Want income but preserve capital

Firewood42 · Post by **Firewood42** » Wed Oct 16, 2013 6:34 am

I am 71 and my wife is 68. We have $300,000 in cash that we would like to get 5 percent income from with total safety. Our original plan was to use CD's but the interest rates are next to nothing. We own our own home, new vehicle, totally out of debt but would like to enjoy our retirement more with income from this money. Any suggestions?

I should add this money is all in an IRA with Fidelity.

market timer · Post by **market timer** » Wed Oct 16, 2013 6:41 am

How about an annuity?

dad2000 · Post by **dad2000** » Wed Oct 16, 2013 6:43 am

Sorry, if there were a guaranteed safe 5% right now, many of us would be heavily invested in it.

All that I can think of is that you can get 2% on some shorter term CDs, and blend it with some equity risk.

Wricha · Post by **Wricha** » Wed Oct 16, 2013 6:53 am

Go to : http://www.immediateannuities.com you can get $1600/month or 6.4% return on CAPITAL nothing left when you are both gone.

Firewood42 · Post by **Firewood42** » Wed Oct 16, 2013 7:02 am

I have looked into annuities but the idea of giving my hard earned money for a monthly income doesn't appeal to me. I would really like to leave my children some money. We are a real close family and they have done everything right but educating 9 grandchildren is so expensive these days that they could use some money when we are gone.

tibbitts · Post by **tibbitts** » Wed Oct 16, 2013 7:29 am

Some problems/questions have no solutions. This is one of them.

Paul

Aptenodytes · Post by **Aptenodytes** » Wed Oct 16, 2013 7:45 am

Might as well aim for 12 percent safe return. Not possible. Need to set a realistic goal. Suggest you read the getting started part of the wiki. You need an IPS.

Toons · Post by **Toons** » Wed Oct 16, 2013 7:51 am

5% income with TOTAL safety?
Sign Me Up

market timer · Post by **market timer** » Wed Oct 16, 2013 8:00 am

Firewood42 wrote:I have looked into annuities but the idea of giving my hard earned money for a monthly income doesn't appeal to me. I would really like to leave my children some money. We are a real close family and they have done everything right but educating 9 grandchildren is so expensive these days that they could use some money when we are gone.

If I were in your situation, I'd buy the annuity and help family with any extra income on an ongoing basis, rather than all at once at some uncertain date as an inheritance.

dbr · Post by **dbr** » Wed Oct 16, 2013 8:12 am

Firewood42 wrote:I have looked into annuities but the idea of giving my hard earned money for a monthly income doesn't appeal to me. I would really like to leave my children some money. We are a real close family and they have done everything right but educating 9 grandchildren is so expensive these days that they could use some money when we are gone.

This is intended with full respect: Unfortunately you are saying that you want both to spend your money and leave your money to your children. That can't be done at the level you might want.

But more productively, the best use of an SPIA type annuity would usually be to sacrifice part of your assets for income and save the other part for emergencies and to eventually pass on. For example, putting $150,000 into the annuity could generate a fixed lifetime income of about $800/month or a payout rate of about 6.4%. That would be guaranteed for your joint lifetimes. There would then be $150,000 you could leave untouched for heirs, if $800/month is an amount you are willing to stay under for spending. Note that all of this is at risk to inflation as the value of a fixed payout can be significantly reduced over time. The same applies to maintaining the value of assets; unless the balance increases over time the purchasing power of the money steadily decreases with inflation.

If you wait to a more advanced age without spending down the assets too much, annuity payouts go up a lot and could be a strategy.

It can also be a reasonable choice to help people now when you have the assets to do it, but one must be careful that the more you give away the less income you will be able to support for yourself.

Grt2bOutdoors · Post by **Grt2bOutdoors** » Wed Oct 16, 2013 8:17 am

Firewood42 wrote:I am 71 and my wife is 68. We have $300,000 in cash that we would like to get 5 percent income from with total safety. Our original plan was to use CD's but the interest rates are next to nothing. We own our own home, new vehicle, totally out of debt but would like to enjoy our retirement more with income from this money. Any suggestions?

I should add this money is all in an IRA with Fidelity.

Impossible!!

Sorry, but the last time I saw close to 5% yields was over 5 years ago and you'd have to go out 10 years to get it. Yield and total safety are not synonomous with each other.

Grt2bOutdoors · Post by **Grt2bOutdoors** » Wed Oct 16, 2013 8:19 am

Firewood42 wrote:I have looked into annuities but the idea of giving my hard earned money for a monthly income doesn't appeal to me. I would really like to leave my children some money. We are a real close family and they have done everything right but educating 9 grandchildren is so expensive these days that they could use some money when we are gone.

