Using CD Investments Like a Self Managed Annuity Question?

[ShokWaveRider]

We have all our nest egg in cash instruments. They are split between Qualified and Non Qualified (No Funds or Stock Market investments, all CDs or 401k guaranteed or MM instruments).

The Percentages are fairly evenly split. 60% has had taxes pain and 40% is in 401k & 427b with taxes due upon withdrawal. Our ages are 65 & 60 respectively.

What I would like to do is invest the lot in a 3% or greater Fixed Income instrument and with draw a specific percentage (4-5%) every year. I have calculated if we did this it would last us for ~40 years with a 1.5% annual increase.

We do not want an annuity. We do not want to put money in the stock market, with the current Net Egg there is no need. We are very comfortable and have worked out that we have more than enough for our future needs.

Is there a CD "like" Instrument that allows systematic withdrawals as I have described?

Thanks

 

[pb4uski]

Sounds like a a couple of year's of withdrawal in an online savings account or MM fund along with a CD ladder would work well for you. I would think that you should be able to get close to 3%.

 

[bingybear]

This is really a question of who takes the risk. Annuity, the insurance company takes the risk and you pay for it. As pb4uski noted a CD ladder and you take the risk (along with FDIC). You could also use treasury or agency bonds in a ladder. I assume you would not want to use corporate bonds based on your comments.

 

[Dtail]

What is the DW doing for healthcare (ACA with subsidies?) until 65 y.o.?
This aspect could affect the taxable to non taxable mix of any new investments.

 

[OldShooter]

I think @pb4usk's concept has legs. The only additional thing I would suggest is that instead of MM or savings account, you look at buying t-bills on the auctions through your broker. For Schwab, I am told that is free on-line. I usually talk to Chris, one of the bond guys, for which there's supposed to be a $25 charge, but he usually waives it.

You won't get 3% with t-bills (at least not in the near future!) but you can buy maturities as short 4 weeks and out to a year. This would allow you to almost micromanage your near-term cash bucket. You can also look at treasury notes, but the shortest maturity is 2 years, so there you might be better with a brokered CD. The key, IMO is that you never want to buy a "used" CD and always want to hold to maturity.

I find your strategy interesting. Many times I have heard it asked "If you've won the game, why keep on playing?" But most of us can't resist!

 

[Freedom56]

We have all our nest egg in cash instruments. They are split between Qualified and Non Qualified (No Funds or Stock Market investments, all CDs or 401k guaranteed or MM instruments).

The Percentages are fairly evenly split. 60% has had taxes pain and 40% is in 401k & 427b with taxes due upon withdrawal. Our ages are 65 & 60 respectively.

What I would like to do is invest the lot in a 3% or greater Fixed Income instrument and with draw a specific percentage (4-5%) every year. I have calculated if we did this it would last us for ~40 years with a 1.5% annual increase.

We do not want an annuity. We do not want to put money in the stock market, with the current Net Egg there is no need. We are very comfortable and have worked out that we have more than enough for our future needs.

Is there a CD "like" Instrument that allows systematic withdrawals as I have described?

Thanks

You are smart to avoid annuities. I wouldn't touch them.

A) Your ultra-low risk options are:

Ladder with MM and CDs
Ladder with treasury notes or agency notes

B) If you want more yield but are willing to take some risk:

Ladder with investment grade corporate notes (avoid energy and retail )

C) If you want even more yield, but assume more risk:

Ladder with the higher end of high yield corporate notes (BB to BB+)
(avoid energy and retail )
Add investment grade preferred stocks from banks

I do a combination of A,B, and C but I do spend some time managing my holdings. In the not to distant future, investment grade corporate notes and preferred will become very attractive as redemption of funds holding those securities are forced to sell. This has already started and most bond funds are negative for the year. I'm floating a lot of cash in MM funds waiting for the bargains.

If you want a safe and worry free portfolio, stick with option A.

