Time to Build my Own Annuity with 20 year Bonds??

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
WolfgangPauli
Posts: 614
Joined: Sun Aug 23, 2015 8:28 am

Time to Build my Own Annuity with 20 year Bonds??

Post by WolfgangPauli »

I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
IDpilot
Posts: 245
Joined: Sat Dec 05, 2020 7:13 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by IDpilot »

You need to think about inflation ...

If it runs at 3% for the next twenty years that $1979 is going to feel like $1095.
bonesly
Posts: 880
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by bonesly »

WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
4.75% seems like a historically high rate for a 20-year T-Bond, but if inflation sparks (war or other geopolitical event, depression, etc.) then rates could go higher and your might be stuck with your existing 4.75% bonds. On the other hand things in the world could smooth out, the Fed could reach their 2% inflation target, and rates could come down so your 4.75% bonds would be looking pretty good in that environment.

If you're inclined to bet one way or the other, that drives whether you buy 20y T-Bonds (or a Single Premium Insurance Annuity (SPIA) if it's even better than 4.75% equivalent) or if you invest in a modest mix of stocks and bonds (anywhere between a stock/bond mix from 20/80 to 40/60). A mix of 30% stocks and 70% bonds is a better risk-adjusted return than 100% bonds or 90% bonds + 10% stocks (red dots in chart below), and is likely to keep pace with inflation over decades (planning to age 95?) better than an all-bond portfolio.
Image

If you're not inclined to go all-in on one path or the other, consider a 50/50 split: $250K in 20y T-Bonds (or a SPIA) and $250K invested into 40/60 fund like Vanguard Life Strategy Conservative Growth (VSCGX), Vanguard Wellesley (VWIAX), or similar (perhaps tax-managed 50/50 if this would be in a taxable account and you're in one of the top two tax brackets).
Call_Me_Op
Posts: 9843
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Call_Me_Op »

IDpilot wrote: Sat Feb 10, 2024 12:11 pm You need to think about inflation ...

If it runs at 3% for the next twenty years that $1979 is going to feel like $1095.
That's what happens with fixed annutities.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
KlangFool
Posts: 31223
Joined: Sat Oct 11, 2008 12:35 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by KlangFool »

OP,

What is your annual expense?

What is your portfolio size?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
WolfgangPauli
Posts: 614
Joined: Sun Aug 23, 2015 8:28 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by WolfgangPauli »

KlangFool wrote: Sat Feb 10, 2024 3:41 pm OP,

What is your annual expense?

What is your portfolio size?

KlangFool
Annual expense is about $150K max and portfolio (not counting houses) is about $7.5M.. I know, no big deal but I am planning on leaving a sizeable amount to my son, on purpose, just what I want to do.

I understand about the what if on inflation but that is why I have quite a bit in stocks.. just don't want it all there. This would be money that is just sitting in a HYSA today.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
ivgrivchuck
Posts: 1638
Joined: Sun Sep 27, 2020 6:20 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by ivgrivchuck »

For most of us TIPS are superior compared to nominal treasuries.

The expected return is almost the same as nominal treasuries, but you get more if inflation turns out to be higher than expected, and you get less if it turns out to be lower than expected. This eliminates most of the inflation risk.

So perhaps it's the time to build your own TIPS ladder, using 20+ year TIPS?
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
w5000
Posts: 301
Joined: Mon Feb 10, 2020 8:33 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by w5000 »

Also note that you can't buy a 20 year treasury with a 4.75% yield now.

The most recent 20 year treasury bond, issued in November and reopened in January, has a coupon of 4.75%, but the current interest yield is 4.479%, so that's what you can actually get. There is a new 20 year bond being issued later this month, though...
Topic Author
WolfgangPauli
Posts: 614
Joined: Sun Aug 23, 2015 8:28 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by WolfgangPauli »

w5000 wrote: Sun Feb 11, 2024 6:54 am Also note that you can't buy a 20 year treasury with a 4.75% yield now.