How about an annuity with a 20 year minimum payout - if you make it to 91, you get your money back overtime. If you don't, your beneficiaries do. Wish I had a better suggestion - everyone I know is in the same raft, can't even call it a boat these days.

dbr · Post by **dbr** » Wed Oct 16, 2013 8:22 am

Grt2bOutdoors wrote:
Firewood42 wrote:I have looked into annuities but the idea of giving my hard earned money for a monthly income doesn't appeal to me. I would really like to leave my children some money. We are a real close family and they have done everything right but educating 9 grandchildren is so expensive these days that they could use some money when we are gone.
How about an annuity with a 20 year minimum payout - if you make it to 91, you get your money back overtime. If you don't, your beneficiaries do. Wish I had a better suggestion - everyone I know is in the same raft, can't even call it a boat these days.

There are varieties of riders that provide for return of capital under various circumstances, at a cost to the payout, of course.

jebmke · Post by **jebmke** » Wed Oct 16, 2013 8:37 am

market timer wrote:How about an annuity?

Doesn't preserve capital. In fact, it guarantees that capital is gone.

midareff · Post by **midareff** » Wed Oct 16, 2013 8:41 am

Toons wrote:5% income with TOTAL safety?
Sign Me Up

Me 2, and while we are at it let's guarantee inflation to be no more than 2%.

Dandy · Post by **Dandy** » Wed Oct 16, 2013 8:57 am

5% with no risk - doesn't exist anymore. You should look into several annuities. It is usually not a good idea to put more than what your state "guarantees" into any one company. The state doesn't really guarantee I believe it just assesses annuity companies that do business in the state to support annuities for their residents up to -- say $100k in case of bankruptcy of annuity company. So you don't want to put more than that amount in any single insurance company.

You also have to decide on whether or not to have a joint annuity that will pay until the longest living dies (but pays less). vs annuities on single lives.

Also, most recommend that only a fraction of your assets be committed to annuities --say 25%

KyleAAA · Post by **KyleAAA** » Wed Oct 16, 2013 9:01 am

You aren't going to be able to generate 5% without taking significant risk. IF retaining control of your principal is important to you, perhaps a conservative asset allocation of about 20% stocks/80% short-term bonds/TIPS would work. You wouldn't be exposed to TOO much risk, but it would still be there.

Aptenodytes · Post by **Aptenodytes** » Wed Oct 16, 2013 9:04 am

OK -- everyone agrees you need to change your goal.

The annuities are red herrings. They might be a good idea, but so might a conventional 3-fund portfolio. In any event, an annuity cannot possibly return 5% net, so it is not the alchemy you seek.

gerrym51 · Post by **gerrym51** » Wed Oct 16, 2013 9:11 am

I want 10 percent

sscritic · Post by **sscritic** » Wed Oct 16, 2013 9:36 am

I want a time machine.

Post by **LadyGeek** » Wed Oct 16, 2013 9:40 am

I want this thread to stay on-topic.

Grt2bOutdoors · Post by **Grt2bOutdoors** » Wed Oct 16, 2013 9:44 am

LadyGeek wrote:I want this thread to stay on-topic.

+1 - I think the OP has gotten the message, 5% totally safe yields does not exist. There are a couple of ideas about how to get closer to his objective, but there is no perfect solution. Stay tuned though, if a default does happen, you may get your 5% yield on either the 30 year or 10 year (if you act fast enough), but that depends on how drastic the market reaction will be.

Imdeng · Post by **Imdeng** » Wed Oct 16, 2013 10:14 am

While 5% with "total" safety does not exist, I believe you can get pretty close to it with a little bit of risk. For example - VWESX has a 5% yield right now - it does have some interest rate risk and credit risk - but it wouldn't keep you awake at night like stocks would. A conservative allocation (like Wellesley, not recommending, just an example) provides 3%+ yield with reasonable capital appreciation possibilities.

Just shift the "total" safety expectation to "reasonable" safety expectation - and several options open up to get a 5% return and also preserving (and growing) capital.

FinancialDave · Post by **FinancialDave** » Wed Oct 16, 2013 10:51 am

Just shift the "total" safety expectation to "reasonable" safety expectation - and several options open up to get a 5% return and also preserving (and growing) capital.

+1

My current retirement dividend strategy is doing over 6%, so dialing it back to 5% would allow for even some possible growth.

I do believe in a few years interest rates "could" improve, so just holding on to your capital, or unwinding your current expectations could help you meet your long term goal, if you don't do "silly" right now by putting it all in an annuity.

fd

Toons · Post by **Toons** » Wed Oct 16, 2013 11:03 am

sscritic wrote:I want a time machine.

LOL....

