Is This A Plan For Disaster ?

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Is This A Plan For Disaster ?

Postby alltheway » Mon Jan 28, 2013 8:18 pm

:oops:
I am a total finance novice. Age 69 .... Have only myself to support. With my monthly S/S plus my tax-free interest (only other source of income) from a single-state tax free municipal bond fund (been in this same fund for 20 years).
I have zero money problems; no debt whatsoever. All I am looking for is to generate enough money to live comfortably (in my simple lifestyle -- so far, it's been no problem). No debt, no major health problems, all the necessary insurance (incl. long-term care insurance). Have a little over one million dollars in this tax free bond fund; no other investments. Approximately $250k liquid (if needed).
No current need to draw any of the principle in my tax free bond fund. With all the talk about the "risk of bond funds dropping due to interest rates rising" ........ Am I nuts to continue this way; all I want to do is sustain myself till I 'bite the bullet', lol.
Any advice for this situation would be appreciated. :happy
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Re: Is This A Plan For Disaster ?

Postby retiredjg » Mon Jan 28, 2013 8:54 pm

Welcome to the forum! I don't see how this could be a plan for disaster.

Do you know the duration of this fund? If you don't know that, what is the ticker symbol for your bond fund?
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Re: Is This A Plan For Disaster ?

Postby alltheway » Mon Jan 28, 2013 9:00 pm

Thanks for the welcome.
The fund: PRNYX
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Re: Is This A Plan For Disaster ?

Postby ourbrooks » Mon Jan 28, 2013 9:20 pm

If interest rates rise, the value of your bond fund is sure to drop, at least, temporarily. The interest the bond fund pays won't drop and will eventually increase.
If you really are able to live off of just the interest, it shouldn't matter.

How long you will be able to live on just the interest is the important question. Let's assume for the sake of discussion that inflation averages a mere 2.5% over the next decade. That means that your expenses will increase by roughly 28% Will you be able to increase your withdrawals by that much?

Some ideas:

With Social Security as your only other source of income, why are in you in a tax free municipal bond fund? You're mostly likely in the 15% tax bracket; even subtracting 15% for taxes from the yield of taxable funds, you're likely to do a lot better in a taxable fund.

A single premium immediate annuity provides payments as long as you live but your heirs don't get anything. The payout rate increases as you age; at age 70, the rates are pretty substantial. You might see how much you would have to spend to provide the same income you're getting from the bonds. You can buy SPIAs with a built-in inflation adjustment or you can keep some money in the bond fund for future inflation adjustments.
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Re: Is This A Plan For Disaster ?

Postby pkcrafter » Mon Jan 28, 2013 9:39 pm

My only concern is with holding everything in a single state bond fund.


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Re: Is This A Plan For Disaster ?

Postby celia » Mon Jan 28, 2013 9:58 pm

+1
pkcrafter wrote:My only concern is with holding everything in a single state bond fund.

. . . especially when the state appears to be CA.


Is there a reason you have everything in a bond fund? Are you very risk adverse? Are you worried that your S/S benefit could be lowered?

(Our answers need to take your comfort level into account.)
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Re: Is This A Plan For Disaster ?

Postby nisiprius » Mon Jan 28, 2013 10:06 pm

If you are living off the interest, interest rises shouldn't be a big concern. In fact, they're good. But your fund won't follow the rises immediately, though, there will be a lag because it will still be holding the old, lower-paying bonds.

At age 69, I would have some mild concern about the possibility of inflation. Social Security is inflation-indexed. Your bond income is not. One random life table looks like this. I wouldn't take it as terribly high precision, but what you can see is that you or I (I'm a little younger than you) not only has good coin-flip chance of living into our mid-eighties, but a distinct possibility of making it into our nineties. Over a period of time of 15, 20, 25 years inflation could possibly take a nasty bite. Social Security is inflation-adjusted, and if you're living on the interest you do have a considerable safety margin in the fact that you could spend down your principal, cautiously, if you had to. Or, as others have mentioned, you could buy a particular kind of insurance product called a "single premium immediate annuity" (SPIA). Note. Watch out for the word "annuity," it means different things. SPIAs are OK, variable annuities are evil, equity-indexed annuities are very evil.