The most recent 20 year treasury bond, issued in November and reopened in January, has a coupon of 4.75%, but the current interest yield is 4.479%, so that's what you can actually get. There is a new 20 year bond being issued later this month, though...
I am assuming that the new issue will be roughly the same and I plan on buying it direct from the US Treasury. If I buy from the US Treasury and hold it to maturity won't I get the 4.75%?
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
bendix
Posts: 735
Joined: Thu Feb 16, 2023 9:35 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by bendix »

ivgrivchuck wrote: Sat Feb 10, 2024 10:01 pm For most of us TIPS are superior compared to nominal treasuries.

The expected return is almost the same as nominal treasuries, but you get more if inflation turns out to be higher than expected, and you get less if it turns out to be lower than expected. This eliminates most of the inflation risk.

So perhaps it's the time to build your own TIPS ladder, using 20+ year TIPS?
I´m not an expert and still learning about the characteristics of TIPS, but wouldnt you forfeit the upside of gaining if interest rates drop? If you own a 20y treasury and interest rates go to e.g. 0%, that´d be a HUGE increase in value of the paper. From the top of my head it may almost double if it were to happen immediately after buying and assuming it stands at 4.75%.
w5000
Posts: 301
Joined: Mon Feb 10, 2020 8:33 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by w5000 »

WolfgangPauli wrote: Sun Feb 11, 2024 8:15 am I am assuming that the new issue will be roughly the same and I plan on buying it direct from the US Treasury. If I buy from the US Treasury and hold it to maturity won't I get the 4.75%?
The coupon on a new issue T-Note (or T-Bond) will be set to the closest 1/8% lower than the yield set by the auction. So if the auction yield is 4.479%, the coupon would be 4 3/8%, and the price of the bond will be less than 100 (for $100 of principal) to compensate for the interest rate difference.

Of course, the results of the auction may not exactly match the market yield. When I've bought 4-week T-Bills over the last month or so, I think the auction gives me a slightly better yield than the current market yield (that I get from CNBC so not sure how accurate that is), but only by a basis point (0.01%) or so. It is highly unlikely that an auction would result in a 20 year bond that was more than 0.25% more than the prevailing market yield.
Topic Author
WolfgangPauli
Posts: 614
Joined: Sun Aug 23, 2015 8:28 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by WolfgangPauli »

w5000 wrote: Sun Feb 11, 2024 8:32 am
WolfgangPauli wrote: Sun Feb 11, 2024 8:15 am I am assuming that the new issue will be roughly the same and I plan on buying it direct from the US Treasury. If I buy from the US Treasury and hold it to maturity won't I get the 4.75%?
The coupon on a new issue T-Note (or T-Bond) will be set to the closest 1/8% lower than the yield set by the auction. So if the auction yield is 4.479%, the coupon would be 4 3/8%, and the price of the bond will be less than 100 (for $100 of principal) to compensate for the interest rate difference.

Of course, the results of the auction may not exactly match the market yield. When I've bought 4-week T-Bills over the last month or so, I think the auction gives me a slightly better yield than the current market yield (that I get from CNBC so not sure how accurate that is), but only by a basis point (0.01%) or so. It is highly unlikely that an auction would result in a 20 year bond that was more than 0.25% more than the prevailing market yield.
Got it.. very helpful.. Thank you
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
Tom_T
Posts: 4757
Joined: Wed Aug 29, 2007 2:33 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Tom_T »

bendix wrote: Sun Feb 11, 2024 8:24 am
ivgrivchuck wrote: Sat Feb 10, 2024 10:01 pm For most of us TIPS are superior compared to nominal treasuries.

The expected return is almost the same as nominal treasuries, but you get more if inflation turns out to be higher than expected, and you get less if it turns out to be lower than expected. This eliminates most of the inflation risk.

