A 3 year annuity can do 4.70% APY. Looking at available bonds and CDs, to get that rate I’m into corporate A bonds, which are far from junk, but also not US treasuries (which used to mean something). The best CDs are about 4.15% for 3 years.
This is what I don’t understand about bond funds. If I buy a bond mutual fund or ETF that is paying 4.70% APY, then I get .4% (or something) per month, which is reinvested in the fund. But if interest rates go up, then my bond fund is worth less, but I still get my .4% every month. I guess that’s the difference between a bond fund and a bond?
this sounds like a MYGA (multi-year guaranteed annuity), and is a-ok in my book. Functions similarly and similar returns as a CD. As others have pointed out, inflation is a concern with this type of product. You should consider a TIPS fund (treasury inflation protected security), but it sounds like you may already have money in that, your “inflation protected bond index” you mention?
“Annuities” covers a pretty wide spectrum of products!
So understanding this as basically a CD with a superior rate, backed by an insurance company rather than FDIC, what do people think about having half your retirement fund in that sort of instrument? And another 7% in bonds.
I get the anxiety that drives it. I guess.
Are there other approaches for the very nervous? How about one of the deferred income annuity products? I guess a Qualified Lifetime Annuity Contract in an IRA?
Depends hugely on what you’re afraid of. An insurance company isn’t going to be able to make good on its investment payout promises if the rest of the financial system is on its ass. Things that promise above market rates can only do that as long as the insurer can remain solvent while paying out above market rates.
In ordinary times I’d not be much worried about buying a 3- or 5-year above-market CD-equivalent product sold by an insurer. I would be about a 10- or 20-year product. In crazy times? Who knows which threat to fear? Inflation? Deflation? Stagflation? Capital flight?
My general thought as to my own portfolio now is to keep the durations short on any and all of my debt-like = interest-bearing holdings. I’m giving up some immediate yield, but I’m buying inflation insurance with that. “Insurance” only in the sense that I won’t be caught with a long bond yielding well below future inflation whose sale value has therefore crashed too.
Which seems to return to earlier discussion here: my take is that in these disaster scenarios there is no safe haven. So since in those worse downsides I am screwed no matter what, I might as well be positioned to have an upside?
In the worst case downsides, the government has seized my assets due to my political affiliation, religion, or whatever other 1938 style executive orders are decreed. At that point I’m trying to get to Mexico before the pogroms start.
I’m aiming for the less severe situation where it’s 2008 (or worse), but instead of buying the dip and bouncing back, we’re still at the bottom after 10 or 15 years. I really don’t want to be in a situation where I lose half my savings, and then try and retire. If my investments just keep up with 3% inflation, I should be able to retire on time.
Why is inflation more of a concern with this type of thing than with anything else? I mean, sure, I’m locked in for 3 years at 4.7% (or 1 for 4%), and inflation goes up, so interest rates go up, so I could have put that money in something earning 5.75% maybe.
If the downside is that I lose out on 1-2% interest for the remainder of the lock-in period, then that seems relatively minor. Is there something I’m missing?
Depends of course how up how fast inflation goes. Remember the ‘70s to early ‘80s it averaged 8 or 9% and hit something like 14?
The downside if inflation jumps is that you are losing in terms of real money. If inflation is at 6% and you are locked for four years under 5% for example.
This is key:
And if inflation is higher than 3%? Then you need to keep up with whatever that number is.
I’m not saying it is a wrong approach. You are most concerned about a prolonged recession with the market losing half its value and not recovering for over a decade or so. Which would make you unable to retire at your hoped for retirement age. And no one can be sure that won’t happen. And this is less risk of catastrophic loss than many others. But it may be at higher risk of loss enough to delay retirement even without full blown catastrophe …
That’s my take on the most probable outcome. Like the Lost Decades - Wikipedia in Japan after the Nikkei high in ~1990. The idjit criminal regime blows up the USA’s business mojo, blows up the USD as the world reserve currency, triggers massive international capital flight out of US-based and/or USD-denominated investments, and steals their way into $T levels of riches while the country staggers and stagnates from crisis to crisis.
The problem is there’s nothing to prevent 10 or 20% per year inflation during that time too. And many reasons to expect the regime to inflate the currency as a feel good populist sop to the working class.
Your “high yield” investment could be losing 15 real percent a year. For the shortish 3 year term you’re buying that’d be awkward but not fatal. I’d be extremely leery of buying a similar investment with a 10 year horizon.
I funded it by taking money from my Fidelity Money Market (SPAXX) account because I feared that the rate on that account would go down & I wanted to diversity my accounts as much as possible. The annuity pays 5%, compounderd while SPAXX is currently paying 3.8% simple interest. Because I’m older than 72, I’m required to take RMDs from the annuity.
I was always of the mindset that annuity = bad, but so far this has been a good deal.
