Safest 4% Return- WWYD?

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JSparks
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Safest 4% Return- WWYD?

Post by JSparks » Wed Dec 11, 2019 10:04 pm

Let me first mention that I was very unsure about asking this question because I know it's lacking in the detail BH's like to see. I apologize for this but I just need to keep it simple for now.

If a retiree needs a very low risk mutual fund with just a 4% return each year for the next 16 years, what would you suggest right now to get that? She is looking for the safest 4% return.

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Re: Safest 4% Return- WWYD?

Post by whodidntante » Wed Dec 11, 2019 10:16 pm

We might not agree on what very low risk is. For example, I consider a 30/70 allocation scandalously conservative, but you might find it unacceptably risky. It might be helpful if you quantify the acceptable loss you can stand. Is it a big deal to lose 15%?

There is no 4% yielding 16-year bond that is a sure thing. However, if the money doesn't need to last into year 17, you can get there by eating into the principal.

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Re: Safest 4% Return- WWYD?

Post by DesertDiva » Wed Dec 11, 2019 10:16 pm

Does this retiree need to take distributions out of the account? Or will the money simply stay parked for a while?

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tadamsmar
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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Wed Dec 11, 2019 10:36 pm

50/50 stock/bond provides a roughly 4% real return according to historical norms. Not sure if there is one fund that stays at that ratio. The risk is determined once you specify the return. Everybody is shopping for the safest so that equalizes risk on all marketable investments that have a 4% real return.
Last edited by tadamsmar on Thu Dec 12, 2019 11:12 am, edited 6 times in total.

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David Jay
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Re: Safest 4% Return- WWYD?

Post by David Jay » Wed Dec 11, 2019 10:40 pm

We do need more context. A “retiree” who needs “16 years” - what happens at year 16? Why 4%, why not 3.5 or 4.5? Give us a bit more narrative...

How much downside risk are they willing to accept? If the answer is “none” then there is no product that can provide 4%.
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Re: Safest 4% Return- WWYD?

Post by Watty » Wed Dec 11, 2019 10:53 pm

JSparks wrote:
Wed Dec 11, 2019 10:04 pm
If a retiree needs a very low risk mutual fund with just a 4% return each year for the next 16 years, what would you suggest right now to get that? She is looking for the safest 4% return.
Would a ladder of individual TIPS work in her situation?

For example if she has $100k and and needs $4K a year then she could buy $4K in individual TIPS that mature each year for 16 years for $64K and also invest the other $36K.

The TIPS would yield a small amount but if she was holding them in a taxable account she would need to pay for the inflation adjustment each year.

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Re: Safest 4% Return- WWYD?

Post by dbr » Wed Dec 11, 2019 11:07 pm

JSparks wrote:
Wed Dec 11, 2019 10:04 pm
Let me first mention that I was very unsure about asking this question because I know it's lacking in the detail BH's like to see. I apologize for this but I just need to keep it simple for now.

If a retiree needs a very low risk mutual fund with just a 4% return each year for the next 16 years, what would you suggest right now to get that? She is looking for the safest 4% return.
Almost always something stated this way really does not exist. A poster above points out that 50/50 stock/bond balanced portfolio gives roughly the required return and is probably the safest of choices that would do that. The problem is that the person in question would almost certainly not consider either the variation in return or the significant chance of not getting all the money back to be safe at all. But one doesn't know until the person asking is willing to be more specific about what is wanted. A couple of other posters have pointed out that there is a big difference between assuring the withdrawal and assuring the with withdrawal and assuring return of the money at the end. After all an amount of money can be put in a safe deposit box, divided into 16 pieces, and one taken each year ending with nothing -- or into 25 pieces and leave 9 at the end. A person certainly can buy TIPS maturing in 16 years and ensure survival of the real value, but the interest to be earned is less than 1% on those terms.

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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Thu Dec 12, 2019 10:47 am

dbr wrote:
Wed Dec 11, 2019 11:07 pm
JSparks wrote:
Wed Dec 11, 2019 10:04 pm
Let me first mention that I was very unsure about asking this question because I know it's lacking in the detail BH's like to see. I apologize for this but I just need to keep it simple for now.