So perhaps it's the time to build your own TIPS ladder, using 20+ year TIPS?
I´m not an expert and still learning about the characteristics of TIPS, but wouldnt you forfeit the upside of gaining if interest rates drop? If you own a 20y treasury and interest rates go to e.g. 0%, that´d be a HUGE increase in value of the paper. From the top of my head it may almost double if it were to happen immediately after buying and assuming it stands at 4.75%.
No matter what you choose, you're going to potentially forfeit something. It's a question of what you want to achieve.

Also, TIPS are still bonds: the market price will change if rates fall. Maybe not as much as a nominal, but it will still change.
KlangFool
Posts: 31223
Joined: Sat Oct 11, 2008 12:35 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by KlangFool »

WolfgangPauli wrote: Sat Feb 10, 2024 9:32 pm
KlangFool wrote: Sat Feb 10, 2024 3:41 pm OP,

What is your annual expense?

What is your portfolio size?

KlangFool
Annual expense is about $150K max and portfolio (not counting houses) is about $7.5M.. I know, no big deal but I am planning on leaving a sizeable amount to my son, on purpose, just what I want to do.
WolfgangPauli,

You can stick with a basic 60/40 portfolio and you will have more than enough money to spend and keep up with the inflation. Your portfolio will grow bigger each year. So, I do not understand why do you need to do anything. The 40% bond portfolio will generate 150K at 5% interest rate. The 60% stock at 2% dividend rate will generate 90K per year.

The 7.5 millions 60/40 portfolio will generate about 240K of dividend and interest. So, I don't understand why do you need to do anything special. Why do something complicated when simplicity works?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
ivgrivchuck
Posts: 1638
Joined: Sun Sep 27, 2020 6:20 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by ivgrivchuck »

bendix wrote: Sun Feb 11, 2024 8:24 am
ivgrivchuck wrote: Sat Feb 10, 2024 10:01 pm For most of us TIPS are superior compared to nominal treasuries.

The expected return is almost the same as nominal treasuries, but you get more if inflation turns out to be higher than expected, and you get less if it turns out to be lower than expected. This eliminates most of the inflation risk.

So perhaps it's the time to build your own TIPS ladder, using 20+ year TIPS?
I´m not an expert and still learning about the characteristics of TIPS, but wouldnt you forfeit the upside of gaining if interest rates drop? If you own a 20y treasury and interest rates go to e.g. 0%, that´d be a HUGE increase in value of the paper. From the top of my head it may almost double if it were to happen immediately after buying and assuming it stands at 4.75%.
If you are confident that long term interest rates are going to drop significantly, you really want to put your money in treasury futures. That's the way to make some real money (and also lose some real money if you are wrong).

I have no idea whether the long term interest rates are going to go up or down going forward, so such speculations don't drive my investment decisions.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
bendix
Posts: 735
Joined: Thu Feb 16, 2023 9:35 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by bendix »

ivgrivchuck wrote: Sun Feb 11, 2024 2:56 pm
bendix wrote: Sun Feb 11, 2024 8:24 am
ivgrivchuck wrote: Sat Feb 10, 2024 10:01 pm For most of us TIPS are superior compared to nominal treasuries.

The expected return is almost the same as nominal treasuries, but you get more if inflation turns out to be higher than expected, and you get less if it turns out to be lower than expected. This eliminates most of the inflation risk.

So perhaps it's the time to build your own TIPS ladder, using 20+ year TIPS?
I´m not an expert and still learning about the characteristics of TIPS, but wouldnt you forfeit the upside of gaining if interest rates drop? If you own a 20y treasury and interest rates go to e.g. 0%, that´d be a HUGE increase in value of the paper. From the top of my head it may almost double if it were to happen immediately after buying and assuming it stands at 4.75%.
If you are confident that long term interest rates are going to drop significantly, you really want to put your money in treasury futures. That's the way to make some real money (and also lose some real money if you are wrong).

