EE Bonds as an "Annuity"

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EE Bonds as an "Annuity"

Postby crowd79 » Fri Feb 08, 2013 3:27 pm

After reading the Boglehead's Guide to retirement investing and the chapter on Annuities, it got me thinking about using EE Bonds as a de-facto "partial" annuity. If I were to reach age 60, for instance, and decided to purchase EE Bonds for 20 years until age 80. Starting at age 80, I would receive double my investment every year for 20 years if I lived to 100 (unlikely!). Seems like this could be cheaper than buying an expensive insurance product, and if I were to die before 100, at least my heirs would receive the Bonds.
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Re: EE Bonds as an "Annuity"

Postby market timer » Fri Feb 08, 2013 3:31 pm

EE bonds are currently a great deal, but I doubt they will provide anywhere near the level of income as an annuity at age 80, due to mortality credits.
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Re: EE Bonds as an "Annuity"

Postby Mel Lindauer » Fri Feb 08, 2013 5:01 pm

crowd79 wrote:After reading the Boglehead's Guide to retirement investing and the chapter on Annuities, it got me thinking about using EE Bonds as a de-facto "partial" annuity. If I were to reach age 60, for instance, and decided to purchase EE Bonds for 20 years until age 80. Starting at age 80, I would receive double my investment every year for 20 years if I lived to 100 (unlikely!). Seems like this could be cheaper than buying an expensive insurance product, and if I were to die before 100, at least my heirs would receive the Bonds.


That will certainly work to provide you with an additional $20,000 per year at age 80 (the annual purchase limit is $10,000) to go along with your SS and other income streams. If that works for you, then there's no reason not to go for it. And I don't see any reason to wait until age 60 to start your ladder.

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Re: EE Bonds as an "Annuity"

Postby FinancialDave » Fri Feb 08, 2013 5:15 pm

crowd79 wrote:After reading the Boglehead's Guide to retirement investing and the chapter on Annuities, it got me thinking about using EE Bonds as a de-facto "partial" annuity. If I were to reach age 60, for instance, and decided to purchase EE Bonds for 20 years until age 80. Starting at age 80, I would receive double my investment every year for 20 years if I lived to 100 (unlikely!). Seems like this could be cheaper than buying an expensive insurance product, and if I were to die before 100, at least my heirs would receive the Bonds.


If I understand what you are saying, it is - say you purchase $10,000 in EE bonds every year for 20 years ,then starting in year 20 you can cash each of the EE bonds out at $20,000 per year. IF, (and this seems to be a very big if, with bonds rates at .2%) this EE doubling guarantee continues until you reach age 80, then I would say this is not a bad plan, but not as good as buying an annuity outright at age 80. If my calculations are correct, it would allow you a fixed annuity with essentially a withdraw rate of 7%. However, right now even at these very low rates you could buy an immediate annuity for a single male at age 80 that would payout about 11%, and even with a 10 year payout to a beneficiary clause you could get 9% -- that is why this is not the best deal.

Also, if you are forced to liquidate any of the EE's before 20 years you could get significantly less with current rates at .2%.

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Re: EE Bonds as an "Annuity"

Postby FinancialDave » Fri Feb 08, 2013 5:21 pm

Now that I reread my above post, a better plan may be to start buying the $10,000 EE's now and when they double in 20 years, use the money to buy an immediate annuity, if you are then in retirement, or just let the money build up until such time as you need the income and then purchase the annuity ladders, in such a way that increases your income each year.

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Re: EE Bonds as an "Annuity"

Postby FinancialDave » Fri Feb 08, 2013 5:25 pm

As a diversification to the above plan you may want to put half your EE allocation into I-bonds, as I suspect your return could be better than 3.5% over the 20 years, but still use the funds to purchase laddered immediate annuities.

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Re: EE Bonds as an "Annuity"

Postby crowd79 » Fri Feb 08, 2013 6:21 pm

FinancialDave wrote:Now that I reread my above post, a better plan may be to start buying the $10,000 EE's now and when they double in 20 years, use the money to buy an immediate annuity, if you are then in retirement, or just let the money build up until such time as you need the income and then purchase the annuity ladders, in such a way that increases your income each year.

fd


Well, I actually have started purchasing EE Bonds, but on a monthly basis for $250 ($3000 per year). After maxing out my IRA's and 401k up to my company match, not much more disposable income I can use to buy the full allotment. I figure by the time I reach 53 years old (33 now), then I've got $500 of guaranteed income coming in every month that could be used to pay medical bills, other expenses, etc...or even based on how my entire portfolio does as a whole, that extra $500 could lead to earlier retirement. But like you said, I will also take your idea into consideration at that time. Thanks.
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Re: EE Bonds as an "Annuity"

Postby FinancialDave » Fri Feb 08, 2013 7:30 pm

Are you doing at least 15% to your IRA and 401k. At your young age you should try and do at least 15% to your normal retirement before putting a lot of money into EE bonds. They should hit the 20 year point a little closer to your retirement. Starting at 40 might be a better idea at least IMO, though obviously you need to decide for yourself. However, at age 33 the bonds will be totally mature by 63.

Remember, you are trading off a return of 3.5% for a market return that could be closer to 10%. The difference of a $250 investment at these two rates is the difference of having $86,717 in bonds or $189,842, if you put the $250 into a low cost fund like VTSMX in a taxable account (for which your taxes will be much less as well.)

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Re: EE Bonds as an "Annuity"

Postby crowd79 » Fri Feb 08, 2013 7:39 pm

FinancialDave wrote:Are you doing at least 15% to your IRA and 401k. At your young age you should try and do at least 15% to your normal retirement before putting a lot of money into EE bonds. They should hit the 20 year point a little closer to your retirement. Starting at 40 might be a better idea at least IMO, though obviously you need to decide for yourself. However, at age 33 the bonds will be totally mature by 63.

Remember, you are trading off a return of 3.5% for a market return that could be closer to 10%. The difference of a $250 investments at these two rates is the difference of having $86,717 in bonds or $189,842, if you put the $250 into a low cost fund like VTSMX in a taxable account (for which your taxes will be much less as well.)

fd


I am aggressively putting away 30% of my income away for retirement (not including the EE Bonds) with a 75/25 stock/bond&cash ratio. I am putting enough away for my employer matching into 401k only, as the expense ratios are very high, with some space left over. I max out my Trad/Roth IRA.
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Re: EE Bonds as an "Annuity"

Postby FinancialDave » Sat Feb 09, 2013 2:18 am

Well, I think you will be set then. Congrats on being able to put away 30% of your salary!

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