Where to place $250k in a "sinking fund"

[BrianB]

I have a situation that I haven't encountered before. I'm thinking it will involve fixed income products or an immediate annuity, but these are investment products I'm not as familiar with as I am with stocks & stock funds where most of our investments are.

(Note: The following are rounded numbers, I realize the exact numbers will be slightly different.)

We are going to receive $250k in after-tax money from the sale of our home. We're thinking to use it as part of our budgeted spending for 10 years instead of IRA withdrawals so we can be more aggressive with Roth conversions over those years while keeping our total income under the $105k limit ($80k of income + $25k standard deduction) of the 12% tax rate.

We're retired so we can't make IRA contributions.

We want $30k per year for 10 years, depleting the whole amount, which will require about a 4% yield. This will take us to our RMD years and it will allow us to convert about $60k per year total from our traditional IRA's and reduce the "tax torpedo" considerably.

This is money we want to be "safe". It also needs to be liquid or laddered so we can get monthly or annual payments. A CD ladder? Or laddered bonds? Fixed annuity or MYGA? Something tax free like muni's (we are in Minnesota) would be a nice feature but not required.

Any suggestions for where to place this money? Or is there something in this plan I am missing that makes it a bad idea?


BrianB

 

[pb4uski]

Have you thought about inflation? That $30k in year 10 is going to have a fraction of the spending power in year 1. But I guess if you need more you can always rely on tIRA or Roth withdrawals.

For $30k annually over 10 years I would look at a 10 year CD or UST ladder and a 10 year payout annuity. The last time I looked at payout annuities I was surprised at the IRRs.

 

[sengsational]

I'm no expert, but the yield curve now doesn't scream to me that you should lock-up your money for 10 years at today's rates. I might just build a short ladder...a few rungs up to 18 or so months and see what happens with rates.

I'll be glad to have someone challenge this idea, and tell me why it's not so smart.

 

[Luvtoride]

I’m not trying to Sell anything but I would check out Gainbridge and their MYGA site. I believe you can achieve your “safe money” goal at a better rate than CDs which will allow 10% free annual withdrawals after the first year. I also agree that you may not want to tie up all of that money for 10 years, especially when the rates between 4 and 10 years with MYGAs are not materially different. Perhaps laddering a couple of MYGAs with 2-5 year terms.






https://www.gainbridge.life

Good luck.

 

[jazz4cash]

I agree with advice to consider MYGAs to meet the goal but look at other providers in addition to Gainbridge. Canvas annuities is another direct seller but there are several MYGA brokers that offer products from many insurers:
Blueprint Income
Immediate Annuities
Stan The Annuity Man
Fidelity

 

[ShokWaveRider]

MYGAs are our plan with after tax money. Mainly for the Tax deferred feature. CDs just are not there yet and DW's ACA is still a concern till 2024. We are sticking with companies that are A (Maybe A- ?) rated or above.

Canvas only sells Puritan Life and they are B++ so they are not in my Radar, see above.
Gainbridge only sells Gugenheim they are A- so I would say they are OK. YMMV

 

[BrianB]

Thanks for the thoughtful & reasoned replies. It's going to be 3 weeks until we have closed the sale & settled in our new apartment, so we have some time to make this decision. All our accounts are with Fidelity (except a WF checking account) and it would be nice to keep everything there for simplicity and because our Fidelity Rep would be able to help DW handle things if I get run over by a beer truck or some other fate.

PB4USKI: A CD ladder would be an easy solution. I see Fidelity brokered CD's are competitive with others, but still the 1-5 year yields are only 3.05% - 3.50%. How long will it take for yesterdays .75% Fed increase to be reflected in CD rates? It seems that rates have crept up very slowly.

I do understand the effects of inflation, but one mitigating factor is that we're in our early 60's now and in our "go-go" years. In a decade we will probably be moving into the "go-slow(er)" years and travel (now 15% of our budget) will likely reduce, offsetting the effects of inflation. Alternately, we modify our plan

Sengsational: I understand what you are saying about rates getting better. I'm a little uneasy about locking up everything for 10 years, so maybe a 5 year x $50k or 3 year x $83k ladder and using the excess principle & interest for smaller repurchases as each matures. I also see the possibility that the Fed stomps on inflation so hard that they crush everything - and start letting off the brakes sooner rather than later.

