4-6% a year

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Topic Author
fblade007
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Joined: Mon Jul 11, 2016 2:58 pm

4-6% a year

Post by fblade007 »

Hello,

My parents are about to sell their house and downsize. The remaining cash - anything between 50-150K they would like to invest in a separate rental property to achieve the above ROI. They are honestly just looking for an additional 500-1000 USD a month if possible.

Isn't there any REIT ETF or Bonds fund that can generate the same ROI but with less the headache, more liquidity than a brick house and monthly or more pay outs? Needs to be super safe and they can live with downturns and aren't planning on selling that one particular fund/ETF.

Thanks,
fblade
AlohaJoe
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Re: 4-6% a year

Post by AlohaJoe »

No, there is nothing that is super safe and pays out 6% a year right now.
runner540
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Re: 4-6% a year

Post by runner540 »

How old are they? Is there any need to preserve principal? If not, they could draw 4% a year for 25 years.
delamer
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Re: 4-6% a year

Post by delamer »

Can you explain what you mean by "needs to be super safe and they can live with downturns?" Those two things are generally contradictory when it comes to investing.

They could invest $150K in the Vanguard Balanced fund and get $6K per year with 4% withdrawals.
tibbitts
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Re: 4-6% a year

Post by tibbitts »

fblade007 wrote:Hello,

My parents are about to sell their house and downsize. The remaining cash - anything between 50-150K they would like to invest in a separate rental property to achieve the above ROI. They are honestly just looking for an additional 500-1000 USD a month if possible.

Isn't there any REIT ETF or Bonds fund that can generate the same ROI but with less the headache, more liquidity than a brick house and monthly or more pay outs? Needs to be super safe and they can live with downturns and aren't planning on selling that one particular fund/ETF.

Thanks,
fblade
Your premise is wrong. Over any period of time a single directly owned property is extremely risky, not "super safe." There is no guarantee of any ROI, much less 4-6%. But if they believe that such an investment will provide what they want, and it might (just as equities or many other investments might), then you shouldn't dissuade them - they need to "own" the decision.

Regarding downturns we've become accustomed to these huge market downturns that at least mostly reverse relatively quickly, but there are no guarantees that will always happen. A downturn could easily outlast them.

Also you don't really want 4-6% nominal, you want some percentage of real return, and that's going to be even harder to come by.
TBillT
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Re: 4-6% a year

Post by TBillT »

The bond fund PONDX pays about 5%.
Another fund PTIAX is also about 5%, and the two funds PONDX/PTIAX are different enough so they are complimentary as a pair.
As always market risk of loss is your problem, you have to do what you are comfortable with.
I would also consider (and use myself) individual bonds.
autopeep
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Re: 4-6% a year

Post by autopeep »

They should consider a single premium annuity (SPIA). Almost certainly a better option than a high risk bond fund.

https://www.bogleheads.org/wiki/Immediate_fixed_annuity
tibbitts
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Re: 4-6% a year

Post by tibbitts »

autopeep wrote:They should consider a single premium annuity (SPIA). Almost certainly a better option than a high risk bond fund.

https://www.bogleheads.org/wiki/Immediate_fixed_annuity
That's an excellent idea - possibly an inflation-adjusted one - but obviously involves giving up the money, if the parents are okay with that.
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Earl Lemongrab
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Re: 4-6% a year

Post by Earl Lemongrab »

autopeep wrote:They should consider a single premium annuity (SPIA). Almost certainly a better option than a high risk bond fund.
They'd probably have to be on the high end of the sale price to get in the right range, unless they're very old. For two 65 YOs, a 150k annuity would generate about $700 a month. If they get closer to the 50k number or are significantly younger then the numbers won't be even that good.
Topic Author
fblade007
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Re: 4-6% a year

Post by fblade007 »

delamer wrote:Can you explain what you mean by "needs to be super safe and they can live with downturns?" Those two things are generally contradictory when it comes to investing.
They could invest $150K in the Vanguard Balanced fund and get $6K per year with 4% withdrawals.


runner540 wrote:How old are they? Is there any need to preserve principal? If not, they could draw 4% a year for 25 years.
60 years old- bothof them.
tibbitts wrote: Your premise is wrong. Over any period of time a single directly owned property is extremely risky, not "super safe." There is no guarantee of any ROI, much less 4-6%. But if they believe that such an investment will provide what they want, and it might (just as equities or many other investments might), then you shouldn't dissuade them - they need to "own" the decision.

