Portfolio Growth Harvesting

[REWahoo]

OK, I'll admit it - the thread title might be a euphemism for market timing.

Like many here, I've been watching the growth of the market to what is probably an unsustainable level. I know trying to time the market isn't a viable strategy and I've not been all that tempted to sell knowing trying to figure out when to buy again is a near-impossible task. So I'm perfectly willing to do what I did in 08/09, simply hold on for dear life and ride out the market's inevitable gyrations. But I really didn't enjoy it then and I have no reason to believe I'll feel any different the next time the market swoons.

I've always told myself that at some point, always "when I get older", I might consider (can't believe I'm actually saying this) buying a SPIA. Well, I'm older (71) and I'm considering it.

What I'm thinking about doing is "harvesting" ~$175,000 from the growth of our portfolio over the past few years and purchasing a SPIA. That should provide ~$1,000/mo income with a 50% survivor benefit for DW.

Other pertinent facts:

- 92% of our annual income is derived from SS and investments
- 8% of our annual income is from DW's small pension
- The combined income from the SPIA, DW's pension and our SS will fund ~55% of our annual expenses.
- The remaining portfolio balance will be what it was when I retired in 2005.

What do you think? Am I simply trying to disguise the fact I'm a DMT?

 

[NW-Bound]

It's just another form of "balancing". Whenever that word is used, it means a "squeaky clean" selling/buying action.

 

[RunningBum]

Nothing wrong with being a DMT, and getting out of the game (partially) when you've got it won isn't a bad idea.


My concern would be locking into an SPIA at low rates. https://www.immediateannuities.com/annuity-trends/ seems to show that.


I might be inclined to put that money into Wellesley or similar, and then to an SPIA if/when rates climb.


SPIAs are only a vague idea to me to look into some day, so my advice may not be worth what you've paid for. I also don't study interest rates too closely, but I just don't think they'll stay this low too much longer.

 

[LOL!]

At age 71, you can spend down your portfolio to zero in the next 30 years anyways, so it doesn't seem like the SPIA is even needed.

 

[REWahoo]

I might be inclined to put that money into Wellesley or similar, and then to an SPIA if/when rates climb.

That money is currently in Wellington, so moving it to Wellesley is an option. I'm a bit reluctant to do that as I already have ~40% of my portfolio in that fund and concerned about having too much of a good thing.

As to the interest rate concern, yes, SPIA payouts will no doubt improve when rates go up which is something that we've all been saying is just around the corner for how many years? I was sure rates would go up before I was old enough to consider buying an annuity, but look what happened...

 

[REWahoo]

At age 71, you can spend down your portfolio to zero in the next 30 years anyways, so it doesn't seem like the SPIA is even needed.

True.

Spending down the portfolio to zero is not a problem if the portfolio stays what it is today. It is a potential problem if it takes a big haircut in the next year or so and is slow to bounce back.

I've found I'm less enthusiastic about riding the market roller coaster in my 70's than I was in my 60's. That leads me to believe I will be even less enthusiastic about doing it in my 80's - assuming I'm still topside.

 

[pb4uski]

I have been having similar thoughts. My only response to the apparently frothy stock market thus far has been to take a little off the table at regular intervals by rebalancing frequently.

I guess the next logical step would be to take a year (or two) of withdrawals off the table and then leave equities alone for a while until they exceed my equity threshold again.

So for example, let's say I am currently have $100 and am at my target of 60/35/5 and my withdrawals are 3% a year... if I cashed in $6 of the $60 in stocks that would bring me to 54/35/11 and ignoring the cash I would be at 61/39 which isn't a ughly bad place to be.

Over the next two years the 11% would drift back down towards 5% as I spent the $6.

If the markets went sideways the 54/35/11 would drift towards 58/37/5 as the denominator decreased from $100 to $94 and I could then rebalance to 60/35/5 by selling bonds and buying stocks.

Of course, there is always the chance that stocks could continue to shine and it will turn out to be the wrong decision... someone could have had the same rationale 2-3 years ago that we have today... so perhaps it is best to just stay the course.

 

[audreyh1]

REWahoo? Did you really start this thread?!?

My %remaining portfolio withdrawal method automatically harvests some of the portfolio gains as my income increases when the portfolio increases.

Converting part of your portfolio to an SPIA? Well, the mechanics are simple in that you’ll drop your income levels to the new portfolio value - I guess that would be a reset.

What kind of income/rates are you looking at? OK I guess you already answered that.

 

[Chuckanut]

FWIW, my sole concession to market timing is move up selling assets to fund the new year's spending a bit. Suppose I need to sell 30k of stock to fund my planned 2018 spending on wine, women and song. Since the market is bumping up against new highs in late 2017, I sell in late 2017 instead of waiting for 2018. In effect, I harvest a bit earlier in case bad weather shows up and wipes out a good portion of my crop.

Does it work? I have no idea. But, it makes for a less stressful 2018 which is certainly a benefit.

 

[REWahoo]

REWahoo? Did you really start this thread?!?

Yep, it's me...or at least an older version of me.

What kind of income/rates are you looking at?

Got a Vanguard SPIA quote: $1,000/mo income with a 50% survivor benefit for $177,000.

 

[flintnational]

I don't see a problem taking money off the table. In your case, it is not market timing. You are pulling it out permanently and converting it to stable, safe income. Now, just don't sell your SPIA to J G Wentworth when the market tanks and buy back in. Then you would be a DMT.

In our case, I have rebalanced 3 times this year (normal plan is once). Each time I have increased cash. We are currently sitting on 8 - 10 years cash (maybe my own self funded SPIA?). It is actually more cash than we need. But I am reluctant to drift above our 70% stock allocation. If the market makes another strong run, I will keep rebalancing into cash.