Luvtoride / Jazz4cash / ShokWaveRider: I know only a little about MYGA's and fixed annuities. We will be meeting with our Fidelity Rep in mid August and I will ask him give us some options they can offer for an MYGA or fixed annuity.

I see that no one came back with an answer like "That's a stupid idea because...", which gives me more confidence in the overall plan.

Thanks all, I will watch here for any other ideas & update what we end up doing. Just the act of organizing the information as I wrote these posts has helped me understand the options.

BrianB

 

[pb4uski]

According to immediateannuities.com, $250,000 would buy a cash flow stream of $2,478/month or $29,736/year for 10 years... that's an IRR of 3.72%... not sure who the issuer is though but there probably isn't much risk with a 10 year payout annuity.

 

[OldShooter]

@BrianB, implicit in your post is the idea that all $250K will be invested in the same way. IMO this assumption is worth questioning.

One common observation is that money needed in 5 years or less should be in fixed income, while the role of equities begins at the 5 year point. In your case, some equities may be a way to reduce inflation risk.

What about a target date product or a home-made target date blend with the target date being 10 years out? Ride that horse for maybe 5 years and then consider moving the remaining balance to one of the options already mentioned. (Never say "market timing" of course, but the current down market may be A Good Thing when looking at a 5+ year scenario.)

If you just look at the AA profiles of a few target date funds, that might give you some ideas for a fund or home-made fund that could provide a little growth for the out years.

 

[RetireAge50]

I’d be tempted to just jam it all into I-bonds and gift it out/withdraw over the 10 years. Inflation would be covered and the sinking fund concept would be obtained.

 

[pb4uski]

I can see some merit to making i-bonds some of the rungs of the ladder. Since the OP says we between two people, his, her and our trusts and gifting they could probably invest $90k in i-bonds right away and $50k a year after that if i-bond yields remain attractive.

 

[jazz4cash]

Where to place $250k in a "sinking fund"

Thanks for the thoughtful & reasoned replies. It's going to be 3 weeks until we have closed the sale & settled in our new apartment, so we have some time to make this decision. All our accounts are with Fidelity (except a WF checking account) and it would be nice to keep everything there for simplicity and because our Fidelity Rep would be able to help DW handle things if I get run over by a beer truck or some other fate.

Luvtoride / Jazz4cash / ShokWaveRider: I know only a little about MYGA's and fixed annuities. We will be meeting with our Fidelity Rep in mid August and I will ask him give us some options they can offer for an MYGA or fixed annuity.






BrianB

If you want to do some research on MYGAs before meeting with your Fido rep….

There is an annuities tab on the Fido webpage where they display the fixed income yield table.

Also, Don’t forget to check the New Issues tab for brokered CDs on that same webpage.

If you browse the web pages for the other brokers (especially Blueprint) there is a lot of generic info pertaining to MYGAs.

 

[BrianB]

Update on our situation:

We met with our Fidelity rep today. I really like Ryan, he's been our rep for over 10 years so he knows us and our approach to money. He was good at explaining SPIA's and bond ladders (areas that I don't have much experience in), and had a couple of options prepared for us to look at. Of course, he is a salesman as well as an account rep so there may be a little bit of self-serving advice in his proposals. He said that Fidelity analysts are not seeing a big jump in rates near term and CD rates have actually fallen a bit recently.

1. A ladder of CD's for years 1-5 with a ladder of treasuries for years 6-10. This would get us 3.16% average yield that would be about $25k / yr.
Pros: More liquidity than an SPIA or MYGA.
Cons: Lowest interest rate; complicated to set up; difficult to equalize payouts over the period; no monthly principle payout options.

2. A 10 year period certain annuity. Payout of $2466 / mo = $29.6k / yr. This is very close to the number that PB4USKI showed in post #8 above.
Pros: Easy to set up; all money at Fido so taxes & records simplified; constant annual taxable amount over entire period.
Cons: Not the highest possible rate; no liquidity.

3. I also looked at a couple of online sites for MYGA's. The interest rates are a little higher (about 4.1%) and they do allow 10% / yr withdrawals with no fee.
Pros: Highest interest rate; simple setup.
Cons: Not at Fidelity so separate tax & records; 10% annual withdrawal limit gets less $$ each year of the term.

