Build Your Own Annuity

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Re: Build Your Own Annuity

Postby xram » Wed Mar 06, 2013 8:25 am

Ever Ready wrote:One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and existing bonds.


What are the odds of this happening?
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Re: Build Your Own Annuity

Postby Aptenodytes » Wed Mar 06, 2013 9:41 am

Maybe this is obvious, but one drawback for people like me who are about to shoot the college tuition rapids is that these EE bonds would be considered maximally available from the perspective of financial aid applications, whereas funds in a 403B/401K/IRA would be less so.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Wed Mar 06, 2013 10:10 am

xram wrote:
Ever Ready wrote:One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and existing bonds.


What are the odds of this happening?


While the new EE Savings Bond rate can be changed, existing EE Bonds will continue to earn the fixed rate and the doubling time period that was in effect when the Bonds were purchased.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Wed Mar 06, 2013 10:16 am

Aptenodytes wrote:Maybe this is obvious, but one drawback for people like me who are about to shoot the college tuition rapids is that these EE bonds would be considered maximally available from the perspective of financial aid applications, whereas funds in a 403B/401K/IRA would be less so.


True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.
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Re: Build Your Own Annuity

Postby Grt2bOutdoors » Wed Mar 06, 2013 10:21 am

Mel Lindauer wrote:
Aptenodytes wrote:Maybe this is obvious, but one drawback for people like me who are about to shoot the college tuition rapids is that these EE bonds would be considered maximally available from the perspective of financial aid applications, whereas funds in a 403B/401K/IRA would be less so.


True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


Not these days......
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Re: Build Your Own Annuity

Postby crowd79 » Wed Mar 06, 2013 10:23 am

Mel Lindauer wrote:
Aptenodytes wrote:Maybe this is obvious, but one drawback for people like me who are about to shoot the college tuition rapids is that these EE bonds would be considered maximally available from the perspective of financial aid applications, whereas funds in a 403B/401K/IRA would be less so.


True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in [b]The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


+1. Make sure your own financial situation is in good shape first.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Wed Mar 06, 2013 10:30 am

Grt2bOutdoors wrote:
Mel Lindauer wrote:
Aptenodytes wrote:Maybe this is obvious, but one drawback for people like me who are about to shoot the college tuition rapids is that these EE bonds would be considered maximally available from the perspective of financial aid applications, whereas funds in a 403B/401K/IRA would be less so.


True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


Not these days......


I guess I'm showing my age, huh? In my generation, many of us got married in our early 20s, had our kids right away, and by the time they were 50 or so, the kids were out of college and out of the house.
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Re: Build Your Own Annuity

Postby Austintatious » Wed Mar 06, 2013 10:59 am

Mel Lindauer wrote:

I guess I'm showing my age, huh? In my generation, many of us got married in our early 20s, had our kids right away, and by the time they were 50 or so, the kids were out of college and out of the house.


Wow! It's true! Those really were the "good ol' days".
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Re: Build Your Own Annuity

Postby gw » Wed Mar 06, 2013 11:58 am

Mel, you shouldn't stick to your guns like this when you're so clearly wrong. Some replies below.

Mel Lindauer wrote:
gw wrote:As an annuity replacement ("build your own") this is a really terrible plan.


Sounds like something I’d expect to hear from an insurance company, but not a Boglehead.


You seem to be implying I'm somehow associated with an insurance company. That's wrong. In fact, you have privileged information about me, so you know it to be wrong. I think you owe me an apology.

The only reason I said this is a really terrible plan is that it is a really terrible plan. Keep your ad hominems to yourself.

Mel Lindauer wrote:
gw wrote:'The reason is obviously mortality credits (as BobK has been saying), but neither the article nor this thread make it clear. The point is not that the annuity outlives the 30-year bond ladder (although it does), nor that only it can provide inflation protection (it can) --- the point is simply that the annuity provides way more income.


In my column, I clearly stated that if the annuitant lived beyond 95 or 100, the SPIA might be the better choice.


I'm astounded that you're still missing the point. It has nothing to do with outliving your bond ladder (although that is another problem with the strategy). If the annuitant lives for only one year, the bond ladder is still a terrible annuity replacement, because with the bond ladder, he can't spend as much money --- in year 1.

Mel Lindauer wrote:
gw wrote:Here's the apples-to-apples comparison, which really should have been in the article, or at least in the first reply to this thread....


Reads more like a tomatoes to apples comparison, because your arguments and figures are flawed.


That's clever, but my arguments and figures are correct. Yours are worse than flawed, they're flat-out wrong, and grossly misleading to boot. And you managed to publish them, and signed your name! You should worry less about scoring points on this forum, and worry more about how an article like this harms your reputation, especially when you fail to correct errors after they're pointed out to you.

Mel Lindauer wrote:
gw wrote:Compare the income at age 65 from either the bond ladder or the annuity. Assume a constant 3.5% return on the bonds (equivalent to doubling in 20 years), invested from 30 years prior to age 65. Assume an SPIA pays out at 6.5% (borrowed this number from the thread, sounds about right). The rest is easy. The bond ladder is worth about $1M at age 65 (excel FV(.035,30,20)), and pays out $40K per year for 30 years. Buying a $1M SPIA pays out $65K per year for the remainder of your life.


The bond ladder is never worth “about $1m at age 65”.

First, the EE Bond buyer is, in essence, buying a series of deferred annuities for $20,000 on an annual basis. So, for 30 years, the investor has purchased 30 deferred annuities for a total of $600,000. Based on the amount invested in the EE Bond deferred annuities, the $40,000 annual payout figure would be 6.7%.

Secondly, even if you ignore that fact, the corpus of the bond ladder maxes out at around $820,000 (not 1mil as you stated). Remember, at age 65, only the first 11 EE Bonds that were purchased between the ages of 35 and 45 have reached the 20-year doubling mark (that’s $440,000). The remaining 19 EE Bonds in the ladder are only worth a bit more than the original $20,000, since the interest rate on those is a paltry 0.2% (that’s $380,00 plus a bit of interest). And at that point, withdrawals start depleting that balance from then on. Therefore, the figure of ~$1mil you used in to bolster your argument isn't accurate.

