to 3 or 4% for a few more years. Get it while you can. By then of course your life expectancy will also have dropped.

Add ss to the mix (say 40 to 50k per year for a couple). So in this scenario, that's a 140 to 150k income per year without touching the principal. Sure there is inflation and taxes to consider but 2m conservatively invested when you are over 70 years old and no debt seems like it would be a pretty comfortable life to me. Of course you can always start tapping the principal if needed at some point.

 

[NoiseBoy]

I dipped a toe into the T-Bill market last year by buying a ladder of three $10k, 13 week T-Bills on treasurydirect.gov. I've since added an additional $5k to each bond and purchased a 26 week bond. I have plans to end my travel CD ladder (two left) early, pay the 6 month interest penalties, and buy T-Bills of the appropriate duration with those funds. Here is what I've learned about buying T-Bills directly:

-- When you buy a $10,000 bond, the government takes the amount of the bond, minus the interest it will earn, from your bank account. For example, a 13 week, $10k T-bill might cost you $9,800. At the end of 13 weeks, you have $10k.

-- You can re-invest T-bills for up to two years. That means you can set your 13 week T-bills to automatically reinvest 7 times. If you do that, the government pops the interest from subsequent purchases into your bank account.

-- T-bills are exempt for state & local income taxes. I know that the OP said not to worry about them, but I'm mentioning it because I got bit by the tax dog mostly because I was unprepared for how I would pay the income taxes on my investment income once I was living only on my pension. By moving my cash investments into government securities from CDs and money market funds, I can make my State tax planning easier as well as save a little too.

-- T-bills are a better investment right now than non-brokered CDs, and it's fun playing with my "safe" money. But, I don't see how buying directly, as I am doing, would be a good long term strategy when I/We need to start keeping our investments simple.

Question for the group: How do I invest the full amount of one of my travel CDs in a new T-bill? For instance, I have one that will be worth about $32,500 when I end it. How do get that full $32,500 working for me in a T-bill? If I buy a $32,500 52 week T-bill, I'm only going to get something like $31,000 invested. Do I just have to take a swag at it? A couple hundred dollars either way won't matter to me.

 

[ShokWaveRider]

So it boils down to a couple in their early 70's with 2m to invest, ss coming in, no debt and they want to invest so it will last for the rest of their lives.

Let's face it, most people would kill (metaphorically speaking) to be in such a position. Also, a reality is most people that age only have ~15 years left but probably should plan for ~20.

So if you invest the 2m in CD's at 5% that will bring in 100k year. Of course that rate may only last for a few more years and drop to 3 or 4% for a few more years. Get it while you can. By then of course your life expectancy will also have dropped.

Add ss to the mix (say 40 to 50k per year for a couple). So in this scenario, that's a 140 to 150k income per year without touching the principal. Sure there is inflation and taxes to consider but 2m conservatively invested when you are over 70 years old and no debt seems like it would be a pretty comfortable life to me. Of course you can always start tapping the principal if needed at some point.

Pretty much our thoughts.

Honestly, though, we would be up for a SPIA (A++ company of course) with say 20 years certain, but if one does the math their pure interest rate return is inferior to other fixed income investments, and at the end of the day all your investment is gone. Now we are tempted (for us) as we have no heirs and if we could find one with 5+% return we may go for it with a portion. I do have trouble recommending them to others though.

 

[dknighd]

No real income requirements just trying to get the safest guaranteed income.

"They manage their current income well and wish to use the return of their
Nest Egg for Emergencies, Travel, and other discretionary spending"

I'm trying to digest this. "No real income requirements." But, "trying to get the safest guaranteed income."
If you do not need income, why are you looking for safe income?
Id do a mix of government bonds, CD's, and SPIA

 

[COcheesehead]

Pretty much our thoughts.

Honestly, though, we would be up for a SPIA (A++ company of course) with say 20 years certain, but if one does the math their pure interest rate return is inferior to other fixed income investments, and at the end of the day all your investment is gone. Now we are tempted (for us) as we have no heirs and if we could find one with 5+% return we may go for it with a portion. I do have trouble recommending them to others though.

Everyone needs to decide what is right for them. We moved to a fixed income heavy model with still some equity and real estate exposure. We average over $19,000 a month. We can’t even spend that much and that is without any pension or taking social security yet.
Now is a great time to lock in longer term income.

 

[RunningBum]

I'm trying to digest this. "No real income requirements." But, "trying to get the safest guaranteed income."
If you do not need income, why are you looking for safe income?
Id do a mix of government bonds, CD's, and SPIA

I agree, it's a mixed message. Sounds like what you really want is the best return, but you don't want to do it with any stocks, right? The return may be all income but doesn't have to be.

Shoot it down if you want, but VG Wellesley would seem like an easy hands-off way to do this but it is about 1/3 stocks.

 

[dknighd]

We average over $19,000 a month.

In my dreams!

 

[Healthy Lifestyle]

A safe and easy portfolio would be a ladder of either US Treasuries, brokered CDs or a combination thereof. Both are credit risk free as long as you stay under the FDIC limits with brokered CDs. I would lean towards a 10-year ladder with 10 rungs, one for each year. Such a ladder would yield about 4.85%.

I am also in a similar situation and have a few more years before age 70 and start collecting SSI. I am presently trying to set up an additional 3-10 year ladder with ~5% return. I am collecting a small pension along with dividends and interest income.

Going forward dw and I believe we have more than enough to live our lives.

(~80% CD, Treasuries, MMF, ~20 Equities).

 

[Exchme]

I would go for a mix of an SPIA (stantheannuityman.com can provide some rates) for guaranteed lifetime income and TIPS to get some inflation protection, see tips ladder.com to make a plan.

 

[ncbill]

SPIAs are for late in life...my retirement calculator tells me not until around age 80.

Younger than that duration-matched individual TIPS are good.

 

[bloom2708]

How did they get to $2 million without stocks? Or stocks were ok, but not from this point?

 

[ShokWaveRider]

How did they get to $2 million without stocks? Or stocks were ok, but not from this point?

Saving. They never had any stocks, not at least that they have shared. They are very conservative ...... like us actually. We stopped investing in stocks when we were about 35 (we are about the same age as us except my DW is 5 years younger than me) and we have more than they have.

In our case home fully paid for by the time I was 40 and No kids could also have a lot to do with it.

 

[Surewhitey]

We have gone to about 50% CD's, treasuries and MM these days. Easy 5% on average is good for no risk (except for inflation).

 

[Midpack]

Though I have just over 52% in equity funds, I have 40% in various 26 week T-Bills (taxable, tax deferred and tax free) and 7.4% in cash. When rates peak (yes, somewhat of a guess), I will ladder including longer duration treasuries. I am not interested in becoming an expert on trading individual bonds at this point to squeak out a couple more basis points in yield (at similar risk), having won the game. A guaranteed 5% plus with almost no effort is appealing to me...at almost any AA including no equities I guess. And the favorable treasury window should be open well into 2024, maybe longer.