I don't think it's a plan for disaster at all, but you may want to keep some other possibilities in mind in case they're needed.
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Re: Is This A Plan For Disaster ?

Postby alltheway » Tue Jan 29, 2013 12:14 am

Well .... I do have a contingency 'housing plan' if anything really went downhill .... I have two now single (with no dependents) siblings who said I could reside with them, if it were ever needed. So, that's one large living expense off the table.

Yes, I am adverse to risk.

Regarding possibility of withdrawing your calculated "28% amount" as add'l expenses yearly from principle .... I believe I could continue that with no problems.

If any health disaster befalls me, I would hope it will be funded by my long term care insurance policy.
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Re: Is This A Plan For Disaster ?

Postby Valuethinker » Tue Jan 29, 2013 8:36 am

celia wrote:+1
pkcrafter wrote:My only concern is with holding everything in a single state bond fund.

. . . especially when the state appears to be CA.


Is there a reason you have everything in a bond fund? Are you very risk adverse? Are you worried that your S/S benefit could be lowered?

(Our answers need to take your comfort level into account.)


And California is headed towards budgetary surplus.

The municipality problem is still more severe, but CA looks like it will make it-- basket case to (relative) success in 5 years.
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Re: Is This A Plan For Disaster ?

Postby Valuethinker » Tue Jan 29, 2013 8:40 am

alltheway wrote::oops:
I am a total finance novice. Age 69 .... Have only myself to support. With my monthly S/S plus my tax-free interest (only other source of income) from a single-state tax free municipal bond fund (been in this same fund for 20 years).
I have zero money problems; no debt whatsoever. All I am looking for is to generate enough money to live comfortably (in my simple lifestyle -- so far, it's been no problem). No debt, no major health problems, all the necessary insurance (incl. long-term care insurance). Have a little over one million dollars in this tax free bond fund; no other investments. Approximately $250k liquid (if needed).
No current need to draw any of the principle in my tax free bond fund. With all the talk about the "risk of bond funds dropping due to interest rates rising" ........ Am I nuts to continue this way; all I want to do is sustain myself till I 'bite the bullet', lol.
Any advice for this situation would be appreciated. :happy


Having everything in 1 bond fund seems imprudent. However another fund, by another fund manager, would probably own the same bonds.

If inflation really took off you'd get hit.

I can't in good faith advise you to do much.

One thought. Buy an inflation linked SPIA annuity with say $200k of your money (or 2 x 100k). Then you can never burn through all your savings and you've bought inflation protection above and beyond that offered by US Social Security. You have also diversified out of fiscal risk exposure to California, and away from interest rate risk.

There's a logic in doing that for up to 1/2 your money. However big finance decisions are best made in small steps-- better to do some now and some in a few years. Annuity salesmen have a habit of trying to sell the wrong annuity.
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Re: Is This A Plan For Disaster ?

Postby Valuethinker » Tue Jan 29, 2013 8:43 am

ourbrooks wrote:If interest rates rise, the value of your bond fund is sure to drop, at least, temporarily. The interest the bond fund pays won't drop and will eventually increase.
If you really are able to live off of just the interest, it shouldn't matter.

How long you will be able to live on just the interest is the important question. Let's assume for the sake of discussion that inflation averages a mere 2.5% over the next decade. That means that your expenses will increase by roughly 28% Will you be able to increase your withdrawals by that much?

Some ideas:

With Social Security as your only other source of income, why are in you in a tax free municipal bond fund? You're mostly likely in the 15% tax bracket; even subtracting 15% for taxes from the yield of taxable funds, you're likely to do a lot better in a taxable fund.

A single premium immediate annuity provides payments as long as you live but your heirs don't get anything. The payout rate increases as you age; at age 70, the rates are pretty substantial. You might see how much you would have to spend to provide the same income you're getting from the bonds. You can buy SPIAs with a built-in inflation adjustment or you can keep some money in the bond fund for future inflation adjustments.



As you hint, a related risk is Japan.

If very low US interest rates continue, the yield on that bond fund will fall. In Japan, 30 year government bonds pay about 1.0% interest rates. 10 year less than that.