 

[OldShooter]

... C) If you want even more yield, but assume more risk ...

What he said.

For Option C, FWIW, we have been very happy with SAMBX, which is a fairly diversified but unleveraged floating rate fund. These are kind of strange animals and merit some study before anyone jumps in, but IIRC we've had a pretty steady 4% yield over the four years since we bought it.

 

[ShokWaveRider]

I find your strategy interesting. Many times I have heard it asked "If you've won the game, why keep on playing?" But most of us can't resist!

Not us, I can resist easily. I do not need the headaches or the loss of sleep, that seems to plague me when doing anything involved with the stock market .

Quite honestly, if we just took the stash divided it by 35 years (No Interest or return) we would be more than comfortable. I would like to get 3 - 4% for "Insurance".

DW DOES currently use the ACA. It is a consideration.

 

[Freedom56]

What he said.

For Option C, FWIW, we have been very happy with SAMBX, which is a fairly diversified but unleveraged floating rate fund. These are kind of strange animals and merit some study before anyone jumps in, but IIRC we've had a pretty steady 4% yield over the four years since we bought it.

I stay away from funds (not including money market) altogether unless they are closed end funds trading at a significant discount to net asset value an whose income can cover their distribution without return of capital. A 4% yield from a fund is not going to get me too excited. I can buy a short term note from Ally, Ford, or Ebay that will give that type of return with a very short duration and a return of capital. None of those companies are going away in the next 4 years.

 

[Jerry1]

trading at a significant discount to net asset value

Can you explain how you determine this - give an example? I get that it’s trading for less than it’s value, but how do you define its value and how do you know/find the value?

 

[Freedom56]

Can you explain how you determine this - give an example? I get that it’s trading for less than it’s value, but how do you define its value and how do you know/find the value?

Please see the link below:

https://www.cefconnect.com/closed-end-funds-daily-pricing

Set your filters according to the fund type you are interested in to narrow your choices. Select the CEF you want to look at and then tab through the information.

As an example, click on the first one on the list. You should see the fund details starting at the overview. Select the other tabs (Fund basics, Distributions, Pricing information, etc...).

One golden rule for CEF investing is that you should NEVER buy them at IPO.
Keep in mind that leveraged funds borrow short term and invest in longer term securities to leverage the yield gain. However, with a flattening yield curve this does not work that well and puts pressure on income.

 

[ShokWaveRider]

William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy?

“In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.”

This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

 

[jetpack]

Well, you can CD ladder it out 10 years in a brokered cd account. Easier to manage, as long as you don't have more than $250k in one bank, it's all FDIC insured. Every year just put what you don't use into more 10 year cds. 10 year CD's are about 3.5% right now.

 

[OldShooter]

William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy?

“In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.”

This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

Makes sense to me, though as I said the game is too much fun for me to stop. But we have enough assets that our financial comfort is not at risk.

The place I think the "stop playing" idea takes some careful thought is with inflation. IIRC the last 30 years inflation history is about 2.8% but reaching back to include the 70s/80s excitement gives you a 4.5% average. Looking at a long, happy retirement, this blows the concept of a "fixed" annuity completely out of the water despite its comforting sound. In 20 years at 4.5%, your "fixed" annuity is down to about 40% in buying power. A lot of posters here seem to not realize that.

 

[Dtail]

William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy?

“In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.”

This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

Interesting concept that I am guessing that not many truly follow aka no stock exposure.
IIRC with your portfolio and expense needs, it would seem that ~3% returns would work for you for preservation of the portfolio.

Not sure the answer, but if the types of investments you invest in don't match interest rate movements, would that result in some tightening of expenses vs. returns?

 

[Dtail]

Makes sense to me, though as I said the game is too much fun for me to stop. But we have enough assets that our financial comfort is not at risk.

