The combined ignorance in this, and the other linked thread is just astounding. The internet continues to be a place run by lowest common denominator knowledge. God I hope you read this Ralph....
Seriously? You want this 64 year old guy with no pension (that obviously is not all that experienced or knowledgeable at investing) to expose HALF of his entire nest egg to an equity index? I can't even believe I need to explain why this is an absolutely awful idea (and for a LOT of reasons).
But since I obviously do, here's the biggest. When dealing with the US stock market, sure it's averaged 8-12% (depending who you ask) over a pretty long stretch of time. But in case anyone's noticed, the year after year returns aren't exactly like.... 7,9,12,6,10,8,9,8. No, here's 99-2009:
2009 27.11
2008 -37.22
2007 5.46
2006 15.74
2005 4.79
2004 10.82
2003 28.72
2002 -22.27
2001 -11.98
2000 -9.11
1999 21.11
Man. Let's hope no 64 year old's followed your advice in 2000, or 2007 (or in the 50's, the 70's, etc). Why does this matter? Basically put, and I can mathematically and graphically prove this if you'd like, the MOST important factor in determing how well a certain person's retirement does in a Monte Carlo simulation is whether or not they suffer losses in the years LEADING UP TO, and DIRECTLY FOLLOWING retirement. When graphed, it basically looks like a bell curve, so if you're 45 you can have your dollars pretty risky, when you're 65 you REALLY REALLY CAN'T, and if you're 85, you can actually be about as risky as you were at 45 (technically... you're money just isn't going to need to last all that much longer).
Basically put, if you just HAPPEN to turn 65 and dump half your money into the S&P right before a particularly nasty stretch of years, your chances of running out of money go absolutely through the roof. You don't have enough time, you're not earning any more, and meanwhile you're probably drawing off of your dollars monthly (reverse dollar-cost avg=bad). That line graph will take an absolute nose-dive. With that being the case, I think you can definitely argue that the absolute most important priority for someone 58-73 (or so) is to not put themselves in a position to lose 30-40% of their life savings.
And before you say "well it always comes back" be prepared to get linked to several articles that show the avg stock market investor return is closer to 3%, mainly due to things like emotional selling during turbulence. Let's say Ralph, who obviously isn't that experienced at investing, drops 150K into your vanguard index fund, and then proceeds to watch it drop to 90 over a couple years. Is there any chance that Ralph might do something rash and sell out near the low? Nah, probably not... that never happens.
Being 64, Ralph should have no more than 36% of his money in something which can lose value in any way whatsoever (rule of 100).
But he's half in bonds, which can't lose value (sorta). But remember, that face value can go down too. In November alone, 30 year US treasuries lost 8% of their current face value, and that's about the only security you're allowed to say is "risk-free." Sure you will get all your money back in 30 years, but if you wanted to sell today, you're out 8%, bud. So bonds don't pass the smell test for something that can't lose value.
Only things that pass the test:
CD's
US Savings Bonds
Annuities
I'm too tired to go into the absurd skepticism these threads have displayed towards the "Claims paying ability of the issuing company." But basically put, in my state alone, the State promises to back up to 500K in annuity dollars, that's if an insurer fails, and doesn't get gobbled up, and doesn't have its obligations covered by a healthy insurer (which is in all of their best interest to do). When's the last time the stock market lost 40%? When's the last time a US citizen had his annuity defaulted on? Guess which one was more recent.
Ralph, if an insurance company is saying, in writing, that it will do something, and you do your due diligence on the company you're buying from yadda yadda, you have about as guaranteed of a thing as you're going to find in this world. Shoot, the US government has mountains of debt - maybe IT will go bankrupt. Are you going to build a bomb shelter and stock up on guns?
Couple closing points. The thread is right that it's not a great time to buy a fixed annuity. Interest rates are at historic lows, and it makes very little sense to "lock-in" to a rate that is almost guaranteed to substantially rise within the next 5 years.
A couple directions to go for now: Bank CD 3-5 year. I'd put 65% in there, so 195K or so. For the other 35%, it wouldn't be a terrible idea to do half in the vanguard stock and half in the vanguard bond.
If you did want to go with an indexed annuity, find one with a lifetime income benefit rider - those rates are still decent sometimes. I did a quick calculator and if you deposited 200K on a LIBR rolling up at 7% compounding annually (available in my state) and didn't touch it for 10 years, you'd have around 25K a year guaranteed lifetime income when you turned it on. You could easily throw the other 100K in a 10 year term bank cd and draw it down while you wait for the annuity to ratchet up.
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