And you apparently overlooked the fact that the EE Bond ladder provides a 30-year period certain stream of income. So, again, the payout figure you used for the SPIA of 6.5% is also bogus since, contrary to your claim, you’re not comparing apples to apples. The actual payout rate for a 30-year term certain SPIA (without lifetime benefit) is actually ~4.56% from quotes I pulled from the internet.

So now we get to the real apples to apples comparison. Based on an $820,000:

The EE Bond annuity pays $40,000 per year or 4.9%
The 30-year period certain SPIA pays $37,392 or 4.56% based on a quote at one site I found.

The brkdirect link you linked to below shows a payout figure for a SPIA with lifetime benefits and a 30-year term certain to be 4.75% or $38,950 vs the $40,000 for the EE Bond ladder.

And if you want to add the inflation protection that you said was available, then the SPIA payments would be even less.


You're so wrong here I hardly know where to start.

Okay, let's start with your valuations, which are patently absurd. Consider the particular bond held at age 65 that matures next year, when the payout will be $40K. Are you seriously proposing to value that bond at only $20K, plus nominal interest accrued at 0.4%? That's clearly ridiculous --- the whole point of your strategy is that the bond has more value than principal plus nominal interest. As a matter of professional competence, you should be well-equipped to value those bonds properly. For example, you could value them as zero-coupon bonds, look up Treasury Strips, and find that bonds maturing two years from now are worth 99% of their future value; bonds maturing 10 years out are worth 80% of their future value; etc., etc. Or you could skip that research and discount the values with appropriate interest rates, which range from 0-3%, and will give the same results. Or you could skip all that nonsense, and take the FV function as a fair estimate (you could correct it for the fact that the bonds stop earning anything decent after 20 years, and get to something above $900K, or you could assume an intelligent person wouldn't actually hold the EE's for 30 years because of that fact, and substitute nominal 30-year bonds, in which case you'll get back to roughly $1M). Anyway, I'll leave all that as an exercise for the financial advisor. If done in any reasonably intelligent way whatsoever, the value of 30 years of $20K annual investments in long-term bonds is well above $800K, and is approximately $1M.

So after you fudge the valuation, your next trick is a little sleight-of-hand with the annuity payout rate, where you switch from the rate of a proper SPIA to a term-certain payout. That's the worst sort of intellectual dishonesty --- the stated purpose of your "build your own annuity" plan is to replicate an annuity. Obviously if you buy a bond ladder from an insurance company, you should expect to earn less than if you build it yourself. That has nothing to do with this conversation --- the point is to compare an actual annuity to your (fundamentally flawed) attempt to replicate one.

Anyway, even if we take your low-balled valuation of $800K, and apply the proper annuity rate (7.1%, per the link above), it's still obvious how terribly the bond ladder fails --- your strategy pays out only $40K, vs. $57K for the annuity. Of course if you value the initial 30 years investment properly ($1M), the comparison is even more striking --- $71K vs. $40K. Now just imagine if some retiree, who needed the income to live on, were to actually follow your bad advice --- they'd be out a full 44% of their income!!!

With all due respect, your advice in the article and in this thread is terrible, and you should be ashamed of it.
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Re: Build Your Own Annuity

Postby bobcat2 » Wed Mar 06, 2013 12:28 pm

Compare the income at age 65 from either the savings bond ladder or a joint SPIA (life annuity). For a 65 year old couple the payout rate is about 6.1% for a joint SPIA.

The bond ladder is worth about $820,000 at age 65 and pays out $40K per year for 30 years. (The first eleven years of the $20,000 per year bond purchases are worth $440,000 at age 65 - they have met the 20 year doubling requirement by then - and the remaining 19 years of bond purchases are worth about $380,000 at age 65 as they have yet to meet the 20 year doubling requirement.) Buying a $820,000 joint SPIA at age 65 pays out about $50,000 per year for the remainder of life for the last to die of the couple. So the couple can get an income stream of $50,000 for life from the joint SPIA or $40,000 per year for 30 years from the bond ladder. The advantages of the bond ladder are flexibility in the income stream while alive, and assets left to heirs if both members of the couple die within 30 years. The advantages of the joint life annuity is $10,000 per year more income for the first 30 years and $50,000 more income per year if either member of the couple should live beyond 30 years.

Of course there is nothing that prevents the couple from combining these safe assets by putting say the first $440,000 into the SPIA for about $26,800 per year and then spend about $25,000 per year out of the bonds spread over 30 years (about $51,800 per year total for 30 years and $26,800 per year beyond thirty years). Or be bold and spend $40,000 per year out the bonds for 19 years for an income stream of $66,800 for 19 years and an income stream of $26,800 beyond 19 years.

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Re: Build Your Own Annuity

Postby Mel Lindauer » Wed Mar 06, 2013 12:32 pm

gw wrote:Mel, you shouldn't stick to your guns like this when you're so clearly wrong. Some replies below.

Mel Lindauer wrote:
gw wrote:As an annuity replacement ("build your own") this is a really terrible plan.


Sounds like something I’d expect to hear from an insurance company, but not a Boglehead.


You seem to be implying I'm somehow associated with an insurance company. That's wrong. In fact, you have privileged information about me, so you know it to be wrong. I think you owe me an apology.

The only reason I said this is a really terrible plan is that it is a really terrible plan. Keep your ad hominems to yourself.

Mel Lindauer wrote:
gw wrote:'The reason is obviously mortality credits (as BobK has been saying), but neither the article nor this thread make it clear. The point is not that the annuity outlives the 30-year bond ladder (although it does), nor that only it can provide inflation protection (it can) --- the point is simply that the annuity provides way more income.


In my column, I clearly stated that if the annuitant lived beyond 95 or 100, the SPIA might be the better choice.


I'm astounded that you're still missing the point. It has nothing to do with outliving your bond ladder (although that is another problem with the strategy). If the annuitant lives for only one year, the bond ladder is still a terrible annuity replacement, because with the bond ladder, he can't spend as much money --- in year 1.

Mel Lindauer wrote:
gw wrote:Here's the apples-to-apples comparison, which really should have been in the article, or at least in the first reply to this thread....