Now a standard SPIA fights that. Fixed income for life.

An inflation linked SPIA fights the other fight, if inflation shoots up. For most Americans, that is called Social Security. Most Americans don't have as much money as OP.

Maybe OP needs one of both?
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Re: Is This A Plan For Disaster ?

Postby bigred77 » Tue Jan 29, 2013 9:14 am

alltheway wrote:Well .... I do have a contingency 'housing plan' if anything really went downhill .... I have two now single (with no dependents) siblings who said I could reside with them, if it were ever needed. So, that's one large living expense off the table.

Yes, I am adverse to risk.

Regarding possibility of withdrawing your calculated "28% amount" as add'l expenses yearly from principle .... I believe I could continue that with no problems.

If any health disaster befalls me, I would hope it will be funded by my long term care insurance policy.




In the US, debt free millionaire’s need to make sure they can move in with elderly siblings “if things really take a turn for the worst”…

Lol I’m just being snarky, I couldn’t resist.
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Re: Is This A Plan For Disaster ?

Postby sometimesinvestor » Tue Jan 29, 2013 9:56 am

I believe he is almost perfectly diversified from California Risk as PRNYX appears to be the TRP NY tax free fund. According to Morningstar its average effective duration is 5.35 years Its average effective maturity is 18.35 years its average credit rating is A
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Re: Is This A Plan For Disaster ?

Postby retiredjg » Tue Jan 29, 2013 11:10 am

alltheway wrote:Am I nuts to continue this way; all I want to do is sustain myself till I 'bite the bullet', lol.

I don't believe I would set things up this way, but I also don't believe it is nuts either.

With a duration of 5.35% in your New York muni bond, if interest rates go up 1%, the value of your muni bond fund may go down about 5.35%. So $1 million would drop to $946,500, but the munis (after a lag time) will start paying you higher interest. If the interest rates increase another 1%, it all happens again (drop in value, but higher incoming interest rate). So the income from your munis may not change all that much, even if interest rates go up.

As you know, interest rates don't jump 1% at at time - it happens gradually. So even if interest rates do go up, it will be a gradual change - not the rug being pulled out from under you. There should be plenty of time to consider and purchase a SPIA if you decide to guarantee your income that way. And the SPIA, bought later, would pay more (because interest rates would be higher and you would be older).

I think you'll be fine if you leave things much as they are. But if you ever need to do something significant, a SPIA is a good solution. You might want to learn about them now rather than trying to learn when you are under stress. For example, I heard that it may be difficult to buy a SPIA after a certain age, but don't know that to be true myself - maybe you should learn things like that now rather than later. Shop around. And maybe someone will be kind enough to post the link to the website where you can compare different fixed annuities. :D

A couple of other things came up that I think you should consider.

1) Is it wise to have all your money in 1 state muni bond fund? This causes me a little concern since the risk is concentrated in one place. I might have bought a state muni fund and a federal muni fund (conglomeration of funds from a lot of states) instead. I don't know the tax cost of "fixing" this. Do you have a very large unrealized gain in this fund? It appears you are in a very low tax bracket - even if there is a gain, you may pay not any tax on some of the gain (up to the top of the 15% tax bracket). You might systematically exchange some of this one fund into something else just to lower your risk some.

2) Should you be using a taxable bond fund instead of a muni? I have no idea what the answer to this one is. Your SS is taxed according to how much other income you get. If you have no other income, very little of your SS is taxed. If you have a lot of other income, 85% of your SS is taxed. So adding income can mean less money to spend.

I don't know if the "income" from your muni counts here. It is income, but not taxed.

Also, if you switch to a taxable bond fund (for some of your money) that income will be taxed by the state of NY. So switching to a taxable bond fund (often a good choice in other circumstances) may not be the best choice for you.

Lastly, the NY muni bond fund is paying nicely - better than most taxable bond funds, so there is certainly no reason to switch for more yield at the present time.

So, no, your investments are certainly not a plan for disaster in my opinion. The thing that could drain your $1.25 million in savings would be long term care and you have already taken care of that (to the extent possible). I would think with Medicare (and a the appropriate supplements) and long term care insurance that your nest egg would be a very comfortable buffer. There are other ways it could be invested, but I'm not sure that would be any improvement over what you are currently doing.
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Re: Is This A Plan For Disaster ?