We are leaning towards the 10 year SPIA. I like the simplicity of the setup and keeping all our assets in one place. It comes very close to our original idea of $30k / yr. Equal monthly payments make budgeting easier. While it lacks liquidity we have other cash that can be used if an urgent need arises.

BrianB

 

[pb4uski]

The IRR of $2,466/month for 10 years from $250,000 is 3.4%.

I don't believe that the ladder is a lower yield... I think it is equal or higher.

Below is a table of CD/bond yields from Schwab... if you laddered government agency bonds you could do alot better than 3.4%... probably more like 3.85% or so on average for a 10 year ladder.... but even CDs could easily match the 3.4% of the 10 year period certain annuity... AND you would have more flexibility... if some emergency arose you can tap the ladder but you can't easily tap the 10 year payout annuity. If you could get to 3.85% that would increase the payout to $2,513.

	3 Mo	6 Mo	9 Mo	1 Yr	18 Mo	2 Yr	3 Yr	4 Yr	5 Yr	10 Yr	20 Yr	30 Yr+
CDs	2.52	2.76	2.91	3.20	3.33	3.40	3.30	3.60	3.50	3.90	--	--
Bonds
U.S. Treasuries	2.66	3.08	3.09	3.21	3.22	3.23	3.26	3.20	3.11	2.98	3.49	3.26
U.S. Treasury Zeros	1.58	2.39	2.84	2.92	2.98	3.06	3.20	3.07	3.09	3.09	3.56	--
Government Agencies	--	--	3.09	3.50	--	4.00	4.00	3.98	3.86	3.84	4.03	4.09

It is true that it is difficult to equalize the payout and there are no monthly payout options, but you can easily overcome this by having the payouts go into a high-yield savings account or money market fund and then put in an automatic transfer from the high-yield savings account or money market fund to your checking account.

 

[BrianB]

PB, thanks for the comments. I've never bought individual Treasuries or Agency bonds (and only a few CD's), so this is a new area for me, but I am learning! I have a few questions about CD & agency bond ladders:

CD's:

Fidelity sets up CD ladders from their listings of brokered CD's using only non-callable issues. This usually eliminates the top 2 or 3 rate listings. As of today the Fido rates for non-callable CD's for 1/2/3/4 years are 3.0/3.3/3.3/3.4%. They don't have any 5 year non-callable issues listed. Your list from Schwab shows some higher rates & longer terms, but are they callable? In your opinion is call risk negligible, minor, moderate or ? The only time I bought a callable CD it did get called, leaving me to find a replacement at a lower rate.

Fidelity also uses secondary market CD's in their ladders, with lower coupon rates & a discount to par value to increase the total return. That means the bulk of the return is in LTCG at the end of the term, correct?

Agency bonds:

It looks like all agency bonds are callable, either immediately or beginning in 12-18 months or less. Many of Fido's agency bonds are AAA/AA+ rated. Do you just look at yield-to-worst or is it necessary to look more closely at the issuer? How does a person decide which bonds to buy?

When I try to set up a 10 year / 10 rung agency bond ladder Fido only shows available options for the 3-4-5-6-8 year terms - nothing for 1-2-7-9-10 year terms. Even if I lower the rating threshold to BBB+ I can't get a full ladder. Is it a Fido problem, or is that typical for the market?

Looking at the 7 year rung as an example, Fido shows a number of available bonds (varying rates, varying premiums or discounts to par) but all have yields of 3.079-3.335. Again, is this a Fido issue or typical of the market?

Any other valuable tips you would have for choosing & buying agency bonds?

Thanks for your time & sharing your knowledge! The fixed income market is so much different from the equities world.

BrianB

 

[pb4uski]

In Schwab, and I suspect Fido as well, you can modify your search to exclude callable if you wish to (but the yields are lower) and you can also modify your search to certain month/years.

If callable, I always look at YTW rather than YTM. Callables don't worry me much since I look at YTW, I just might have to reinvest at a lower rate but I don't minds as long as I'm getting paid for it compared to yields on similiar non-callable bonds.

I don't care if return is coupon interest or amortization of discount... it is still return... in fact, I have a number of zero coupon T Bills.