Firewood42 · Post by **Firewood42** » Wed Oct 16, 2013 3:49 pm

Thanks for the advice. I am going to have to make a decision pretty soon as it has been in cash too long. Ah for the good old days when my dad and grandpa enjoyed 6 per cent cd's and 30cent a gallon gasoline. Looks like we won't be able to travel as much as they did.

dm200 · Post by **dm200** » Wed Oct 16, 2013 3:57 pm

A ladder of brokered CDs - perhaps going out 5 years or so. Five year rates on brokered CDs would be about 2.10 -2.20%. Perhaps even go out 6 or 7 years?

You will NOT get your 5%, but you will have no loss of principal.

With $300,000 - a ladder might go $60,000 - 1,2,3,4,5 years each; a six year ladder might be $50,000 each year. Perhaps keep $25-$50,000 for spending modestly.

ogd · Post by **ogd** » Wed Oct 16, 2013 4:28 pm

Can't be done right now -- you have to either give up the 5% or the complete safety. Your money simply isn't as valuable to potential creditors as it used to be, in this slow economy.

Closest "safe" investments to that number are long-term bonds: Treasuries at 3.5% or mixed Treasuries + high grade corporates at 4.5% (VLGSX and VBLTX, respectively). I'm putting "safe" between quotes because while credit risk is negligible (as of this afternoon), they have significant interest rate risk (which won't affect your returns in the long term) and inflation risk (which will). Both of these are also risks of a non-inflation indexed annuity.

Highest yielding investments with absolute safety: non-brokered CDs (i.e. direct), at 2%. These have no interest rate risk if you can do early withdrawals, and inflation risk is mitigated by the same. I.e. if inflation and interest rates spike up, you can withdraw and reinvest at the higher rates that are expected to be available, or just wait out the relatively short 5 years.

TIPS, which are safe from inflation, yield so little that they're not even worth mentioning here.

By taking some risk, e.g. 30-40% stocks in a balanced fund like Vanguard's LifeStrategy Conservative Growth, or Target Retirement Income, or Wellesley, you might be able to come closer to your number with more hope of preserving some capital for your heirs, and rely on stocks to keep up with inflation to some degree. This is what I'd recommend to my parents if they could access them.

You should also consider Vanguard's free financial plan service at your asset levels. They are very good at this, I think.

reggiesimpson · Post by **reggiesimpson** » Wed Oct 16, 2013 4:30 pm

http://www.learnbonds.com/20-individual ... ng-over-5/ This may whet your appetite.

orlandoman · Post by **orlandoman** » Wed Oct 16, 2013 4:40 pm

Here's a not mentioned option, 'CD type' annuities. Current rates:
10 year - 3.65% $200,000 min; 3.4% $10,000 min
5 year - 2.5% $200,000 min; 2.25% $10,000 min

Google 'Multi-Year Guaranteed Fixed Annuity Rates' for all options

At the end of the period, you can either annuitize or get all your principal plus interest back. Be aware that there is a surrender charge for early termination. The surrender charge is 'X%' (depends on co. & term) and goes down to 0% at the end of the term.

pkcrafter · Post by **pkcrafter** » Wed Oct 16, 2013 5:49 pm

Firewood, if you are designating the 300k for your family's retirement, the usual advice is it is fine to use a good portion of equities because the time horizon is very long. If this is a taxable account, you could use tax-managed balanced, which is 50/50. The other thing you can do is gift cash money each year to members of your family or offer to help fund a Roth. If your primary concern is for your own needs as a back up, then some equity is still appropriate because you appear to have good financial capacity to take risk. If that's not acceptable, then your choices are low-yielding bonds and cash investments.

Paul

grayfox · Post by **grayfox** » Wed Oct 16, 2013 6:05 pm

Firewood42 wrote:I am 71 and my wife is 68. We have $300,000 in cash that we would like to get 5 percent income from with total safety. Our original plan was to use CD's but the interest rates are next to nothing. We own our own home, new vehicle, totally out of debt but would like to enjoy our retirement more with income from this money. Any suggestions?

I should add this money is all in an IRA with Fidelity.

Some of the long-term bond funds are almost 5%

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX) SEC Yield 4.80%

Number of bonds 503
Yield to maturity 5.2%
Average coupon 5.7%
Average maturity 24.6 years
Average duration 13.6 years

Distribution by credit quality* (% of fund) as of 09/30/2013
U.S. Government 5.3%
Aaa 1.6%
Aa1 1.9%
Aa2 6.7%
Aa3 7.5%
A1 13.1%
A2 21.3%
A3 20.9%
Baa1 19.2%
Baa2 2.7%
Baa3 0.2%
Cash -0.4%
Total 100.0%

joe8d · Post by **joe8d** » Wed Oct 16, 2013 7:21 pm

Firewood42 wrote:I am 71 and my wife is 68. We have $300,000 in cash that we would like to get 5 percent income from with total safety. Our original plan was to use CD's but the interest rates are next to nothing. We own our own home, new vehicle, totally out of debt but would like to enjoy our retirement more with income from this money. Any suggestions?