Regarding downturns we've become accustomed to these huge market downturns that at least mostly reverse relatively quickly, but there are no guarantees that will always happen. A downturn could easily outlast them.

Also you don't really want 4-6% nominal, you want some percentage of real return, and that's going to be even harder to come by.
You are correct hence why I do not want them to buy a single house but I was looking at REIT.

So there is no way to get my parents some decent extra income with 50K-to-150K ? I find that hard to believe but I just don't know. To clarify what I mean with safe investments: I'm not looking for bitcoins or individual stocks. I could live with Individual bonds (any ideas ?) but I would prefer ETF/Funds as I am more at ease with them. Downturn or not they do not need the cash that they will be investing anytime soon as they are from Europe and have full pension and social security - just looking for extra income so they don't have to use their other cash savings for the crazy stuff they planning (like eating at a restaurant lol)

Thanks!
CedarWaxWing
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Re: 4-6% a year

Post by CedarWaxWing »

TBillT wrote:The bond fund PONDX pays about 5%.
Another fund PTIAX is also about 5%, and the two funds PONDX/PTIAX are different enough so they are complimentary as a pair.
As always market risk of loss is your problem, you have to do what you are comfortable with.
I would also consider (and use myself) individual bonds.
http://portfolios.morningstar.com/fund/ ... ture=en-US

PONDX appears to be "-51.xx % Cash) and "151.xx % bonds".

How can that be? Does that mean it is leveraged with borrowed money?

What are their differences that would make them complimentary as a pair?

And the fact that the bonds are not rated is not bothersome?


thanks
Dottie57
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Re: 4-6% a year

Post by Dottie57 »

Immediateannuities.com - the top money maker pays out 5.27% a year of the premium

Payout will be less with cola.
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Kevin M
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Re: 4-6% a year

Post by Kevin M »

I don't think it's the effective way to look at things, but if you want to just focus on income, Vanguard high-yield corporate fund admiral shares has an SEC yield of 4.75% and a recent distribution yield of 5.46%. Of course there will be significant price volatility to earn this yield, and you probably should expect the price (NAV) to gradually decline over time.

You can earn a safe nominal return with CDs held to maturity. Top yield on a 5-year CD currently is 2.5%, which is better than the 5-year Treasury yield of 1.8%. To possibly earn more than this, you must take some risk, which by definition means you may also earn less.

As pointed out already, rental real estate is risky. It also requires work.

The unadjusted yield of the Vanguard REIT fund, admiral shares, is 3.93%. This includes return of capital and capital gain distributions. The adjusted effective yield is 2.48%. Vanguard - REIT Index Fund disclaimer. Of course this fund can be extremely volatile, with a maximum drawdown of -68%, with a drawdown length of 2 years 1 month, and a recovery time of 5 years 5 months: Backtest Portfolio Asset Allocation (click on Drawdowns tab). This is for monthly returns.

So the REIT fund has about the same yield as a good CD, but with enormously more risk.

Kevin
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delamer
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Re: 4-6% a year

Post by delamer »

It is best to look at their liquid portfolio as a whole, rather than isolate the money from their house sale. "Decent income" is in the eye of the beholder; if they invest it half in stocks and half in bonds, then they can comfortably take 4% of their total assets each year without having to be concerned about depleting their nest egg. There is no magic way to get more than that without risking their nest egg.
sport
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Re: 4-6% a year

Post by sport »

Are they experienced landlords? Do they know the costs and risks of owning rental property. Here is a list of some of them:
1. Taxes
2. Insurance
3. Legal fees
4. Accounting fees
5. Maintenance and repairs
6. Loss of income due to vacancy periods
7. Tenants who damage the property
8. Tenants who do not pay
9. Management fees if they do not do it themselves
10. Snow removal/landscaping
11. Decrease in value due to economic conditions (lower rents)
12. Decrease in value due to neighborhood changes (lower rents)
13. Water/sewer bills
14. Pest control
Topic Author
fblade007
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Re: 4-6% a year

Post by fblade007 »

sport wrote:Are they experienced landlords? Do they know the costs and risks of owning rental property. Here is a list of some of them:
1. Taxes
2. Insurance
3. Legal fees
4. Accounting fees
5. Maintenance and repairs
6. Loss of income due to vacancy periods
7. Tenants who damage the property
8. Tenants who do not pay
9. Management fees if they do not do it themselves
10. Snow removal/landscaping
11. Decrease in value due to economic conditions (lower rents)
12. Decrease in value due to neighborhood changes (lower rents)
13. Water/sewer bills
14. Pest control
I see your point and that;s why I am trying to move them away from it. Real Estate (without any type of appreciation) has a 4% RI over here so I'm sure I should be able to find them something equally good with less the headache as said.