I have no idea whether the long term interest rates are going to go up or down going forward, so such speculations don't drive my investment decisions.
Like you, I dont know tomorrow´s interest rates. With that bit of Boglehead Orthodoxy out of the way, I like longer term bonds at the moment for offering a fairly nice interest rate and the potential to take a hefty dip in any of the coming 20 years or so given the debt is already at 33T. But yea, I understand your point.
User avatar
Mel Lindauer
Moderator
Posts: 35729
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Mel Lindauer »

Don't forget to work I Bonds into your consideration. They're very flexible as to when they can be redeemed without any loss of principle (any time between one and 30 years) and they'll protect your investment from inflation. Sort of a "build-your-own annuity" with inflation protection.
Best Regards - Mel | | Semper Fi
z3r0c00l
Posts: 3766
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by z3r0c00l »

Absolutely a good option. Same with CD ladders, bond mutual funds, I-bonds, and other similar options. Each has pros and cons that one must think about such as liquidity, volatility, and inflation. I go with I-bonds personally, but to do that right you need to slowly accumulate for a decade+. If I were already 50 years old+, I would consider it possibly too late for I-bonds to be a significant option and would look elsewhere. If income for life is your priority, you could wait for retirement then buy an SPIA which is basically like buying your own pension plan.

Just consider a very real scenario: in 20 years stocks are up 100 - 200%. Would you have regrets? Balance that against the other option: in 20 years stocks have mostly gone sideways after inflation.
70% Global Stocks / 30% Bonds
Topic Author
WolfgangPauli
Posts: 614
Joined: Sun Aug 23, 2015 8:28 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by WolfgangPauli »

KlangFool wrote: Sun Feb 11, 2024 8:50 am
WolfgangPauli wrote: Sat Feb 10, 2024 9:32 pm
KlangFool wrote: Sat Feb 10, 2024 3:41 pm OP,

What is your annual expense?

What is your portfolio size?

KlangFool
Annual expense is about $150K max and portfolio (not counting houses) is about $7.5M.. I know, no big deal but I am planning on leaving a sizeable amount to my son, on purpose, just what I want to do.
WolfgangPauli,

You can stick with a basic 60/40 portfolio and you will have more than enough money to spend and keep up with the inflation. Your portfolio will grow bigger each year. So, I do not understand why do you need to do anything. The 40% bond portfolio will generate 150K at 5% interest rate. The 60% stock at 2% dividend rate will generate 90K per year.

The 7.5 millions 60/40 portfolio will generate about 240K of dividend and interest. So, I don't understand why do you need to do anything special. Why do something complicated when simplicity works?

KlangFool
The main reason is everything you cited above is "on average" but those could go bear pretty fast and I always thought there was value in having some "floor" for bad times. But, your point is well taken.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
KlangFool
Posts: 31223
Joined: Sat Oct 11, 2008 12:35 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by KlangFool »

WolfgangPauli wrote: Mon Feb 19, 2024 9:35 pm
KlangFool wrote: Sun Feb 11, 2024 8:50 am
WolfgangPauli wrote: Sat Feb 10, 2024 9:32 pm
KlangFool wrote: Sat Feb 10, 2024 3:41 pm OP,

What is your annual expense?

What is your portfolio size?

KlangFool
Annual expense is about $150K max and portfolio (not counting houses) is about $7.5M.. I know, no big deal but I am planning on leaving a sizeable amount to my son, on purpose, just what I want to do.
WolfgangPauli,

You can stick with a basic 60/40 portfolio and you will have more than enough money to spend and keep up with the inflation. Your portfolio will grow bigger each year. So, I do not understand why do you need to do anything. The 40% bond portfolio will generate 150K at 5% interest rate. The 60% stock at 2% dividend rate will generate 90K per year.

The 7.5 millions 60/40 portfolio will generate about 240K of dividend and interest. So, I don't understand why do you need to do anything special. Why do something complicated when simplicity works?