Reads more like a tomatoes to apples comparison, because your arguments and figures are flawed.


That's clever, but my arguments and figures are correct. Yours are worse than flawed, they're flat-out wrong, and grossly misleading to boot. And you managed to publish them, and signed your name! You should worry less about scoring points on this forum, and worry more about how an article like this harms your reputation, especially when you fail to correct errors after they're pointed out to you.

Mel Lindauer wrote:
gw wrote:Compare the income at age 65 from either the bond ladder or the annuity. Assume a constant 3.5% return on the bonds (equivalent to doubling in 20 years), invested from 30 years prior to age 65. Assume an SPIA pays out at 6.5% (borrowed this number from the thread, sounds about right). The rest is easy. The bond ladder is worth about $1M at age 65 (excel FV(.035,30,20)), and pays out $40K per year for 30 years. Buying a $1M SPIA pays out $65K per year for the remainder of your life.


The bond ladder is never worth “about $1m at age 65”.

First, the EE Bond buyer is, in essence, buying a series of deferred annuities for $20,000 on an annual basis. So, for 30 years, the investor has purchased 30 deferred annuities for a total of $600,000. Based on the amount invested in the EE Bond deferred annuities, the $40,000 annual payout figure would be 6.7%.

Secondly, even if you ignore that fact, the corpus of the bond ladder maxes out at around $820,000 (not 1mil as you stated). Remember, at age 65, only the first 11 EE Bonds that were purchased between the ages of 35 and 45 have reached the 20-year doubling mark (that’s $440,000). The remaining 19 EE Bonds in the ladder are only worth a bit more than the original $20,000, since the interest rate on those is a paltry 0.2% (that’s $380,00 plus a bit of interest). And at that point, withdrawals start depleting that balance from then on. Therefore, the figure of ~$1mil you used in to bolster your argument isn't accurate.

And you apparently overlooked the fact that the EE Bond ladder provides a 30-year period certain stream of income. So, again, the payout figure you used for the SPIA of 6.5% is also bogus since, contrary to your claim, you’re not comparing apples to apples. The actual payout rate for a 30-year term certain SPIA (without lifetime benefit) is actually ~4.56% from quotes I pulled from the internet.

So now we get to the real apples to apples comparison. Based on an $820,000:

The EE Bond annuity pays $40,000 per year or 4.9%
The 30-year period certain SPIA pays $37,392 or 4.56% based on a quote at one site I found.

The brkdirect link you linked to below shows a payout figure for a SPIA with lifetime benefits and a 30-year term certain to be 4.75% or $38,950 vs the $40,000 for the EE Bond ladder.

And if you want to add the inflation protection that you said was available, then the SPIA payments would be even less.


You're so wrong here I hardly know where to start.

Okay, let's start with your valuations, which are patently absurd. Consider the particular bond held at age 65 that matures next year, when the payout will be $40K. Are you seriously proposing to value that bond at only $20K, plus nominal interest accrued at 0.4%? That's clearly ridiculous --- the whole point of your strategy is that the bond has more value than principal plus nominal interest. As a matter of professional competence, you should be well-equipped to value those bonds properly. For example, you could value them as zero-coupon bonds, look up Treasury Strips, and find that bonds maturing two years from now are worth 99% of their future value; bonds maturing 10 years out are worth 80% of their future value; etc., etc. Or you could skip that research and discount the values with appropriate interest rates, which range from 0-3%, and will give the same results. Or you could skip all that nonsense, and take the FV function as a fair estimate (you could correct it for the fact that the bonds stop earning anything decent after 20 years, and get to something above $900K, or you could assume an intelligent person wouldn't actually hold the EE's for 30 years because of that fact, and substitute nominal 30-year bonds, in which case you'll get back to roughly $1M). Anyway, I'll leave all that as an exercise for the financial advisor. If done in any reasonably intelligent way whatsoever, the value of 30 years of $20K annual investments in long-term bonds is well above $800K, and is approximately $1M.

So after you fudge the valuation, your next trick is a little sleight-of-hand with the annuity payout rate, where you switch from the rate of a proper SPIA to a term-certain payout. That's the worst sort of intellectual dishonesty --- the stated purpose of your "build your own annuity" plan is to replicate an annuity. Obviously if you buy a bond ladder from an insurance company, you should expect to earn less than if you build it yourself. That has nothing to do with this conversation --- the point is to compare an actual annuity to your (fundamentally flawed) attempt to replicate one.

Anyway, even if we take your low-balled valuation of $800K, and apply the proper annuity rate (7.1%, per the link above), it's still obvious how terribly the bond ladder fails --- your strategy pays out only $40K, vs. $57K for the annuity. Of course if you value the initial 30 years investment properly ($1M), the comparison is even more striking --- $71K vs. $40K. Now just imagine if some retiree, who needed the income to live on, were to actually follow your bad advice --- they'd be out a full 44% of their income!!!

With all due respect, your advice in the article and in this thread is terrible, and you should be ashamed of it.


First, I did not mean to imply that your were connected with the insurance industry. I simply stated that your comments were the type I typically get on Forbes from the insurance industry when I write about annuities, and not the type I normally see here on the Bogleheads forum.

I stand by my article and my post. You asked for an apples to apples comparison, and that's what I gave you. My EE Bond Annuity which has a 30-year term certain payout vs a 30-year term certain SPIA shows that the EE Bond pays more. Your figure of 7.1% is simply not a valid number for this comparison, and I showed that the EE Bond annuity payout was larger.

I've made my points and you've made yours. We'll simply have to agree to disagree and let others decide for themselves.

Finally, I have written favorably about SPIAs in my Forbes columns. Here's a link: http://www.forbes.com/2010/07/29/single ... dauer.html

I do think that my EE Bond annuity and a SPIA could both be part of a solid retirement plan; it doesn't have to be an either or choice.
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Re: Build Your Own Annuity

Postby LadyGeek » Wed Mar 06, 2013 5:55 pm

As a reminder:

We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
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Re: Build Your Own Annuity

Postby Leif » Wed Mar 06, 2013 6:27 pm

Mel Lindauer wrote:
True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


When I bought my EE the doubling period was 17 years and later somea t 20 years. However, I didn't think I would hold them for that long. I expected to use them for college expenses. However, the low rate environment came along. I didn't do the math, but I figured I'm probably better often waiting for the doubling period and paying the tax then cashing in for college expenses.