I should add this money is all in an IRA with Fidelity.

Ah, for the old days when you could get 5.75 % from a saving bank passbook account

FinancialDave · Post by **FinancialDave** » Wed Oct 16, 2013 11:52 pm

If you are going to venture into any funds at all you might want to consider the Vanguard Managed Payout Distribution Focus. It is pegged to yield 7%, so if you only draw 5% I think this is a pretty good option with a high likely hood of success for you.

It's 3 year return has been 9.6% and it's 5 year has been 5.3%. Unfortunately not much track record beyond that, as it was established in 2008.

fd

redhounds · Post by **redhounds** » Thu Oct 17, 2013 1:52 pm

FinancialDave wrote:If you are going to venture into any funds at all you might want to consider the Vanguard Managed Payout Distribution Focus. It is pegged to yield 7%, so if you only draw 5% I think this is a pretty good option with a high likely hood of success for you.

It's 3 year return has been 9.6% and it's 5 year has been 5.3%. Unfortunately not much track record beyond that, as it was established in 2008.

fd

Actually, that fund will be rolled into another of the Managed Payout funds and the payout will be set at 4% as of January of next year. https://personal.vanguard.com/us/insigh ... w-10162013

Abe · Post by **Abe** » Thu Oct 17, 2013 2:12 pm

joe8d wrote:
Firewood42 wrote:I am 71 and my wife is 68. We have $300,000 in cash that we would like to get 5 percent income from with total safety. Our original plan was to use CD's but the interest rates are next to nothing. We own our own home, new vehicle, totally out of debt but would like to enjoy our retirement more with income from this money. Any suggestions?

I should add this money is all in an IRA with Fidelity.
Ah, for the old days when you could get 5.75 % from a saving bank passbook account

I remember when pass book saving accounts paid 5.25%, and I thought that was really low because you could get CD's paying 7%. I never dreamed back then that interest rates would go this low and stay so long. Just goes to show you, you can't assume anything.

PacNorWest · Post by **PacNorWest** » Thu Oct 17, 2013 2:47 pm

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Woodshark · Post by **Woodshark** » Thu Oct 17, 2013 5:10 pm

A totally off the wall idea is to buy a rental home in your area. If you buy in a good neighborhood a 5% yield after taxes etc is very easy to do plus the house should retain it's value or even go up over time. This could give you a nice income stream and the house could be sold at a nice profit at some point in the future.

Firewood42 · Post by **Firewood42** » Thu Oct 17, 2013 8:32 pm

Since this is a taxable IRA, I have to pay regular income tax on the approx. $10,000 minimum withdrawal. So I do want to keep the funds in an IRA no matter what I invest in. I pay very little income tax at a $10,000 withdrawal rate. Will be looking into some of the funds mentioned. Would also like to keep it in Fidelity if possible although I have been looking into Vanguard funds. Don't want to give any money to my children now as we may need it. They are doing fine, but when they finish raising their children, it would be nice to leave them something to help with their retirement.

newbogleb · Post by **newbogleb** » Thu Oct 17, 2013 9:11 pm

Is there a median time that Non-trade REIT's wait until they go public? I can afford to wait a while, I just need to know for my A.A.

PacNorWest wrote:Re: Want income but preserve capital
by PacNorWest » Thu Oct 17, 2013 5:17 pm

I'm not sure that this online forum is the best place to obtain ALL the information that you seek.
A financial advisor can get you what you want. BUT you did not mention "liquidity" in your specification.

Non-trade REIT's pretty much pay 6.5 percent - BUT you cannot redeem the principle unless/until the REIT goes public.
For example, at my discretion, my FA put me in Cole REIT before it went public (it is now trading on the NYSE as COLE).
It paid 6.5% which I reinvested in shares at a discounted price through my FA.
That REIT owned commercial real estate such as HomeDepot, Lowes, Walgreen, etc. etc. and the REIT was making property acquisitions during the recession crisis. It seemed like a pretty "safe" place to put capital. (It was and is a safe bet.)

I really don't care how much money my Financial Adviser made when I purchased the non-traded REIT product.
I clearly came out ahead.
Non-traded REIT's are products available through financial advisers.

Financial advisers are mostly disparaged on Bogleheads.org None-the-less, there are some VERY good FA's out there.
And they offer products that meet your posted specifications.

Bear in mind, these products are not gold-plated risk-free and may not be suitable for everyone.

PacNorWest · Post by **PacNorWest** » Fri Oct 18, 2013 8:48 am

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