KlangFool
The main reason is everything you cited above is "on average" but those could go bear pretty fast and I always thought there was value in having some "floor" for bad times. But, your point is well taken.
Don't worry, be prepared!

IMHO, the floor for the bad times when your portfolio is not good enough is to keep some physical gold and silver.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
majiaknight
Posts: 222
Joined: Tue Jan 26, 2016 1:55 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by majiaknight »

I share similar thoughts in DIY annuity when long-term bond yield is high. That's why I invested ~$400K recently split between agency bonds in IRAs (>5% yield to maturity w/ call protection slightly higher than 20y T-Bonds and matures in 20-30 years from Fidelity secondary market https://fixedincome.fidelity.com/ftgw/fi/FILanding ) and I Bonds (using the gift box trick to lock the higher fixed rates of 0.9%-1.3%).
Cah
Posts: 208
Joined: Fri Jun 30, 2023 10:39 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Cah »

WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Great thought, almost never raised on these boards. I provided the entire retirement income for the 1st six years that way. Purchased 3 bond funds . Amortized the principle plus estimated income for 72 months of withdrawal and bingo instant 0 cost annuity.
FellsGuy
Posts: 488
Joined: Thu Dec 23, 2021 12:30 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by FellsGuy »

WolfgangPauli wrote: Sun Feb 11, 2024 8:15 am
w5000 wrote: Sun Feb 11, 2024 6:54 am Also note that you can't buy a 20 year treasury with a 4.75% yield now.

The most recent 20 year treasury bond, issued in November and reopened in January, has a coupon of 4.75%, but the current interest yield is 4.479%, so that's what you can actually get. There is a new 20 year bond being issued later this month, though...
I am assuming that the new issue will be roughly the same and I plan on buying it direct from the US Treasury. If I buy from the US Treasury and hold it to maturity won't I get the 4.75%?
Why from treasury direct? If you can buy from Fidelity or Vanguard? I bonds of course the exception.
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness. | Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”
17outs
Posts: 221
Joined: Thu Feb 13, 2020 3:03 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by 17outs »

Of course, they don’t really pay monthly, but it would be awesome if they did. DIY annuity would be so easy to buy.
AlwaysLearningMore
Posts: 1837
Joined: Sun Jul 26, 2020 2:29 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by AlwaysLearningMore »

Cah wrote: Fri Feb 23, 2024 10:32 pm
WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Great thought, almost never raised on these boards. I provided the entire retirement income for the 1st six years that way. Purchased 3 bond funds . Amortized the principle plus estimated income for 72 months of withdrawal and bingo instant 0 cost annuity.
Would you mind providing some details such as which funds you used, and the process? (not the exact amount of course). Thank you.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
Cah
Posts: 208
Joined: Fri Jun 30, 2023 10:39 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Cah »

AlwaysLearningMore wrote: Sat Feb 24, 2024 3:33 pm
Cah wrote: Fri Feb 23, 2024 10:32 pm
WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Great thought, almost never raised on these boards. I provided the entire retirement income for the 1st six years that way. Purchased 3 bond funds . Amortized the principle plus estimated income for 72 months of withdrawal and bingo instant 0 cost annuity.
Would you mind providing some details such as which funds you used, and the process? (not the exact amount of course). Thank you.
Vanguard short term Corp. Vangaurd high yield Corp. Doubleline total return.
Dovahkiin
Posts: 247
Joined: Thu Jan 26, 2012 10:36 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by Dovahkiin »

WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Reading the whole thread with 7.5m in assets and $150k withdrawal, that's an incredibly safe 2% withdrawal rate. However, unexpected inflation can really suck, and what people don't realize if we revisit the 1970s - equities did underperform nearly 50% when adjusted for inflation.

So I made a spreadsheet that calculates a bond ladder of sorts, assuming its a zero coupon bond, and suggest sthe amount of bonds to buy. TIPS right now are about trading at 2% real yield spreads.