Once the doubling period is complete do the bonds continue to appreciate, or do they stay at that value until the interest rate period allows them to catch up?
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Re: Build Your Own Annuity

Postby Mel Lindauer » Wed Mar 06, 2013 6:49 pm

Leif Eriksen wrote:
Mel Lindauer wrote:
True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


When I bought my EE the doubling period was 17 years and later somea t 20 years. However, I didn't think I would hold them for that long. I expected to use them for college expenses. However, the low rate environment came along. I didn't do the math, but I figured I'm probably better often waiting for the doubling period and paying the tax then cashing in for college expenses.

Once the doubling period is complete do the bonds continue to appreciate, or do they stay at that value until the interest rate period allows them to catch up?


After they double, EE Bonds continue to earn interest until they reach final maturity at 30 years.
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Re: Build Your Own Annuity

Postby Abe » Wed Mar 06, 2013 7:47 pm

I think I know why Mel doesn't post a lot on the forum. He is just trying to introduce new ideas, but a lot of people on here want to nit-pick everything he says. Most everything these people are disputing, Mel has already covered in prior post, so he has to keep repeating what he has already said.
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Re: Build Your Own Annuity

Postby umfundi » Wed Mar 06, 2013 8:49 pm

Abe wrote:I think I know why Mel doesn't post a lot on the forum. He is just trying to introduce new ideas, but a lot of people on here want to nit-pick everything he says. Most everything these people are disputing, Mel has already covered in prior post, so he has to keep repeating what he has already said.

I need to read that real slowly ...

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That's more than 8 posts a day.

Please define what you think "doesn't post a lot" is.

Nisiprius is slightly ahead

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Re: Build Your Own Annuity

Postby Abe » Wed Mar 06, 2013 10:17 pm

umfundi wrote:
Abe wrote:I think I know why Mel doesn't post a lot on the forum. He is just trying to introduce new ideas, but a lot of people on here want to nit-pick everything he says. Most everything these people are disputing, Mel has already covered in prior post, so he has to keep repeating what he has already said.

I need to read that real slowly ...

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That's more than 8 posts a day.

Please define what you think "doesn't post a lot" is.

Nisiprius is slightly ahead


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Okay, I admit it. He does post a lot. This is a good example of the point of my post. Nit-picking.
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Re: Build Your Own Annuity

Postby umfundi » Thu Mar 07, 2013 1:12 am

Abe wrote:This is a good example of the point of my post. Nit-picking.


I would call it getting your facts straight. :P

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Re: Build Your Own Annuity

Postby xram » Thu Mar 07, 2013 8:00 am

Mel Lindauer wrote:
xram wrote:
Ever Ready wrote:One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and existing bonds.


What are the odds of this happening?


While the new EE Savings Bond rate can be changed, existing EE Bonds will continue to earn the fixed rate and the doubling time period that was in effect when the Bonds were purchased.



So they are GUARANTEED to double in value in 20 years even though the 0.20% rate may change?

I made my first purchase of ee bonds the other day. I like the idea of these as a "backup" if everything else goes to H-E-double hockey sticks.....
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Re: Build Your Own Annuity

Postby Mel Lindauer » Thu Mar 07, 2013 11:48 am

xram wrote:
Mel Lindauer wrote:
xram wrote:
Ever Ready wrote:One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and existing bonds.


What are the odds of this happening?


While the new EE Savings Bond rate can be changed, existing EE Bonds will continue to earn the fixed rate and the doubling time period that was in effect when the Bonds were purchased.



So they are GUARANTEED to double in value in 20 years even though the 0.20% rate may change?

I made my first purchase of ee bonds the other day. I like the idea of these as a "backup" if everything else goes to H-E-double hockey sticks.....


Actually, both the 20 year doubling and the 0.2% fixed rate remain in effect on previously purchased EE Bonds that were sold under those conditions. However, for new EE Bonds, they could change one or both (the fixed rate and the doubling period), but you'd know that in advance of purchasing the EE Bonds.
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Re: Build Your Own Annuity

Postby xram » Thu Mar 07, 2013 6:40 pm

Mel Lindauer wrote:
xram wrote:
Mel Lindauer wrote:
xram wrote:
Ever Ready wrote:One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and [u]existing bonds[/u].


What are the odds of this happening?


While the new EE Savings Bond rate can be changed, existing EE Bonds will continue to earn the fixed rate and the doubling time period that was in effect when the Bonds were purchased.



So they are GUARANTEED to double in value in 20 years even though the 0.20% rate may change?

I made my first purchase of ee bonds the other day. I like the idea of these as a "backup" if everything else goes to H-E-double hockey sticks.....


Actually, both the 20 year doubling and the 0.2% fixed rate remain in effect on previously purchased EE Bonds that were sold under those conditions. However, for new EE Bonds, they could change one or both (the fixed rate and the doubling period), but you'd know that in advance of purchasing the EE Bonds.


Thanks. But why then does it say "existing" bonds? Sorry if just not getting it
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Re: Build Your Own Annuity

Postby rr2 » Thu Mar 07, 2013 7:29 pm

xram wrote:
Thanks. But why then does it say "existing" bonds? Sorry if just not getting it

My understanding is that, once the bond is issued, the fixed rate for the EE bond will not change for the first 20 years. For example, it will stay at 0.2% for the entire 20 years. However, at the 20 year mark, a one time adjustment will be made such that the bond reaches it's face value i.e. doubles. For the years 20-30, the interest rate may change but the changed interest rate will be made before the beginning of this final 10 year period.

See: http://www.treasurydirect.gov/indiv/res ... ndafer.htm
What interest will I get if I buy an EE Bond now?

0. 20% annual interest rate for EE Bonds issued between November 1, 2012 and
April 30, 2013.