If a retiree needs a very low risk mutual fund with just a 4% return each year for the next 16 years, what would you suggest right now to get that? She is looking for the safest 4% return.
Almost always something stated this way really does not exist. A poster above points out that 50/50 stock/bond balanced portfolio gives roughly the required return and is probably the safest of choices that would do that. The problem is that the person in question would almost certainly not consider either the variation in return or the significant chance of not getting all the money back to be safe at all. But one doesn't know until the person asking is willing to be more specific about what is wanted. A couple of other posters have pointed out that there is a big difference between assuring the withdrawal and assuring the with withdrawal and assuring return of the money at the end. After all an amount of money can be put in a safe deposit box, divided into 16 pieces, and one taken each year ending with nothing -- or into 25 pieces and leave 9 at the end. A person certainly can buy TIPS maturing in 16 years and ensure survival of the real value, but the interest to be earned is less than 1% on those terms.
I think you are right. I think the poster is, in effect, asking where he can buy some item like a car (or a safe investment) with specific characteristics at about 1/4 of its actual market price.

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Re: Safest 4% Return- WWYD?

Post by lakpr » Thu Dec 12, 2019 11:31 am

I had posted the below in another thread, where the poster was asking for suggestions on how to get some higher yield on money that might be needed in 1-3 years for a home purchase. Perhaps this will be of some use to the OP ...

As was said by other posters above me -- there is NO GUARANTEE about the future yield of this portfolio. But given that stocks and intermediate treasuries usually swing in the opposite directions (if stocks are tanking, people sell them and flee to treasuries; if stocks are soaring, everyone wants to sell lower-yielding instruments like treasuries and capture the market returns ..), this particular blend has been very remarkably consistent in the overall return.
lakpr wrote:
Thu Dec 12, 2019 8:00 am
Lateinvestor,

I think we discussed this point last week, upthread. I recommended, and will again strongly urge, a blend of 20% stocks and 80% intermediate term treasuries. This particular portfolio almost never lost money in the past 2 decades, that includes the dotcom crash of 2001 and the Great Recession of 2008. It lost only a tiny sliver of 0.16% in 2018; to put it in perspective that is only $16.00 on a $10k investment.

See the link below where I used Vanguard funds as proxies for the stock market index and bond market index. I tried to use Fidelity index funds too but the available data goes only back to 2012, hence cannot provide information as to how the portfolio would behave under times of stress (2001 and 2008).

I have also plotted the portfolio using a total bond market index that includes corporate bonds (not just solely intermediate term treasuries), but as you can see, that particular portfolio did lose money in the 2008 recession. So from a principal preservation perspective, it may not be right choice.

https://www.portfoliovisualizer.com/bac ... tion3_2=80

As I also said, treasuries are also exempt from state tax, which is an added advantage.

Please also google the term "Risk Efficient Frontier". Basically it is a hockey stick shaped graph that measures risk against returns. A 100% bonds allocation has more risk than a 20:80 blend (the base of the hockey stick), but the latter portfolio has higher returns.

Edited to add: a 100% allocation to intermediate term treasuries actually performed significantly worse over the past 2 decades, and did lose money during some years. You can see that in the link above. It must be a 20:80 blend

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Re: Safest 4% Return- WWYD?

Post by fuddbogle » Thu Dec 12, 2019 11:51 am

This may not be as safe as they'd like but with only what you've described, I'd invest here:

Vanguard LifeStrategy Income Fund (VASIX)

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Re: Safest 4% Return- WWYD?

Post by livesoft » Thu Dec 12, 2019 12:05 pm

Does the 4% return need to be used as income, that is paid out by the investment? Or is it simply put back into the investment? Is there a possibility that the investment would need to be sold and withdrawn either partially or entirely before the 16 years has past?

If the investor dies, do they care if the investment gets passed heirs or goes to zero upon death?
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Re: Safest 4% Return- WWYD?

Post by illumination » Thu Dec 12, 2019 12:09 pm

I would probably do something like 40/60 equities to fixed income. So maybe something like VTI and ladder Treasuries, CDs, and/or a Money Market Mutual Fund?

The Vanguard Wellesley fund is something is close to 40/60 and has a really good track record if you just wanted a single fund. It's actively managed, but really low fees.

But these solutions do have the possibility of not returning a positive 4% every single year.

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Re: Safest 4% Return- WWYD?

Post by dbr » Thu Dec 12, 2019 12:18 pm

illumination wrote:
Thu Dec 12, 2019 12:09 pm
I would probably do something like 40/60 equities to fixed income. So maybe something like VTI and ladder Treasuries, CDs, and/or a Money Market Mutual Fund?