I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal... currently, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) seems like the best option. Seems to have survived 2008/2009 pretty well.
Admiral
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Re: 4-6% a year

Post by Admiral »

fblade007 wrote:
sport wrote:Are they experienced landlords? Do they know the costs and risks of owning rental property. Here is a list of some of them:
1. Taxes
2. Insurance
3. Legal fees
4. Accounting fees
5. Maintenance and repairs
6. Loss of income due to vacancy periods
7. Tenants who damage the property
8. Tenants who do not pay
9. Management fees if they do not do it themselves
10. Snow removal/landscaping
11. Decrease in value due to economic conditions (lower rents)
12. Decrease in value due to neighborhood changes (lower rents)
13. Water/sewer bills
14. Pest control
I see your point and that;s why I am trying to move them away from it. Real Estate (without any type of appreciation) has a 4% RI over here so I'm sure I should be able to find them something equally good with less the headache as said.

I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal... currently, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) seems like the best option. Seems to have survived 2008/2009 pretty well.
You're not getting the easy answer you want because it doesn't exist. We no longer live in a high-interest rate world where ultra-safe investments like bank deposits and CDs yield significant (or, in your case 4-6% real) returns. We might get back there someday, but not tomorrow. Can you make 5%? Probably, but it won't be guaranteed or safe.

To make that kind of return your best bet is to invest it in a diversified portfolio with low expenses and withdraw the money as needed---with the knowledge that 4% may, or may not, deplete the portfolio more than you are comfortable with. If they have plenty of other assets, then this would be the best course of action.
delamer
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Re: 4-6% a year

Post by delamer »

fblade007 wrote:
sport wrote:Are they experienced landlords? Do they know the costs and risks of owning rental property. Here is a list of some of them:
1. Taxes
2. Insurance
3. Legal fees
4. Accounting fees
5. Maintenance and repairs
6. Loss of income due to vacancy periods
7. Tenants who damage the property
8. Tenants who do not pay
9. Management fees if they do not do it themselves
10. Snow removal/landscaping
11. Decrease in value due to economic conditions (lower rents)
12. Decrease in value due to neighborhood changes (lower rents)
13. Water/sewer bills
14. Pest control
I see your point and that;s why I am trying to move them away from it. Real Estate (without any type of appreciation) has a 4% RI over here so I'm sure I should be able to find them something equally good with less the headache as said.

I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal... currently, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) seems like the best option. Seems to have survived 2008/2009 pretty well.


Above, I specifically suggested a 50 stock/50 bond portfolio -- which you could do with two funds -- would allow your parents to withdraw 4% without fear of depleting their assets. How is that not answering your question?
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arcticpineapplecorp.
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Re: 4-6% a year

Post by arcticpineapplecorp. »

fblade007 wrote: I see your point and that;s why I am trying to move them away from it. Real Estate (without any type of appreciation) has a 4% RI over here so I'm sure I should be able to find them something equally good with less the headache as said.

I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal... currently, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) seems like the best option. Seems to have survived 2008/2009 pretty well.
First off, if I were going to use the high yield corporate fund (which I'm not sure I'd do that. you'll see why in a moment), I would use VWEAX instead of VWEHX. The difference? 0.10% per year. VWEHX are investor shares, but if you instead choose admiral you save money. However, the VWEAX has a minimum $50,000 to get the lower fee instead of $3000 minimum as with VWEHX. But you said they're looking to invest "anything between 50-150K" so that shouldn't be a problem, right?

Now with that out of the way, let's check what you said (two great things that go great together):

#1.
I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal"
It's not that anyone can't help you get 4-6%, it's that not only is it inconsistent with your request that it be "super safe" but your own original statement, "Needs to be super safe and they can live with downturns and aren't planning on selling that one particular fund/ETF" is inconsistent. If it is super safe, then why would there be downturns in the first place??? See what I mean?