I agree with both of you: Unless you are one of the uber-wealthy, I don’t think there is any way to make a gain in what I see as the trajectory of the economy over the next 10+/- years. I remember back in COVID being appalled at how inflationary the “stimulus” measures, most of them fraud-ridden and unproductive, were. I was right. Now we have a couple of serial arsonists in charge who delight in going around the planet setting off wars for self-gratification. That’s going to make COVID inflation look puny. I’m guessing economic doldrums or worse for a long time. We small fry are not going to be able to invest our way out of this, the best we can do is minimize our losses.
depends on what you are trying to do. I mean, a QLAC doesn’t really protect against inflation either, even with a cost of living rider since the rider just adds a certain percent every year, and is not tied to real inflation numbers. And it’s no safer than any other product offered by an insurance company. If that insurance company goes belly up, so long to your money. Your best bet for (almost) guaranteed nominal dollars is government bonds and your best bet for (almost) guaranteed inflation adjusted real returns are TIPS. But of course, the returns on these are generally low because like everything in investing, returns are inversely proportional to risk. If you’re not taking a lot of risk, you’re not getting a big return. But if you are only trying to keep up with inflation, then TIPS are the safest thing available.
Excepting the decision to wait on social security until 70, which buys an inflation adjusted lifetime annuity.
How do these annuity products handle early withdrawal? To me whatever I have in cash equivalents is there to have available to use to ride out a few years of market crash, and even rebalance during. If it is only available at significant penalty it is of less use for me. Unless the income it produces is enough to live off of, and I wouldn’t put that much in it.
Exactly. Delayed SS is an incredible COL insured annuity, really the only true one you can get at this point
Depends on the product you are buying probably, but they all have significant early withdrawal penalties. You do NOT want to be buying an annuity if you think you may need to withdraw the money early.
The Guardian annuity I referenced allows the holder to take up to 10% of the annuity value/year without a surrender charge. The required RMDs also have no surrender charge. So on a $100K annuity, you could get up to about $15K annually with no penalty.
But that’s one reason I wouldn’t put more than 10% of my investment stake into one of these.
Yep, sometimes you have to run as fast as you can just to stay in the same place.
This is why I was originally thinking of moving about half my portfolio to international equities, but the new oil shock is set to hit the rest of the world much harder than it hits the US. Yes, oil is a global market, but there is a big difference between $150/barrel domestic supply, and not available at any price because the ships can’t get through.
I’m convinced those stimulus packages contributed a large amount to inflation[1], but the other huge thing they did was get the US into recovery much, much faster than countries that did nothing or, even worse, austerity. It’s easy to quibble about the details of the stimulus, and cases of fraud, but don’t let that distract from the overall good that it did. Just like the bailouts from the 2008 recession, a very tough pill to swallow—seemingly rewarding those that got us into the mess—but ultimately necessary to move into recovery[2].
The point is, I do not trust the current regime to take any kind of appropriate measure to guide us out of a financial mess. I don’t want to go any further in a non-P&E or Pit thread, but it’s impossible to discuss investing without brushing up against the deeply intertwined political situation.
I own a TIPS fund, and one 10 year TIPS bond, but there isn’t enough in there to be a real hedge against inflation.
And if you are taking a big risk, then you also have a big chance of losing.
I know I’ve been very spoiled by the last 35 years of investing, where you can just throw money at index funds and do very well. Now more than ever before, I think there is a strong possibility those days are over.
along with shortages, supply chain disruptions, and profiteering ↩︎
some lasting regulations to make sure it didn’t happen again would have been nice ↩︎
you may or may not be right, but there are no real attractive alternatives. At least the stock market has a long track record, and has weathered a lot of storms. Maybe “this time is different”, but maybe not, and anyway, what else are you going to invest in?
Might be. Or not. Of course we won’t know about future until it’s the past.
And I appreciate the catch-22. If you have enough you can afford to take some risk or you can manage to avoid it, play it safe and still retire on plan. But if you don’t? The risk can be more existential to retirement plans but without the higher returns of greater risk you won’t get there. A conundrum!
I wonder if there is a place in this thread to game out various futures and how different approaches would fair? And which approach might offer the best risk adjusted approach. Hardest I think to be positioned against, short of complete collapse that there is guard against, is maybe stagflation for a decade or two?
What position would you want to be in if you knew that was coming?
But very fraught because it’s always a potential political football. I lean towards the side of taking it earlyIF you aren’t still working. Partly because a bird in the hand at 62 when you’re more mobile is worth two in the bush at 70 when you’re less so. Partly because the break even on that gamble is around age 79-80 when you start having to consult the actuarial tables. Partly because I worry less about flat-out SS insolvency per se than I do about what the current political instability might try to do to solve it. If it is something like a means test instead of increasing the taxable income limits and you have a decent income/assets, you might be better to try and get under a potential grand-fathering wire.
Acknowledging that everybody’s individual situation is different of course. My poor as a church mouse mother did well delaying until 70. Meanwhile my estimated post-tax SS should just about exactly clear my mortgage payment at 62. Tempting to take it just for that and free up my steady monthly pension income for anything else.
Of course. In this specific discussion context though, a comparison with other lifetime annuities, for any hypothetical person who might see a place for that and who has the means between 62 and 70 to invest in one? Nothing else close to it. There are people who take social security before 70 and then buy a lifetime annuity. That boggles my mind.
I am OTOH sympathetic to the position of needing/wanting the cash flow now, and those who are of the belief that not taking it is opportunity cost because they believe investing it will give them a better return. And I guess if someone has good reason to expect a shorter than average lifespan. I prefer betting against that and not having to worry if I win my bet!