The Vanguard Wellesley fund is something is close to 40/60 and has a really good track record if you just wanted a single fund. It's actively managed, but really low fees.

But these solutions do have the possibility of not returning a positive 4% every single year.
I might also, but such a suggestion does not fit the stated requirement of "a very low risk mutual fund." We are going to have to wait for the OP to get more clarification from the investor. I don't think anything outside a money market fund meets that requirement for a mutual fund, and the current interest rate, with who knows what chance of going higher or lower, is around 2% and not 4%, and only just more than 0% in real dollars.

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Re: Safest 4% Return- WWYD?

Post by lakpr » Thu Dec 12, 2019 12:28 pm

fuddbogle wrote:
Thu Dec 12, 2019 11:51 am
This may not be as safe as they'd like but with only what you've described, I'd invest here:

Vanguard LifeStrategy Income Fund (VASIX)
VASIX lost money during 2008 recession, whereas the 20:80 blend with treasuries did not. VASIX also invests in international stocks and international bonds, both of which lagged the domestic counterparts by large margins over the past 15 years at least.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Thu Dec 12, 2019 12:46 pm

fuddbogle wrote:
Thu Dec 12, 2019 11:51 am
This may not be as safe as they'd like but with only what you've described, I'd invest here:

Vanguard LifeStrategy Income Fund (VASIX)
I don't think that provides 4% average real return. Too little stock.

Vanguard LifeStrategy Conservative Growth Fund (VSCGX) would be closer to the mark.

As I pointed out earlier, the market tends to make all investments that have a specific expected return equally risky. There is no such thing as a safer investment that returns 4%.

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Re: Safest 4% Return- WWYD?

Post by bradpevans » Thu Dec 12, 2019 2:18 pm

Got a family member with a mortgage?

Might loan them a chunk ... at 4% (a bit high in today's market but in the ballpark)

some might consider that risk free others might say extremely high risk

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Re: Safest 4% Return- WWYD?

Post by fyre4ce » Thu Dec 12, 2019 2:55 pm

There are no traditional "risk-free" investments currently available that pay 4%. Sorry. So, your family member will have to make compromises somewhere, either in risk, return, or return of principal.

If they're not willing to take on any more risk, then choices are savings accounts or CDs, which currently pay 2-2.5%.

If they're not willing to get less than a 4% return, best bet is probably a blend of stock and bond passive mutual funds in a simple 2 or 3 fund portfolio.

If they need a risk-free 4% return but don't care about getting the principal back, an annuity would be worth exploring.

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Re: Safest 4% Return- WWYD?

Post by JoeRetire » Thu Dec 12, 2019 4:32 pm

JSparks wrote:
Wed Dec 11, 2019 10:04 pm
If a retiree needs a very low risk mutual fund with just a 4% return each year for the next 16 years, what would you suggest right now to get that? She is looking for the safest 4% return.
Those are two entirely different questions.

There is always a safest 4% return vehicle.

There may not be a very low risk mutual fund with a 4% return each year for the next 16 years (depending on how you define very low risk).
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Re: Safest 4% Return- WWYD?

Post by JSparks » Fri Dec 13, 2019 8:20 pm

Sorry it took so long to get back on the forum. It's been a crazy week. I wanted to answer a couple of the questions and make some clarifications.

She is not looking for distributions/income from this investment. She is also not looking for a "risk-free" investment. She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).

I thought about suggesting a single mutual fund for this since she wants a set-it-and-forget-it investment. Of course, I will help her monitor it from time to time just to make sure its on track. I'm thinking a target retirement date fund set for something like 2020 (VTWNX?) but I'm not sure.

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Re: Safest 4% Return- WWYD?

Post by annu » Fri Dec 13, 2019 9:16 pm

Maybe a cd ladder? Psecu was offering a cd @3.25%. Munibond for the state she is in might be another option

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Re: Safest 4% Return- WWYD?

Post by JoMoney » Fri Dec 13, 2019 9:31 pm

A "safe" 4% for the next 16 years is reaching a bit too far.
An intermediate term corporate bond fund is returning less than 3%, government bonds even less.
One could probably find some individual bonds that might get a portfolio up to 4% but only with taking on quite a bit of credit risk, so not really "safe".