Postby sscritic » Tue Jan 29, 2013 11:27 am

retiredjg wrote: Your SS is taxed according to how much other income you get. If you have no other income, very little of your SS is taxed. If you have a lot of other income, 85% of your SS is taxed. So adding income can mean less money to spend.

I don't know if the "income" from your muni counts here. It is income, but not taxed.

Yes it counts. See the wiki.
The relevant income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50% of your Social Security benefits.
http://www.bogleheads.org/wiki/Taxation ... y_benefits

or the SSA.
Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"
http://www.ssa.gov/planners/taxes.htm
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Re: Is This A Plan For Disaster ?

Postby retiredjg » Tue Jan 29, 2013 12:33 pm

Thanks SS Siri! So that means that the percentage of SS which is taxed would not go up or down as the result of switching from tax-exempt bonds to taxable bonds. So that eliminates an argument against taxable bonds, but I'm still not convinced that taxable bonds are better for this situation, at this time anyway.
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Re: Is This A Plan For Disaster ?

Postby Epsilon Delta » Tue Jan 29, 2013 1:43 pm

retiredjg wrote:Thanks SS Siri! So that means that the percentage of SS which is taxed would not go up or down as the result of switching from tax-exempt bonds to taxable bonds. So that eliminates an argument against taxable bonds, but I'm still not convinced that taxable bonds are better for this situation, at this time anyway.

It makes the argument against taxable bonds smaller but it does not eliminate it entirely. Whether you prefer munis or taxable depends on the rates on each and your marginal tax rate on each, and the marginal rates can be complicated.

Suppose your in the 15% bracket and can get $85 of tax exempt interest or $100 of taxable interest. It looks like a wash, but if you have SS income the taxable bonds adds an extra $15 to your combined income, which could result in an extra 85% * $15 of taxable SS income or 15% * 85% * $15 = $1.91 of extra tax.
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Re: Is This A Plan For Disaster ?

Postby alltheway » Tue Jan 29, 2013 8:01 pm

Thank you all so much for your helpful comments.
I'll probably just ride this out (as I have done for years) and not get panicked by the news stories that I read.
Excellent information here on this website !!
I looked up some of the issues that you guys have posted; unless I am totally off base on the income tax issue:
I read it this way from (IRS publications) you pointed to ....

My adjusted gross income is:
• Nontaxable interest
• ½ of your Social Security benefits
= Your "combined income" ........... So, if this amount works out to be more than $34,000, [...] they will now tax 85% of your Social Security income amount?

[off topic comments removed by admin alex]
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Re: Is This A Plan For Disaster ?

Postby Valuethinker » Wed Jan 30, 2013 6:10 am

[comments directly responding to OT comments in last post removed by admin alex]

I feel your pain, towards the end of what was undoubtedly a long life of hard graft and saving.

But I caution you. A very wise man once told me 'if you don't have enough to do in the last 1/3rd of your life, you sit around worrying about your money and people trying to take it, and your health'.

From that post, you are in grave danger of falling into that trap.


Remember, we could live in Syria. Or to pick a less war torn country, Greece, where the equivalent of Social Security pensions are being slashed in half, and people are wandering around unable to obtain cancer drugs (the Greek healthcare system was in billions of default to drug manufacturers). You have old people sifting through garbage looking for food to eat. One 79 year old set himself on fire on the steps of the Parliament to make the point.

You cannot safely go to Syria now (beautiful country, wonderful people by the way) but you could take some of that money and go to places where people really struggle (Zambia? Eastern Turkey? India? Nepal? Latin America?) and come back recharged by the notion of how lucky we are to be born into the societies in which we live. Or visit Vancouver and see how well that works at the opposite extreme (over even Toronto, in all its extremes of wealth and poverty).

Count your blessings to live in a rich western country. And accept that no one likes paying taxes, and, yes, some people 'work' the system-- true in all countries. Around me (less than 5 miles) it is a street of $30m houses (not kidding) owned by people who pay no tax in the UK and only use them a few weeks in the year (Russian oligarchs and rich Arabs, mostly). Fair? No. But I like my neighbourhood and my house a lot better than these ugly behemoths.