EE Bonds issued after May 2005 earn interest for up to 30 years. They earn a fixed rate of interest. For the first 20 years, EE bonds earn the same fixed rate that was set when the bond was issued. We may change the rate or the way an EE Bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts. (This is different from the type of interest that I Bonds earn. Comparing I Bonds to EE Bonds.)
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Re: Build Your Own Annuity

Postby umfundi » Fri Mar 08, 2013 10:52 pm

Mel,

Another thought:

One of the drawbacks of an SPIA is you cannot get your money back in an emergency.

Your EE Ladder would seem to have a similar problem: If you need the money before the doubling period, you will have much lower returns.

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Re: Build Your Own Annuity

Postby Mel Lindauer » Sat Mar 09, 2013 3:51 pm

umfundi wrote:Mel,

Another thought:

One of the drawbacks of an SPIA is you cannot get your money back in an emergency.

Your EE Ladder would seem to have a similar problem: If you need the money before the doubling period, you will have much lower returns.

Keith


While you might have lower returns, you can still get your money back with the EE ladder, so I don't see that as a problem. Since you're not going to buy the 30-year term certain SPIA or start withdrawing from the EE Bond ladder until age 65, by that time 10 or 11 of your EE Bonds in the ladder would have already doubled, so you could elect to use one or more of those for the emergency.
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Re: Build Your Own Annuity

Postby bayview » Sat Mar 09, 2013 5:10 pm

rr2 wrote:...My understanding is that, once the bond is issued, the fixed rate for the EE bond will not change for the first 20 years. For example, it will stay at 0.2% for the entire 20 years. However, at the 20 year mark, a one time adjustment will be made such that the bond reaches it's face value i.e. doubles. For the years 20-30, the interest rate may change but the changed interest rate will be made before the beginning of this final 10 year period.

See: http://www.treasurydirect.gov/indiv/res ... ndafer.htm ...

Thanks for this link. I was poking around on the Treasury EE site, and I couldn't find anything about the guaranteed doubling. You'd think that they would have this plastered all over every web page. Here's what the FAQ link says:
Q: When will my paper bond be worth its full value?

A: You bought a paper EE Bond at half its face value. For example, you paid $50 for a $100 paper EE Bond.

The bond starts to earn interest on what you paid (not on its face value). Over time, with interest compounded every six months, the bond gets closer and closer to its face value.

Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

EE Bonds continue to earn interest for up to 30 years.

Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

I highlighted the last paragraph on electronic bonds since I think that these are the only type available now, and I didn't want the initial paper bond discussion to be a distraction.

As to the Mel vs Bobcat discussion, my take is that for those of us who will have SS (and pension) income, we already have income flows adjusted for inflation. Does every single source of additional income have to be indexed? Can't there be some diversification in this as well? My husband and I will have combined SS and pension income of $5K a month in today's dollars. The SS income is COLA'd and my pension is mostly COLA'd (max of 1% less than the COLA, essentially.) I don't know that every additional dollar beyond this needs to be indexed as well. (For younger people who are understandably unsure about SS and pensions, this is a different story, of course. I'm speaking as one of the despised boomers. :) )

And another point is that even though the advanced elderly are more vulnerable to inflation, they're also way less likely to be buying cars and going to France and writing checks to the symphony. So yes, LTC expense is much more likely, but other expenses will have decreased. Our parents are 86 - 90 years old, and they're very, very clear that they don't want to have big medical interventions done at this point in their lives. Maybe there might be some humongous expense that hit us at age 95-100 (should we live that long), but I don't think it's reasonable to try to insure against every conceivable possibility. If we run short at that point, well, there you are. Stick us on an iceberg and shove us out to sea, I guess.
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Re: Build Your Own Annuity

Postby Levett » Sat Mar 09, 2013 6:36 pm

"Does every single source of additional income have to be indexed?"

Not in my view given what you've said about your SS + COLA'd pension + desired mo. income.

But I am (to be clear) far more amenable, in principle and practice, to bobcat's general observations than to the "build your own annuity" notion, which strikes me as no more compelling than privatizing social security.

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Re: Build Your Own Annuity

Postby texas_archer » Sat Mar 09, 2013 9:40 pm

bayview wrote:
rr2 wrote:...My understanding is that, once the bond is issued, the fixed rate for the EE bond will not change for the first 20 years. For example, it will stay at 0.2% for the entire 20 years. However, at the 20 year mark, a one time adjustment will be made such that the bond reaches it's face value i.e. doubles. For the years 20-30, the interest rate may change but the changed interest rate will be made before the beginning of this final 10 year period.

See: http://www.treasurydirect.gov/indiv/res ... ndafer.htm ...

Thanks for this link. I was poking around on the Treasury EE site, and I couldn't find anything about the guaranteed doubling. You'd think that they would have this plastered all over every web page. Here's what the FAQ link says:
Q: When will my paper bond be worth its full value?

A: You bought a paper EE Bond at half its face value. For example, you paid $50 for a $100 paper EE Bond.

The bond starts to earn interest on what you paid (not on its face value). Over time, with interest compounded every six months, the bond gets closer and closer to its face value.

Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

EE Bonds continue to earn interest for up to 30 years.

Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

I highlighted the last paragraph on electronic bonds since I think that these are the only type available now, and I didn't want the initial paper bond discussion to be a distraction.

As to the Mel vs Bobcat discussion, my take is that for those of us who will have SS (and pension) income, we already have income flows adjusted for inflation. Does every single source of additional income have to be indexed? Can't there be some diversification in this as well? My husband and I will have combined SS and pension income of $5K a month in today's dollars. The SS income is COLA'd and my pension is mostly COLA'd (max of 1% less than the COLA, essentially.) I don't know that every additional dollar beyond this needs to be indexed as well. (For younger people who are understandably unsure about SS and pensions, this is a different story, of course. I'm speaking as one of the despised boomers. :) )

And another point is that even though the advanced elderly are more vulnerable to inflation, they're also way less likely to be buying cars and going to France and writing checks to the symphony. So yes, LTC expense is much more likely, but other expenses will have decreased. Our parents are 86 - 90 years old, and they're very, very clear that they don't want to have big medical interventions done at this point in their lives. Maybe there might be some humongous expense that hit us at age 95-100 (should we live that long), but I don't think it's reasonable to try to insure against every conceivable possibility. If we run short at that point, well, there you are. Stick us on an iceberg and shove us out to sea, I guess.


http://www.treasurydirect.gov/indiv/res ... atefaq.htm

EE Bonds issued on and after May 1, 2005, will reach original maturity at 20 years. These bonds also are guaranteed to double in value from their issue price no later than 20 years after their issue dates. This is the bonds' original maturity. If a bond does not double in value as the result of applying the fixed rate for 20 years, the Treasury will make a one-time adjustment at original maturity to make up the difference. During the 10-year extended maturity period that follows original maturity, bonds will earn interest at the fixed rate set at issue unless a new rate or new terms and conditions are announced for the extension period.
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Re: Build Your Own Annuity

Postby Austintatious » Sun Mar 10, 2013 9:18 am

Levett wrote:"

But I am (to be clear) far more amenable, in principle and practice, to bobcat's general observations than to the "build your own annuity" notion, which strikes me as no more compelling than privatizing social security.