There are some fixed-term annuity products that will get close to 4%
https://www.blueprintincome.com/fixed-annuities
But there's complications and terms once you're locked in that make that an option to be careful with. If you're under 59.5 there's potentially tax penalties from using an annuity product.
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Re: Safest 4% Return- WWYD?

Post by arcticpineapplecorp. » Fri Dec 13, 2019 9:54 pm

JSparks wrote:
Fri Dec 13, 2019 8:20 pm
her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).
is she accounting for inflation? By that I mean if her parents gave her $5,000 for her wedding 30 years ago, she would need to give her daughter more than $5000 now because of inflation. $5000 bought much more 30 years ago than it does today. You can use an inflation calculator if you haven't already, but that also makes her goal harder to achieve due to a greater amount needed. Sorry to throw in a monkey wrench.

with that aside, the "least risky option" as you put it, means a risk free rate. I believe you'd look at a treasury for that. Unfortunately, treasuries aren't paying 4% a year. So if you want a higher return than what the risk free rate is paying, that requires you to take on risk, which then makes it the opposite of "least risky".
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Re: Safest 4% Return- WWYD?

Post by willthrill81 » Fri Dec 13, 2019 10:20 pm

If she's okay with some volatility (nothing will guarantee a 4% return over the next 16 years), Vanguard's Wellesley Income fund is a conservative fund with a 35% stock / 65% bond allocation. I'd say that it has a very good shot at averaging at least 4% over the next 16 years.
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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 9:19 am

JSparks wrote:
Fri Dec 13, 2019 8:20 pm
Sorry it took so long to get back on the forum. It's been a crazy week. I wanted to answer a couple of the questions and make some clarifications.

She is not looking for distributions/income from this investment. She is also not looking for a "risk-free" investment. She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).

I thought about suggesting a single mutual fund for this since she wants a set-it-and-forget-it investment. Of course, I will help her monitor it from time to time just to make sure its on track. I'm thinking a target retirement date fund set for something like 2020 (VTWNX?) but I'm not sure.
Again there is no mutual fund investment that can guarantee delivering at least 3.92% average return. A person could invest enough in any of the suggested conservative balanced funds, including TR funds, as to have almost no chance of falling below the required result, but there would also be a good chance of ending up with a lot more money than that. Computing how much more she has to start with to meet the requirement would be tricky. But I wonder why this investment has to be in one instrument all by itself rather than the investor having a financial plan that ends up sixteen years from now with the ability to give someone the money needed. What is the picture of her total assets and how are they invested? I wouldn't want to lecture, but if this wedding expense that far in the future is so massive relative to overall financial resources that it needs to be ensured now with a special investment, then I would be worried that the overall financial picture is in trouble.

Usually when a person wants to match a definite liability at a definite future time one does that with individual bonds that mature at the point needed. There can be some tricky issues about where to keep the interest as it is paid. But other than long term Treasuries the risk of doing that would be too high. You can get about 2% in a Treasury now, but to meet her goal she would have to start with about twice what she is planning to start with.

A different question, is if she is committed to a dedicated fund, why can't contributions be added as time goes along? A person who has money now would likely also be able to save more in the future. Most people who have a future spending goal save for it rather than just keep money for a very long time under conditions of no risk.

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Re: Safest 4% Return- WWYD?

Post by grok87 » Sat Dec 14, 2019 9:34 am

EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 9:36 am

grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.

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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Sat Dec 14, 2019 9:37 am

JSparks wrote:
Fri Dec 13, 2019 8:20 pm
Sorry it took so long to get back on the forum. It's been a crazy week. I wanted to answer a couple of the questions and make some clarifications.

She is not looking for distributions/income from this investment. She is also not looking for a "risk-free" investment. She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).

I thought about suggesting a single mutual fund for this since she wants a set-it-and-forget-it investment. Of course, I will help her monitor it from time to time just to make sure its on track. I'm thinking a target retirement date fund set for something like 2020 (VTWNX?) but I'm not sure.
I guess you are saying that she has some specific amount of money for a wedding fund and she wants it to grow to a larger specific amount over 16 years.

It's not clear to me how she can take on some risk. Does she plan to down-size the wedding if the investment performs poorly?

Honestly, I think the best plan is to put the money in a safe investment and set up a savings plan so that she ends up with the required funds 16 years from now. That is the sort of plan that actually works.