So you have to determine if they want safety or growth. The two are incompatible. Have you noticed lately that we're in a low interest rate environment? That means you shouldn't expect safe assets to offer much growth. If you're looking for growth, that means having to take risk, which means it can't be "super safe". So first you need to get clear on what you're even asking for and if it makes sense. Is the goal safety or growth. Can't be both. Which is it gonna be? Then and only then once you've figured that out can you start the process of choosing a fund to achieve either that safety OR growth. Not both. Sorry, don't kill the messenger.

#2. You say the high yield corporate fund "Seems to have survived 2008/2009 pretty well." Did it? What's your definition of that? Let's take a look at how it did between 2008-2009 (your choice of years). Since you picked those years I'll look at 1/1/08-12/31/09. If you want a different set of dates you'll have to be more specific than just 2008/2009:

Now if by "did pretty well" you mean it ended up and not down (started with $10,000 on 1/1/08 and ended with $10,975 on 12/31/09) sure. But you do notice the fund fell by 28.48% between 1/1/08 and 12/5/08. Is that your idea of "super safe"? Are you absolutely sure your parents won't "plan on selling that one particular fund"???

Image

source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
chinto
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Re: 4-6% a year

Post by chinto »

Out of curiosity I just priced an immediate annuity (as in minutes ago). For a 55 year old male it yielded 5.73%,which is in the range of what you are looking for. I would tend to go to the lower end of what they want cash flow wise and invest anything left over in CDs or preferably a equity index fund, which, without respect toward principle balance should yield 1.7 to 3.4.

For example ITOT total stock market yield 1.73 ER of .03%
IVV S&P500 yield 1.87& ER of .04
DGRO Dividend Growth yield 2.15 ER .08%
HDV High Dividend yield 3.35 ER .08%

Honestly, if it were my parents I would look at 50% annuity and 50% in HDV or DGRO

If you go with a 50% annuity and 50% in HDV that gives you a yield of 4.54%, right in the middle of your target with a level of inflation protection.

and 50% annuity with 50% DGRO puts you at 3.94% once again with a level of inflation protection.

You can play around with percentages, I would consider 40-70% in an annuity and I really would want at least 30% in equities to counter inflation and perhaps a bit of growth (hence the reason I included ITOT an IVV)
smitcat
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Re: 4-6% a year

Post by smitcat »

fblade007 wrote:
sport wrote:Are they experienced landlords? Do they know the costs and risks of owning rental property. Here is a list of some of them:
1. Taxes
2. Insurance
3. Legal fees
4. Accounting fees
5. Maintenance and repairs
6. Loss of income due to vacancy periods
7. Tenants who damage the property
8. Tenants who do not pay
9. Management fees if they do not do it themselves
10. Snow removal/landscaping
11. Decrease in value due to economic conditions (lower rents)
12. Decrease in value due to neighborhood changes (lower rents)
13. Water/sewer bills
14. Pest control
I see your point and that;s why I am trying to move them away from it. Real Estate (without any type of appreciation) has a 4% RI over here so I'm sure I should be able to find them something equally good with less the headache as said.

I am just honestly surprised no-one is able to answer to the point on how to make 4-6% which doesn't even look like an unreachable goal... currently, the Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) seems like the best option. Seems to have survived 2008/2009 pretty well.
You have not explained the rest of their holdings which could easily affect the amount of funds they have after taxes, which in turn will affect the best choices. With both of them at 60 their health needs to come into the picture as well - we are in a similar age and timeframe.
TBillT
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Re: 4-6% a year

Post by TBillT »

CedarWaxWing wrote:
TBillT wrote:The bond fund PONDX pays about 5%.
Another fund PTIAX is also about 5%, and the two funds PONDX/PTIAX are different enough so they are complimentary as a pair.
As always market risk of loss is your problem, you have to do what you are comfortable with.
I would also consider (and use myself) individual bonds.
http://portfolios.morningstar.com/fund/ ... ture=en-US

PONDX appears to be "-51.xx % Cash) and "151.xx % bonds".

How can that be? Does that mean it is leveraged with borrowed money?

What are their differences that would make them complimentary as a pair?