Lev


I'm not sure I understand. Actually, I'm sure that I don't. Please explain why Mel's "build your own annuity" concept would be considered as "no more compelling than privatizing social security", and why bobcat's resort to a commercial annuity would not be.
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Re: Build Your Own Annuity

Postby yahoo » Sun Mar 10, 2013 10:09 am

The very idea of purchasing 20k$/year in EE bonds for 30 years seems ludicrous, given the stingy long term rate of return. It's doubtful EE bonds will even keep up w/ inflation.

This is no way to build an income stream for life. Someone with a 30 year investing horizon should have an asset allocation that tilts towards stocks, the only real engine for growth in a portfolio. This pot of money can then be used(30 years from now) to generate a guaranteed income steam using SPIA's, bonds, value stocks, covered calls, or whatever.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Sun Mar 10, 2013 10:48 am

yahoo wrote:The very idea of purchasing 20k$/year in EE bonds for 30 years seems ludicrous, given the stingy long term rate of return. It's doubtful EE bonds will even keep up w/ inflation.

This is no way to build an income stream for life. Someone with a 30 year investing horizon should have an asset allocation that tilts towards stocks, the only real engine for growth in a portfolio. This pot of money can then be used(30 years from now) to generate a guaranteed income steam using SPIA's, bonds, value stocks, covered calls, or whatever.


Ludicrious is a pretty strong claim, and IMO, totally uncalled for.

The EE Bond ladder isn't meant to be the ONLY investment that someone makes. From the column:

That $40,000 would be in addition to any pension, Social Security and other retirement plan income, such as from a 401k, 403b and/or IRA.


Rather than being the only investment, it's simply one leg of the retirement stool that's meant to provide a GUARANTEED stream of income in retirement, which stocks can't do. While we all hope that equties will be a "real engine for growth", just ask a Japanese investor about that. And, given current and projected inflation rates, the 3.5%+ guaranteed return of EE Bonds could, indeed, outstrip inflation. And, should inflation rear it's ugly head to where it looks like it would outstrip the 3.5%+ return of the EE Bonds, then the investor would simply switch from buying EE Bonds to buying I Bonds for their ladder.
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Re: Build Your Own Annuity

Postby bertilak » Sun Mar 10, 2013 12:10 pm

Mel Lindauer wrote:Rather than being the only investment, it's simply one leg of the retirement stool that's meant to provide a GUARANTEED stream of income in retirement, which stocks can't do.

Mel, I think the concept of a GUARANTEED income stream is very important. As a recent retiree I am just beginning to fully appreciate this. (I thought I had it covered with a pension and Social Security backed by an IRA, but now realize I haven't thought through inflation yet.)

Almost ALL the discussion, theory, and advice on BH focuses on the accumulation phase of investing, to the point of making it seem that is all there is to it. I see lots of advice on how retirees need to manage risk with a conservative bond-heavy asset allocation. In fact the decumulation phase needs a completely different strategy. I think that even during the accumulation phase the future decumulation phase could benefit from some pre-planning. For example (as you say) building bond ladders that start to pay off during retirement. I don't see this addressed in answers to portfolio questions.

I read somewhere that during the accumulation phase it is the expected risk-weighted results that are important but during decumulation it is the worst possible results that count. An analogy: during the accumulation phase you have many future revolutions of the merry-go-round so if you miss the brass ring on this turn you still have more shots at it coming up -- on the average you will eventually get it. In retirement, you are on the last turn so "average" means nothing. I think there is room for a greater emphasis on this in the Wiki. It should be a top-level dividing line as to what strategies are appropriate. Now it seems to be buried down in lists of products or mentioned as an aside.

Another important topic is simplicity vs. complexity. This is, of course, a big item already for Bogleheads, but only in the context of getting the most out of a traditional portfolio of stocks and bonds, not as a topic for preventing mistakes by beneficiaries or incapacitated primary investors. A fire-and-forget strategy would be ideal as opposed to continued management of a complex slice and dice portfolio.

OK, rant over. I think the above considerations would improve bogleheads.org, but I don't feel qualified to do the job.
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Re: Build Your Own Annuity

Postby crowd79 » Sun Mar 10, 2013 12:52 pm

What do people think of my current plan to buy EE Bonds routinely for the next 17 years, starting at $250 per month, and then increasing it by $10 per month every year for the next 17 years until age 49 (increasing slightly for inflation)? I am currently 33 years old and my strategy is to have guaranteed income between the ages of 53-69, until I would start withdrawing from Social Security at 70. Depending on how the rest of my portfolio does (75% stocks/ 20% bonds/ 5% cash) over the next 20-30 years, starting to receive EE Bond payments at age 53 (though unlikely, probably late 50's more realistic) could tilt in favor of early retirement. If not, I will just let the EE Bond income accumulate until actually do retire sometime later (late 50's thru 60's), and count on that EE income until I start taking SS at age 70.