The fact that some risk is OK implies that she can downsize the wedding. I'd say downsize it now so that she would have to save less over the years.

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Re: Safest 4% Return- WWYD?

Post by lakpr » Sat Dec 14, 2019 9:38 am

dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.

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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 9:41 am

lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
I knew I should look that up. Grok? But maybe she should tell her daughter that if she waits until twenty years from now she will have the money promised. I am not a fan of building Houdini style financial conundrums to be evaded when practical answers abound.

If it were me, as I posted earlier, I would assume an ongoing financial plan for myself that makes paying that expense highly possible, or I would plan on adding savings for sixteen years. I would not create an artificial dilemma that is unsolvable at current interest rates.

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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Sat Dec 14, 2019 9:44 am

JSparks wrote:
Fri Dec 13, 2019 8:20 pm
She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).posting.php?mode=quote&f=1&p=4889029#
It this inclusive of inflation :?:

Inflation is a big deal. "4%" means "somewhere between %0 and %4" until you specify whether she need real dollars or nominal dollars in 16 years.

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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 9:54 am

tadamsmar wrote:
Sat Dec 14, 2019 9:44 am
JSparks wrote:
Fri Dec 13, 2019 8:20 pm
She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).posting.php?mode=quote&f=1&p=4889029#
It this inclusive of inflation :?:

Inflation is a big deal. "4%" means "somewhere between %0 and %4" until you specify whether she need real dollars or nominal dollars in 16 years.
If give her daughter what her mother gave her is intended, the time line may be more than 16 years. And, of course, since future inflation is not known there is no way to specify exactly how much to invest unless one invests in a known real return. That, of course, is nearly possible by buying a TIPS that matures when needed. There is still a trick involving how to reinvest the interest payments, and, of course, the current yield is only about 2% real.

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Re: Safest 4% Return- WWYD?

Post by tadamsmar » Sat Dec 14, 2019 10:19 am

dbr wrote:
Sat Dec 14, 2019 9:54 am
tadamsmar wrote:
Sat Dec 14, 2019 9:44 am
JSparks wrote:
Fri Dec 13, 2019 8:20 pm
She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).posting.php?mode=quote&f=1&p=4889029#
It this inclusive of inflation :?:

Inflation is a big deal. "4%" means "somewhere between %0 and %4" until you specify whether she need real dollars or nominal dollars in 16 years.
If give her daughter what her mother gave her is intended, the time line may be more than 16 years. And, of course, since future inflation is not known there is no way to specify exactly how much to invest unless one invests in a known real return. That, of course, is nearly possible by buying a TIPS that matures when needed. There is still a trick involving how to reinvest the interest payments, and, of course, the current yield is only about 2% real.
I funded my daughter's wedding with a withdrawal from my 401K. But it would have been better if I just used a loan, particularly since I was able to sell some inherited land later and could have easily paid off the loan.

With a wedding 16 years out, it might be better just to invest in a 401K and then take a loan from it. Assuming a 401K is available.

If you take on risk, you have to be prepared to eat the risk somehow.

coachd50
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Re: Safest 4% Return- WWYD?

Post by coachd50 » Sat Dec 14, 2019 10:55 am

Quick question : How does this mother know there will be a wedding to pay for in exactly 16 years?

SchruteB&B
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Re: Safest 4% Return- WWYD?

Post by SchruteB&B » Sat Dec 14, 2019 11:07 am

coachd50 wrote:
Sat Dec 14, 2019 10:55 am
Quick question : How does this mother know there will be a wedding to pay for in exactly 16 years?
This is what I was wondering too. People are getting married less frequently and at later and later ages. This seems like an oddly specific time frame.

CodeMaster
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Re: Safest 4% Return- WWYD?

Post by CodeMaster » Sat Dec 14, 2019 11:12 am

Cant get any safer then this 5.09 APY checking account :sharebeer :beer
https://www.youtube.com/watch?v=GhpcCRZBPsg

dbr
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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 11:15 am

SchruteB&B wrote:
Sat Dec 14, 2019 11:07 am
coachd50 wrote:
Sat Dec 14, 2019 10:55 am
Quick question : How does this mother know there will be a wedding to pay for in exactly 16 years?
This is what I was wondering too. People are getting married less frequently and at later and later ages. This seems like an oddly specific time frame.
It would make sense if sixteen years from now the daughter is at the age the mother was when the mother was married. It would not necessarily have to be that the daughter actually gets married exactly then.