And the fact that the bonds are not rated is not bothersome?


thanks
There is another recent thread on that subject, but yes I think it relates to techniques used by PONDX...
ACM4297
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Re: 4-6% a year

Post by ACM4297 »

Vanguard Wellesley Income (VWINX) might be your best option or maybe Target Date Income (VTINX).
t3chiman
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Re: 4-6% a year

Post by t3chiman »

fblade007 wrote:....Isn't there any REIT ETF or Bonds fund that can generate the same ROI but with less the headache, more liquidity than a brick house and monthly or more pay outs?...
VHT has averaged 9.8% annual return since 2004.
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arcticpineapplecorp.
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Re: 4-6% a year

Post by arcticpineapplecorp. »

t3chiman wrote:
fblade007 wrote:....Isn't there any REIT ETF or Bonds fund that can generate the same ROI but with less the headache, more liquidity than a brick house and monthly or more pay outs?...
VHT has averaged 9.8% annual return since 2004.
Yes it has. But with all due respect, the OP is reflecting on how a particular investment performed between 2008-2009...s/he specifically mentioned that with regards to the high yield corporate, so we must assume at a minimum s/he's concerned about volatility. How did the vanguard health care fund do between 1/1/08-12/31/09 (again, using his dates, not mine)? Let's see (VHT for the uninitiated is the vanguard health care ETF). I chose to use the fund, admiral share class instead of the ETF to look at percentage/dollar growth/losses with dividends reinvested not just price changes:

Ended down around 7% over that entire time period, but fell as much as 36.1% just between 1/1/08-3/6/09. Again I ask, is s/he concerned about volatility? Will his/her parents really stay the course if they see the safety they want go away during a two year period...in which they're trying to generate 4-6% per year?

Image

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
t3chiman
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Re: 4-6% a year

Post by t3chiman »

arcticpineapplecorp. wrote:... How did the vanguard health care fund do between 1/1/08-12/31/09 (again, using his dates, not mine)? Let's see (VHT for the uninitiated is the vanguard health care ETF). I chose to use the fund, admiral share class instead of the ETF to look at percentage/dollar growth/losses with dividends reinvested not just price changes:

Ended down around 7% over that entire time period, but fell as much as 36.1% just between 1/1/08-3/6/09. Again I ask, is s/he concerned about volatility? ...
Those were dark days. Vanguard Health turned $10000 into $6800 before things turned around. But VWEHX turned that same $10000 into $7300. Better, but still tough to watch.
As for "tolerance for volatility", the original poster was ambiguous. The market will fluctuate, as they say.

I have tried sliding the compare window around the various Vanguard funds, and it is not difficult to show the health care funds taking a relative beating compared to alternatives. But, by and large, the health care fund managers do a fine job, bettering their colleagues' performances by 2-3 percentage points annually. Over time, that gap adds up. Does the excellent [long-term] performance justify the apparent [short-term] volatility? Only the OP can say.
Topic Author
fblade007
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Re: 4-6% a year

Post by fblade007 »

Hi All -

Appreciate the feedback and sorry for not attending your question faster but preparing for a return to real life from vacation!

Parents are EU based and both have a pension (around 3K a month both added together) but planning a move to be closer to the family.
the House they are selling is worth a total of 500K and they have about 70K savings.
They are looking at downsizing into something worth 350K - save the rest or invest.
I believe that because of the buffer and the pension income they are pretty "downturn" proof, ie they wouldn't have a large need to sell when all goes south.

They are really just looking for some extra income on top of their pension but wouldn't need to withdraw from the capital and can even skip a few months of needed.

What caught my eye until now is:

1) Vanguard Wellesley Income Fund Investor Shares (VWINX) 60 Stocks / 40 Bonds and long running record and limited down side based on 2008 stats.
2) Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) which has a long running record also.

Which is very close to what I am looking for !

Thanks all - back to packing bags now ! Will be back later to check up.
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BeBH65
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Re: 4-6% a year

Post by BeBH65 »

Hello fblade,
fblade007 wrote:Hi All -
Parents are EU based and both have a pension (around 3K a month both added together) but planning a move to be closer to the family.
Please have a look at these wiki pages on investing in US-based assets from outside of the US. In many/most? cases it is not a good idea for no-US based people to invest in US-domiciled funds: double dividend witholding tax and estate tax are best avoided.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
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patrick013
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Re: 4-6% a year

Post by patrick013 »

You could pick up SPYD at a price to yield 4%. Well diversified
and should also have some cap gains. To me a fixed annuity is
like a CD but you get some principal back every year. Some are
priced for lifetime income. Fidelity has good prices for various
fixed annuities also. TSM or the 500 would have the best returns
likely but volatility of returns where some years there's no cap gains
to withdraw is also likely.

SPDR S&P 500 High Dividend ETF, Smart Beta
age in bonds, buy-and-hold, 10 year business cycle
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