Age 33/$3000 (invested in EE Bonds yearly) > Age 53/$6000 (income for year) > Total amassed
34/$3120 > 54/$6240 > Total:$12,240
35/$3240 > 55/$6480 > Total $18,720
36/$3360 > 56/$6720 > Total $25,440
37/$3480 > 57/$6960 > Total $32,400
38/$3600 > 58/$7200 > Total $39,600
39/$3720 > 59/$7440 > Total $47,040
40/$3840 > 60/$7680 > Total $54,720
41/$3960 > 61/$7920 > Total $62,640
42/$4080 > 62/$8160 > Total $70,800
43/$4200 > 63/$8400 > Total $79,200
44/$4320 > 64/$8640 > Total $87,840
45/$4440 > 65/$8880 > Total $96,720
46/$4560 > 66/$9120 > Total $105,840
47/$4680 > 67/$9360 > Total $115,200
48/$4800 > 68/$9600 > Total $124,800
49/$4920 > 69/$9840 > Total $134,600
50 Stop buying, in anticipation of taking SS at 70.

Now what I mean by possibly retiring early, is for example, I determined it was okay to retire at Age 62. By the end of age 62, I will have amassed $70,800 in EE Bond income (if not spent in prior years from 53 thru 62). Adding EE Bond income from Ages 63-69 gives me another guaranteed $63,800 in income. $70,800 + $63,800 = $134,600 total income, which I can spread out over 7 years leading into SS withdraws starting at age 70, which is a guaranteed $19,228.57 in income per year from ages 63-69, divided by 7 years. Obviously if I were to retire a few years earlier, then this amount would be smaller, but you get the idea....

Not only would a guaranteed income from EE Bonds possibly lead to early retirement, but it could also mean delaying SS payments, which would be much larger than starting at 62, for instance. a win-win in my opinion and IMO, Mel is spot on.
Last edited by crowd79 on Sun Mar 10, 2013 1:40 pm, edited 1 time in total.
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Re: Build Your Own Annuity

Postby yahoo » Sun Mar 10, 2013 1:31 pm

Mel Lindauer wrote:
yahoo wrote:
That $40,000 would be in addition to any pension, Social Security and other retirement plan income, such as from a 401k, 403b and/or IRA.


Rather than being the only investment, it's simply one leg of the retirement stool that's meant to provide a GUARANTEED stream of income in retirement, which stocks can't do. While we all hope that equties will be a "real engine for growth", just ask a Japanese investor about that. And, given current and projected inflation rates, the 3.5%+ guaranteed return of EE Bonds could, indeed, outstrip inflation. And, should inflation rear it's ugly head to where it looks like it would outstrip the 3.5%+ return of the EE Bonds, then the investor would simply switch from buying EE Bonds to buying I Bonds for their ladder.


The larger picture here is building wealth to use in retirement and what is the most efficient method for doing so.

Stockpiling EE bonds, yearly , as a way to build wealth for a retirement that starts 30 years hence, is diverging away from the standard advice, espoused on this site for building wealth:

asset allocation, low fees, buy and hold, rebalancing, and diversification (I'll call this the Boglehead method)

Stockpiling EE bonds, yearly , and comparing this to a SPIA bought in 2043 is meaningless and yes ludicrous. Thirty years ago the government issued bonds paying over 15%. These were ,historically speaking, high rates. Anyone who locked in a SPIA in the early to mid 1980's, did very well.

The payout on a SPIA will be based on interest rates in 2043.

Why not use the Boglehead method for the next 30 years to build wealth, then examine what makes sense to generate income when that time comes? The boglehead method will include an allocation to bonds, as part of your total allocation.

Would you really suggest to someone in there 20's or 30's to invest heavily (20k$/yr) in EE bonds to build wealth, 30 years from now?
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Re: Build Your Own Annuity

Postby Scotttheking » Sun Mar 10, 2013 1:45 pm

Mel Lindauer wrote:I guess I'm showing my age, huh? In my generation, many of us got married in our early 20s, had our kids right away, and by the time they were 50 or so, the kids were out of college and out of the house.


Among people with professional careers it is more common to marry mid to late 20s (or later) and have kids in late 20s to late 30s.
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Re: Build Your Own Annuity

Postby munnix » Sun Mar 10, 2013 1:49 pm

Mel,
Thanks for this really interesting idea. I'm in my later 50 and hope to retire in the next 4 or 5 years, have a 403(b) and fully contribute to a Roth. For me to start building my own annuity I'd have to forego funding some or all of my Roth. I'm probably a tad light on fixed income (46% at present), so again here the annuity idea makes a lot of sense to me. Any thoughts or recommendations of funding the annuity en lieu of continuing to fund the Roth?
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Re: Build Your Own Annuity

Postby Mel Lindauer » Sun Mar 10, 2013 2:31 pm

munnix wrote:Mel,
Thanks for this really interesting idea. I'm in my later 50 and hope to retire in the next 4 or 5 years, have a 403(b) and fully contribute to a Roth. For me to start building my own annuity I'd have to forego funding some or all of my Roth. I'm probably a tad light on fixed income (46% at present), so again here the annuity idea makes a lot of sense to me. Any thoughts or recommendations of funding the annuity en lieu of continuing to fund the Roth?


While we often think of using the Roth as the last source of retirement income because if it's not needed, we could pass it along to our heirs tax-free, in your case the Roth could also provide the funding for a SPIA if your 403b doesn't provide enough desired income. Or the withdrawals from the Roth could help fund your retirement without buying an annuity. Since the Roth gives you options, I'd probably continue funding it if I were in your position.
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Re: Build Your Own Annuity

Postby JamesSFO » Sun Mar 10, 2013 5:38 pm

Mel thanks for posting this, I think it is good food for thought
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Re: Build Your Own Annuity

Postby Leif » Tue Mar 12, 2013 12:22 am

Mel Lindauer wrote:
Leif Eriksen wrote:
Mel Lindauer wrote:
True. However, the real advantage of using Savings Bonds for college is their tax-free feature if used for qualifying educational expenses. Remember, because of the low fixed rate on the EE Bonds (currently 0.2%), the EE Bonds won't be very attractive until they reach 20 years which, under this plan, would be when the investor would be 55 (or later). For for most investors, 55 is beyond the "kids in college" stage.

And, as we say in The Bogleheads' Guide to Investing, your kids can borrow for college but you can't borrow for your retirement.


Once the doubling period is complete do the bonds continue to appreciate, or do they stay at that value until the interest rate period allows them to catch up?


After they double, EE Bonds continue to earn interest until they reach final maturity at 30 years.