But, of course, the OP can come back with more thoughts from their friend for whom they are asking. It may be the most productive aspect in this discussion is provoking more thought from that person regarding what is really wanted.

illumination
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Re: Safest 4% Return- WWYD?

Post by illumination » Sat Dec 14, 2019 11:34 am

For something like paying for a wedding and you have 16 years, I'd just do half VTI, half BND and call it a day if I wanted to be conservative. If it were my daughter, I'd go 100% in a fund like VTI just for the tax sheltering.

I definitely would not be actively managing CD ladders or anything like that for a one day event 16 years from now.

The fallout for greater risk is pretty menial, they might have a cash bar at their wedding. It's not like someone is going to be eating cat food in their retirement if you slightly miss the mark. Even in some pretty bad time periods like going through the "lost decade" of the 2000's, you can come awfully close to hitting 4% with a total market fund after 16 years.

dbr
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Re: Safest 4% Return- WWYD?

Post by dbr » Sat Dec 14, 2019 11:49 am

illumination wrote:
Sat Dec 14, 2019 11:34 am
For something like paying for a wedding and you have 16 years, I'd just do half VTI, half BND and call it a day if I wanted to be conservative. If it were my daughter, I'd go 100% in a fund like VTI just for the tax sheltering.

I definitely would not be actively managing CD ladders or anything like that for a one day event 16 years from now.

The fallout for greater risk is pretty menial, they might have a cash bar at their wedding. It's not like someone is going to be eating cat food in their retirement if you slightly miss the mark. Even in some pretty bad time periods like going through the "lost decade" of the 2000's, you can come awfully close to hitting 4% with a total market fund after 16 years.
I think the problem in the mind of the friend of the OP is the daughter getting exactly what the friend of the OP got from her mother. This has led to thinking that something should be established now to make that come out exactly with no further involvement. This ends up creating one of those what I call "Houdini's boxes" from which there may be no simple escape. A little common sense applied to the thought process provides a number of perfectly practical solutions, of which yours would be a totally acceptable example.

grok87
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Re: Safest 4% Return- WWYD?

Post by grok87 » Sat Dec 14, 2019 12:48 pm

dbr wrote:
Sat Dec 14, 2019 9:41 am
lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
I knew I should look that up. Grok? But maybe she should tell her daughter that if she waits until twenty years from now she will have the money promised. I am not a fan of building Houdini style financial conundrums to be evaded when practical answers abound.

If it were me, as I posted earlier, I would assume an ongoing financial plan for myself that makes paying that expense highly possible, or I would plan on adding savings for sixteen years. I would not create an artificial dilemma that is unsolvable at current interest rates.
i also used to be a skeptic re EE bonds because of the need to wait the full 20 years to get the 3.5% CAGR return.
but with rates so low, i think they are very compelling. also no state taxes. i'm buying all i can. wish i could buy more.
RIP Mr. Bogle.

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willthrill81
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Re: Safest 4% Return- WWYD?

Post by willthrill81 » Sat Dec 14, 2019 1:00 pm

grok87 wrote:
Sat Dec 14, 2019 12:48 pm
dbr wrote:
Sat Dec 14, 2019 9:41 am
lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
I knew I should look that up. Grok? But maybe she should tell her daughter that if she waits until twenty years from now she will have the money promised. I am not a fan of building Houdini style financial conundrums to be evaded when practical answers abound.

If it were me, as I posted earlier, I would assume an ongoing financial plan for myself that makes paying that expense highly possible, or I would plan on adding savings for sixteen years. I would not create an artificial dilemma that is unsolvable at current interest rates.
i also used to be a skeptic re EE bonds because of the need to wait the full 20 years to get the 3.5% CAGR return.
but with rates so low, i think they are very compelling. also no state taxes. i'm buying all i can. wish i could buy more.
With current bond yields being where they are, I can see how someone could be drawn to EE bonds. But the interest rate risk, inflation risk, and loss of liquidity don't make the anticipated 1.5% real return (based on the Fed's inflation target) appealing to me. Also, for money that's 'locked away' for 20 years, I think that stocks are very likely to far outperform a 3.53% nominal return. In all, the downside risk of EE bonds seems to outweigh the upside potential, IMHO.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Safest 4% Return- WWYD?