The place I think the "stop playing" idea takes some careful thought is with inflation. IIRC the last 30 years inflation history is about 2.8% but reaching back to include the 70s/80s excitement gives you a 4.5% average. Looking at a long, happy retirement, this blows the concept of a "fixed" annuity completely out of the water despite its comforting sound. In 20 years at 4.5%, your "fixed" annuity is down to about 40% in buying power. A lot of posters here seem to not realize that.

OldShooter - didn't see your post when I responded, but that was my concept explained more elegantly by you.

 

[Huston55]

OP-

Not sure what guaranteed income streams you do/will have but, a concept you may want to consider is to fill any gaps (gap=expenses-guaranteed income) with fixed income investments (CD/bond ladder, etc) & out any leftover assets ins something lower risk but with a bit more upside potential (like Wellesley). This is also a “win the game” strategy, which some call “floor & upside), and which provides some inflation protection. Food for thought.

 

[FIRE'd@51]

What I would like to do is invest the lot in a 3% or greater Fixed Income instrument and with draw a specific percentage (4-5%) every year. I have calculated if we did this it would last us for ~40 years with a 1.5% annual increase.

You might want to plug your numbers into this calculator. I plugged the bolded numbers above into it and get the result that the payments would only last 32 years. To last 40 years you would need to earn 4% on the portfolio.

Present Value of a Growing Annuity - Formula and Calculator

 

[ShokWaveRider]

You might want to plug your numbers into this calculator. I plugged the bolded numbers above into it and get the result that the payments would only last 32 years. To last 40 years you would need to earn 4% on the portfolio.

Present Value of a Growing Annuity - Formula and Calculator

I have done the math. Mine includes SS tat I will start taking at FRA. We have no heirs, I got it down to 35 years with $250k left at the end when I am 95.

 

[Dash man]

Have you figured in risk of inflation and what that would do to your portfolio if we had a period of prolonged higher inflation. Pure cash would be a risky place to be if it did happen.

 

[ShokWaveRider]

Have you figured in risk of inflation and what that would do to your portfolio if we had a period of prolonged higher inflation. Pure cash would be a risky place to be if it did happen.

Yes, use this calculator. Put in $25k per year for SS.

The FourPercentRule Retirement Calculator

 

[Dash man]

Yes, use this calculator. Put in $25k per year for SS.



The FourPercentRule Retirement Calculator

I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

 

[brokrken]

I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

+1

 

[pb4uski]

William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy?

“In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.”

This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

When Bernstein totally changed his stripes after the 2008 great recession and became uber conservative he lost all credibility in my view.

That said, in many cases a conventional 60/40 AA plays right into his strategy once SS and/or pensions are considered. If I take our basic annual spending.... not what we actually spend but a lower amount that we would spend if we needed to tighten our belts because of a downturn... then subtract SS and any pensions... then multiply by 35 years and divide by our nestegg.... I get a % that is pretty close to our 40% allocated to bonds and cash.... but I don't think of myself as playing it safe.

IOW, if I took our bonds and cash divided by 35 and added SS then we would have enough to live on.... but there would be inflation risk and not a lot of luxury.

I actually have the opposite view... if you have "won the game" then you can well afford to keep playing prudently and gain the benefits of continuing to play (in our case for DD, DS, charity and perhaps some splurges).... I plan to dance with the girl that brought me to the dance so to speak.

 

[OldShooter]

I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

Our answer to that is to hold TIPS as inflation insurance. I consider any shortfall between the TIPS total return and any alternatives to simply be an insurance premium payment.

Also, if we really get some exciting inflation I expect the TIPS to be bid up well beyond their bond-calculator value by panicked buyers. This will be exacerbated because Treasure will stop selling new TIPS in order to not be pouring gasoline on the fire. So we will make some money there.

To belabor the point, TIPS are inflation insurance just like I buy fire insurance on our houses. I won't be disappointed if we don't get the inflation any more than I would be disappointed if we didn't have a house burn down. Both are low-probability, high-impact events though the house fire IMO is lower probability than a period of exciting inflation.