Thanks for clarifying that for me.
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Re: Build Your Own Annuity

Postby Austintatious » Fri Mar 15, 2013 11:58 am

I just recently came across an article on Wade Pfau's blog that touches on some of the concepts considered in this thread. It includes a "guest post" by investment advisor Larry Frank discussing, very generally, the long term viability of annuity providers and their products. I'm not aware of it's having been discussed before, at least in this thread. See http://www.wpfau.blogspot.com and scroll down to the Thursday, February 14, 2013 article entitled Larry Frank Guest Post on Viability of Annuity Providers.
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Re: Build Your Own Annuity

Postby STC » Fri Mar 15, 2013 12:46 pm

yahoo wrote:The very idea of purchasing 20k$/year in EE bonds for 30 years seems ludicrous, given the stingy long term rate of return. It's doubtful EE bonds will even keep up w/ inflation.

This is no way to build an income stream for life. Someone with a 30 year investing horizon should have an asset allocation that tilts towards stocks, the only real engine for growth in a portfolio. This pot of money can then be used(30 years from now) to generate a guaranteed income steam using SPIA's, bonds, value stocks, covered calls, or whatever.


Right horse for right course buddy. The biggest threat to a retirement nest egg is the combination of sudden decline in value with the need to continue to draw down from that nest egg. If you can "hide in your bunker" during times of economic turmoil your outcome will likely be much better then eeking out an incremental 50 basis points on your FI returns during the accumulation phase.

Especially during early retirement this ladder make sense. I started IBonds last year, and will start EEBonds next year (at 35). When I get to retirement at 55 I will have ~$45-$50k per year (in todays dollars) in guaranteed income till 75. At 75 a SPIA makes economic sense to get to the end of the road.

The short-sighted mantra of maximum FI returns during accumulation is just that, short-sighted.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 15, 2013 1:05 pm

STC wrote:Especially during early retirement this ladder make sense. I started IBonds last year, and will start EEBonds next year (at 35). When I get to retirement at 55 I will have ~$45-$50k per year (in todays dollars) in guaranteed income till 75. At 75 a SPIA makes economic sense to get to the end of the road.

Just want to clarify, EE Bonds only provide nominal dollars. I thought today's dollars meant inflation adjusted in the future.
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Re: Build Your Own Annuity

Postby STC » Fri Mar 15, 2013 1:10 pm

rr2 wrote:
STC wrote:Especially during early retirement this ladder make sense. I started IBonds last year, and will start EEBonds next year (at 35). When I get to retirement at 55 I will have ~$45-$50k per year (in todays dollars) in guaranteed income till 75. At 75 a SPIA makes economic sense to get to the end of the road.

Just want to clarify, EE Bonds only provide nominal dollars. I thought today's dollars meant inflation adjusted in the future.


Actually, I do both IBond and EEBond and then assumed a 2.5% inflation rate to come to that inflation adjusted income stream. Its a projection. So could vary.
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Re: Build Your Own Annuity

Postby learning_head » Fri Mar 15, 2013 6:39 pm

bertilak wrote:PPS: Perhps I should look at inflation-indexed annuities. I just remember Wade Pfau's study where inflation-indexed annuities did worse than nominal annuities at avoiding "failures", meaning the overall portfolio not supplying the needed cash flow.


Actually, Phau more recent work finds that inflation-protected SPIA do in fact outperform normal ones if inflation is higher than expected (he used ~4%)... Here is a link to recent post about it, and to the March 2013 article (see Figure 5 as an example on page 8).
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 15, 2013 7:59 pm

STC wrote:
rr2 wrote:
STC wrote:Especially during early retirement this ladder make sense. I started IBonds last year, and will start EEBonds next year (at 35). When I get to retirement at 55 I will have ~$45-$50k per year (in todays dollars) in guaranteed income till 75. At 75 a SPIA makes economic sense to get to the end of the road.

Just want to clarify, EE Bonds only provide nominal dollars. I thought today's dollars meant inflation adjusted in the future.


Actually, I do both IBond and EEBond and then assumed a 2.5% inflation rate to come to that inflation adjusted income stream. Its a projection. So could vary.

Understood. I wish I was as fore-sighted as you are at age 35. That sounds like a good plan. Good luck.
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Re: Build Your Own Annuity

Postby STC » Sat Mar 16, 2013 10:07 am

Thanks. Will see if I can do it. My savings goals are aggressive, and I live in Hoboken NJ (HIGH cost of living).
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Re: Build Your Own Annuity

Postby DualIncomeNoDebt » Sat Mar 16, 2013 10:23 am

How are people purchasing $20k in EE bonds per year, as discussed above? TD says max is $10k per year per SS number.
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Re: Build Your Own Annuity

Postby Austintatious » Sat Mar 16, 2013 10:38 am

DualIncomeNoDebt wrote:How are people purchasing $20k in EE bonds per year, as discussed above? TD says max is $10k per year per SS number.


I think they're talking about $20K for a household couple, like a husband and wife.
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Re: Build Your Own Annuity

Postby STC » Sat Mar 16, 2013 10:54 am

DualIncomeNoDebt wrote:How are people purchasing $20k in EE bonds per year, as discussed above? TD says max is $10k per year per SS number.


His:
$10k IBond
$10k EEBond

Her:
$10k IBond
$10k EEBond

You can add another $5k each to Ibond with tax refund. I have not yet done that
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Re: Build Your Own Annuity

Postby Chizz » Sun Dec 29, 2013 5:37 pm

In looking at creating an annuity to cover living expenses over the next 40 to 50 years I see the tiger in the closet being inflation. I have fond It is possible to create an inflation protected stream of income by buying, over the next 10 to 15 years, I-bonds, 10yr tips, and 30yr tips. This can begin paying in as little as 5 years and continue well past mid century. The ee-bond is only better than the I-bond if held for 20 years and inflation stays very low. The I-bond can be sold at any time after the fifth year which make them ideal for filling in income gaps before, between and after the tips mature, all this with no inflation risk. I lived thru the 70s' and 80s', Imo the limited (1-2%) probable interest rate advantage of ee-bonds over the short term does not make up for the possible inflation risk over the long term.
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