Post by pkcrafter » Sat Dec 14, 2019 1:30 pm

JSparks,
She is not looking for distributions/income from this investment. She is also not looking for a "risk-free" investment. She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount.
If mom is trying to match the spending power of what she had, she may need to give daughter 2x what she received. The goal may be unrealistic? Also, mom cannot know when daughter might get married.

If this is a taxable account, I'd suggest mom use Vanguard tax-managed balanced (50/50) for the next 10-12 years and then switch to something with about 22-25% stock until needed.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

TN_Boy
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Re: Safest 4% Return- WWYD?

Post by TN_Boy » Sat Dec 14, 2019 1:47 pm

JSparks wrote:
Fri Dec 13, 2019 8:20 pm
Sorry it took so long to get back on the forum. It's been a crazy week. I wanted to answer a couple of the questions and make some clarifications.

She is not looking for distributions/income from this investment. She is also not looking for a "risk-free" investment. She has no need to earn more than 4% over the 16 year term so she's looking for whatever the least risky option is to get to her goal which is to pay for a wedding with a certain dollar amount for her daughter. She's trying to precisely match what her mom gave her when she got married. She gave me the investment amount, the term, and the final required amount. I came up with 3.92-ish% required to get her there. This is inclusive of federal, state, and local taxes based on her current bracket and a prayer that taxes won't change much between now and then (I did pad the number to allow some upward tax movement though).

I thought about suggesting a single mutual fund for this since she wants a set-it-and-forget-it investment. Of course, I will help her monitor it from time to time just to make sure its on track. I'm thinking a target retirement date fund set for something like 2020 (VTWNX?) but I'm not sure.
I will join the chorus of several people noting that the OP's friend's plan doesn't seem to make a of sense. Here are some problems:

1) Inflation on the amount given to OP friend. Let's say she got $X for the wedding. Is she computing inflation on $X since she was given the money as the amount to give?
2) Inflation on the amount given to the daughter after 16 years. Say $X above plus inflation is $Y. Does $Y include inflation over the next 16 years? That is, do you need about 4% nominal or 4% real growth .....
3) Why in the world 16 years? Why not 14, or 17 or . ...... how can you possibly know this far in advance the date of a wedding? Or is the idea just to say when the daughter hits a certain age "if and when you get married, here is something towards the wedding?"
4) I think the idea of bucketing this particular expense is bad. She has savings? Invest them in a reasonable long term asset allocation. When the time comes to give the daughter money, give it then, using a portion of her savings that is appropriate and what she can afford.

Both 1) and 2) are basically "are we talking real or nominal dollars," something which trips up a lot of people.

illumination
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Re: Safest 4% Return- WWYD?

Post by illumination » Sat Dec 14, 2019 2:26 pm

dbr wrote:
Sat Dec 14, 2019 11:49 am
illumination wrote:
Sat Dec 14, 2019 11:34 am
For something like paying for a wedding and you have 16 years, I'd just do half VTI, half BND and call it a day if I wanted to be conservative. If it were my daughter, I'd go 100% in a fund like VTI just for the tax sheltering.

I definitely would not be actively managing CD ladders or anything like that for a one day event 16 years from now.

The fallout for greater risk is pretty menial, they might have a cash bar at their wedding. It's not like someone is going to be eating cat food in their retirement if you slightly miss the mark. Even in some pretty bad time periods like going through the "lost decade" of the 2000's, you can come awfully close to hitting 4% with a total market fund after 16 years.
I think the problem in the mind of the friend of the OP is the daughter getting exactly what the friend of the OP got from her mother. This has led to thinking that something should be established now to make that come out exactly with no further involvement. This ends up creating one of those what I call "Houdini's boxes" from which there may be no simple escape. A little common sense applied to the thought process provides a number of perfectly practical solutions, of which yours would be a totally acceptable example.

True, but I think though there is some cover with "this was the wedding fund created for this purpose and this is what the market returned". It was not an active choice to shortchange anyone. If it does better than expected, even better. I also think you're never going to get apples to apples with a 16 year gap and the inflation adjustments to what was given to the other person.

The only realistic scenario to achieve something close to 4% or better every year would be some investment in equities or equity-like instruments, it's just then a debate of what percent. I'm not sure there's any rolling 16 year time period that a 50/50 doesn't hit at least 4% with maybe the exception of the Great Depression.