Remember: life is not fair, and 'they' are always trying to get your money to give it to the 'undeserving'. That's as true, btw, of my electric and gas utility as it is of my tax bill.
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Re: Is This A Plan For Disaster ?

Postby Grt2bOutdoors » Wed Jan 30, 2013 10:13 am

Regarding your requirement to pay taxes: Would you rather have 65 cents in your pocket, 50 cents or zero? I'd rather have the jingle in my pocket than nothing and be reliant upon the mercy of others. Be thankful for your good fortune and enjoy it! There are many who don't have a dollar to their name.
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Re: Is This A Plan For Disaster ?

Postby alltheway » Thu Jan 31, 2013 8:27 pm

[off-topic comments removed by admin alex]
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Re: Is This A Plan For Disaster ?

Postby Dandy » Fri Feb 01, 2013 10:41 am

I wouldn't say disaster but I would be uncomfortable with so many eggs in one basket. I know you are risk averse but have you considered an immediate annuity to fund some of your monthly expenses? I am not sure if you have $1 million plus $250 liquid. If so, you could have some of that in a CD ladder. Others have questioned whether or not you are in a tax bracket that really benefits from such a large muni investment.

A word on being so risk averse. My late mother in law had almost all her money in CDs. She was very risk averse. Other than a small Social Security payment she lived off the CDs. That was great when short term CD rates were 5% or so. But as they dropped so did most of her income. Her "safe" CDs dropped her income steadily until she was lucky to get 1 or 2%. Not only was her income dropping from lower CD interest she had to start spending some of the CD money when it matured. A double hit - lower income and smaller amount in CDs earning that lower income. How safe was that strategy??

You have a lot of eggs in one type of investment muni bonds. You are fortunate that with all the problems the states are having that your investment is still doing its job for you. There is no place to put your money that doesn't have risk. Muni funds probably aren't keeping up with inflation and face a small risk of default as well as losing value, at least for awhile, when interest rates rise.
In my opinion you need to look at investments that are reasonably safe but offer different risks and rewards. I wouldn't be overly concerned with taxes you are probably in a low tax bracket. Remember it is the overall risk of your portfolio that is important not that each selection is always going up. An fixed income immediate annuity, CD ladder and Vanguard's Retirement Income fund are things to consider.
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Re: Is This A Plan For Disaster ?

Postby BrandonBogle » Fri Feb 01, 2013 11:19 am

Dandy wrote:A word on being so risk averse. My late mother in law had almost all her money in CDs. She was very risk averse. Other than a small Social Security payment she lived off the CDs. That was great when short term CD rates were 5% or so. But as they dropped so did most of her income. Her "safe" CDs dropped her income steadily until she was lucky to get 1 or 2%. Not only was her income dropping from lower CD interest she had to start spending some of the CD money when it matured. A double hit - lower income and smaller amount in CDs earning that lower income. How safe was that strategy??


My mom is basically facing the same thing now. She was great at always saving for retirement, but not at investing for retirement. Everything went into CDs and now that she just entered retirement, she realizes that she will dip into her principle every year and because of entering the came so late (so she is take a 40/60 split), she won't keep up with inflation outside of SS.

Sorry Op that I have nothing to contribute to your situation other than reading suggestions from others is helping me formulate a plan for my mom.
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Re: Is This A Plan For Disaster ?

Postby Taylor Larimore » Fri Feb 01, 2013 11:56 am

Maybe someone will be kind enough to post the link to the website where you can compare different fixed annuities.


I feel "kind enough":

www.immediateannuities.com/

We purchased two single premium immediate annuities (SPIAs) from this website about 10 years ago. The transactions worked well and we are happy with our purchases. Vanguard SPIAs should also be compared.

Best wishes.
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Re: Is This A Plan For Disaster ?

Postby retiredjg » Fri Feb 01, 2013 12:11 pm

Taylor Larimore wrote:I feel "kind enough":

Thank you Taylor. :happy I was not sure which website was a good one, but I would feel comfortable using one that you recommend.
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