 

[Another Reader]

This sounds like a "whee" moment to me... Interest rates will rise dramatically as soon as you do it.

Interest rates do look like they are rising, so a pullback could affect stocks and bonds. Bonds could be hurt more. The W funds won't help you if that happens. I would want to wait on an annuity if rates really are rising. How about good old cash, invested in a CD ladder or something similar?

 

[SecondCor521]

Questions for you:

1. What do you think about the possibility of inflation eroding the value of your SPIA over time?
2. Why not just move more money to bonds?

(Sincere questions with sincere curiosity behind them.)

 

[REWahoo]

. I would want to wait on an annuity if rates really are rising. How about good old cash, invested in a CD ladder or something similar?

I have considered it.

My current AA is 43/47/10 so I'm already at 10% cash and I'm not sure adding more cash would result in an AA I'd be happy with, even thought I told myself it was only temporary. Selling Wellington (65/35) to buy the SPIA would leave my AA about the same. Going to cash to wait out interest rates seems too much like market timing to me, but maybe I'm just kidding myself.

 

[REWahoo]

Now, just don't sell your SPIA to J G Wentworth when the market tanks and buy back in. Then you would be a DMT.

No company with a jingle as irritating as JG Wentworth's will ever see a penny of my business!

 

[audreyh1]

Yep, it's me...or at least an older version of me.


Got a Vanguard SPIA quote: $1,000/mo income with a 50% survivor benefit for $177,000.

So that’s a payout rate of ~6.8%, and it’s only partially taxed?

Maybe only 3.7% would be taxable and the rest considered return of principal? Really quick calcs there as I didn’t include your wife survivor benefits.

 

[REWahoo]

1. What do you think about the possibility of inflation eroding the value of your SPIA over time?

That will definitely happen and something I've considered.

The later one waits to purchase a SPIA the greater the odds the Grim Reaper will cut short the eroding effects of inflation. That's the main reason I'm just now considering it. And if I beat the odds and live to be a hundred, that tiny little annuity check will be a reminder of what a dumb@ss I was in my "youth".

2. Why not just move more money to bonds?

Good question.

I suppose the fact I already have 47% in bonds and 10% in cash make me uncomfortable increasing those percentages - too many eggs in one basket. I think, along with my age, that is why a SPIA is becoming more attractive to me. I have no pension "leg" on my retirement stool and an annuity (warts and all) would likely be more stable for my and DW's financial future.

 

[REWahoo]

So that’s a payout rate of ~6.8%, and it’s only partially taxed?

I'd purchase this using tax deferred funds (Vanguard IRA) so I though the monthly payments would be taxed as ordinary income. Am I missing something?

 

[audreyh1]

I'd purchase this using tax deferred funds (Vanguard IRA) so I though the monthly payments would be taxed as ordinary income. Am I missing something?

No, sorry, I was thinking after tax (non qualified) SPIA, not one in an IRA.

No change in how much income is taxed then.

It changes your RMD situation a bit?

 

[REWahoo]

It changes your RMD situation a bit?

Yes, a bit, but the impact isn't really significant.

 

[OldShooter]

I am kind of a dumb guy on annuities, never having seriously considered one, but I'm curious to enhance my education by hearing comments on a couple of thoughts:

First, a "fixed" annuity is a myth. The value of the annuity payments constantly depreciates with inflation. Inflation over the past 30 years has averaged 4.1%. If this continues for the next 20, the buying power of a "fixed" $1000 payment will be $432. Looking back 45 years instead of 30 picks up a high (up to 15%) inflation period that will make 4.1% look like a gift. But when people talk about annuities they do seem to like the (IMO fictional) "fixed" aspect.

Second, to purchase an annuity is simply to pay someone else to take a risk that the purchaser doesn't want to take. The seller has to price the risk, add his costs to manage the annuity, and add enough profit to make the product worthwhile. In buying an annuity, though, the purchaser seems to rarely buy an annuity that also transfers inflation risk, which seems to me to be the biggest risk of all.

In formal risk management one evaluates three things: the potential impact of an event happening, the probability of that event happening, and the cost to mitigate. It seems like that same thinking should be used in evaluating an annuity purchase but people don't seem to approach it this way.

 

[Honeyfill]

This is also a good time to pay off any debt. I have been paying off low interest debt all year with my stock gains. I never bothered before because the interest rates were between 0 and 3% and I was in accumulation mode. Now that the market is so high, I have reached my networth targets and I am starting to think about retirement. Debt that did not bother me before now feels like the sword of Damocles hanging over my head!

 

[Bikechuck]

I plan to look into a SPIA without an inflation rider when I reach my 70s. I do not consider it market timing and Wade Pfau feels that SPIAs are better than bond funds in today's interest rate environment.

I will likely want a 100% continuation of the benefit for my wife though which I understand would reduce the monthly payments.

I retired this year at the age of 64 and 1/12 years old. I want to wait until my 70s to pick up additional mortality credits.

 

[Danmar]

Reasonable plan. I’m considering the same strategy. But in my case I would buy a SPIA to replace my alimony requirements. End result is the same, less equity in the AA but also more disposable cash flow to safely spend. In my case the critical metric is the Xwife’s age. She is currently 67 and each year I wait the cost should go down by about 3-4%.

 

[capjak]

Things to think about:

1. 100% survivorship, obviously based on your situation, assume there is a reason for the 50% survivor vs some other arrangement even 20 year guaranteed payments (20 year period Joint Life) may be the same
2. SPIAs are commodities Vanguard's supplier is not always the cheapest, shop them, Immediate annuity, Call Stan the annuity man etc.....
3. Consider after tax $$ to control taxes if needed?

Based on your comments/defense of SPIA I think you should do it, perhaps by laddering (i.e. 90,000 now and 90,000 1 year from now)