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wander
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Re: Safest 4% Return- WWYD?

Post by wander » Sat Dec 14, 2019 2:46 pm

grok87 wrote:
Sat Dec 14, 2019 12:48 pm
dbr wrote:
Sat Dec 14, 2019 9:41 am
lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
I knew I should look that up. Grok? But maybe she should tell her daughter that if she waits until twenty years from now she will have the money promised. I am not a fan of building Houdini style financial conundrums to be evaded when practical answers abound.

If it were me, as I posted earlier, I would assume an ongoing financial plan for myself that makes paying that expense highly possible, or I would plan on adding savings for sixteen years. I would not create an artificial dilemma that is unsolvable at current interest rates.
i also used to be a skeptic re EE bonds because of the need to wait the full 20 years to get the 3.5% CAGR return.
but with rates so low, i think they are very compelling. also no state taxes. i'm buying all i can. wish i could buy more.
+1. Thanks to Taylor Larimore, we will have a nice self-built annuity when we retire when our EE bonds get doubled yearly. With $40k a year, plus pension and social security alone, I think we will be in good shape financially.

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arcticpineapplecorp.
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Re: Safest 4% Return- WWYD?

Post by arcticpineapplecorp. » Sat Dec 14, 2019 3:12 pm

CodeMaster wrote:
Sat Dec 14, 2019 11:12 am
Cant get any safer then this 5.09 APY checking account :sharebeer :beer
https://www.youtube.com/watch?v=GhpcCRZBPsg
did you watch the video? For starters the first bank he mentions "consumers credit union" is now offering 4%, not 5% (that might have been earlier in the year before rates dropped.) And even the blogger says "You do have to be a pretty active user" and it's only up to $15,000. We don't know the amount the OP wants to save, but it sounds like money to just park. To get 4% on this account you need to:
To qualify for the monthly high interest reward (4.00% APY) you must meet the following minimum checking account requirements each statement cycle: (1) make 12 debit card transactions that post to your account during the statement cycle, (2) maintain at least a $1,000 average daily balance in the account, (3) receive an aggregate of $1,000 or more during the statement cycle in recurring direct deposits to the account, and (4) be enrolled in and receive monthly eStatements. Accounts that do not maintain at least a $1,000 average daily balance will not earn interest during the statement cycle. Accounts that maintain at least a $1,000 average daily balance, but don’t meet one of the other listed reward requirements will earn 0.01% APY for the entire account balance.

source: https://www.consumerscu.org/rates/deposit-rates-2
and
Earns you 4.00% APY*** on balances up to $15,000 when you have 12 posted debit card transactions per month, a $1,000 average daily balance, $1,000 minimum recurring monthly direct deposit and eStatements.

source: https://www.consumerscu.org/personal/banking/checking
the blogger mentions tab bank next for 4% but:
Qualification Cycle:

At least 1 direct deposit, ACH transaction, or bill pay transaction(s)
At least 15 debit card purchases of $5 or more**

source: https://www.tabbank.com/kasasa-cash-checking/
so, ya gotta read the fine print.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

MotoTrojan
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Re: Safest 4% Return- WWYD?

Post by MotoTrojan » Sat Dec 14, 2019 3:32 pm

4% after tax? After inflation? Either of those factors could drastically impact the outcome.

anoop
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Re: Safest 4% Return- WWYD?

Post by anoop » Sat Dec 14, 2019 4:00 pm

lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
And you can only buy $10K worth of it each year. Probably too limiting for the OP.

grok87
Posts: 9104
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Re: Safest 4% Return- WWYD?

Post by grok87 » Sat Dec 14, 2019 9:55 pm

anoop wrote:
Sat Dec 14, 2019 4:00 pm
lakpr wrote:
Sat Dec 14, 2019 9:38 am
dbr wrote:
Sat Dec 14, 2019 9:36 am
grok87 wrote:
Sat Dec 14, 2019 9:34 am
EE Bonds. double in 20 years. so 3.5% return. not quite 4% for 16 years but close.
Excellent. And a simple solution to the problem by just investing a little more to start with.
The EE bonds return only 0.5% from years 0 through 19. Only when year 20 rolls around, the value doubles.
And you can only buy $10K worth of it each year. Probably too limiting for the OP.
Well $20k per year for a married couple. if one does the $20k now in december and then another $20k in january then that's $40k.
RIP Mr. Bogle.

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