Given the $23,750 of spending you want to guarentee along with a $500k budget, I do see some value in a TIPS ladder for you. I have two different recommendations. I'm going to round up to an even $24,000 as treasuries trade in units of $1,000.

First one is the cheapest. Buy $23,750 in face value for TIPS for each rung:

Rate Zero Coupon
2.00% $23,529.41
2.00% $23,068.05
2.00% $22,615.74
2.00% $22,172.29
2.00% $21,737.54
2.00% $21,311.31
2.00% $20,893.44
2.00% $20,483.77
2.00% $20,082.13
2.00% $19,688.36
2.00% $19,302.31
2.00% $18,923.84
2.00% $18,552.78
2.00% $18,189.00
2.00% $17,832.35
2.00% $17,482.70
2.00% $17,139.90
2.00% $16,803.82
2.00% $16,474.34
2.00% $16,151.31


So in year 20 you'd spend $16,151.31 of today's money, and it'd return 2% real rate, or if inflation remains 3%, it'd return 5% per year, and be valued at 42,854.23 nominal dollars 20 years from now.

This ladder costs $392,434.40

The other option is to increase your nominal liability by 3% every year, so in year 20 it'd be $43,346, then buy enough tips in today's dollars so at a 2% real yield, it'll spit out $43,346 in today's dollars in 20 years from now. Discounted today it'd be $29,171.07 of today's dollars spent on TIPS expiring in year 20. So under 2% real yield + 3% inflation, $29171.07 grows to 77,399.53 - pretty nice 5%+ growth in nominal terms.

Rate Zero Coupon
2.00% $24,235.29
2.00% $24,472.90
2.00% $24,712.83
2.00% $24,955.11
2.00% $25,199.77
2.00% $25,446.82
2.00% $25,696.30
2.00% $25,948.23
2.00% $26,202.62
2.00% $26,459.51
2.00% $26,718.92
2.00% $26,980.87
2.00% $27,245.38
2.00% $27,512.50
2.00% $27,782.23
2.00% $28,054.60
2.00% $28,329.65
2.00% $28,607.39
2.00% $28,887.85
2.00% $29,171.07

This ladder costs $532,619.80.

I like this strategy a lot, $532k / $7.5 million = 7% of your portfolio spent. You're locking up some really super defensible bonds and a nice hedge against severe inflation, along with a 3% increasing COLA every year that's a cola compounded. :)

So I think that will be a great hedge in addition to the rest of your portfolio! I also don't see any harm in doing it, especially if it helps you sleep at night and stay invested aggressively with the rest of your portfolio.

In addition, with your low 2% withdrawal rate, it's very likely in 1-2 years your portfolio will grow $500k in itself, so this ladder is almost "free" in a sense.

My other idea is you could also buy $1.2 million of tips which would spit off $24,000 of bond income every year, inflation adjusted. Instead of a 1-20 year ladder, buy a 20-30 year ladder like the nominal treasury bond fund TLT does.

Then backload it at 3% compounded per year, and this is the amount of bonds you'd purchase in today's dollars:

Rate Zero Coupon
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00% $103,314.19
2.00% $104,327.08
2.00% $105,349.89
2.00% $106,382.73
2.00% $107,425.70
2.00% $108,478.89
2.00% $109,542.41
2.00% $110,616.36
2.00% $111,700.83
2.00% $112,795.94
2.00% $113,901.78

The total price of this ladder is $1,193,835.81.

The $103k of today's dollars of the 20-year bond would grow to $153k if it were a zero coupon bond in 20 years. So this strategy would cost 16% of your portfolio, but provide $24,000/year of real coupons, increasing with CPI indexed inflation. Then ages 70-80 it'll provide some substantial face value as bonds mature.

I hope these ideas helps you!
AlwaysLearningMore
Posts: 1837
Joined: Sun Jul 26, 2020 2:29 pm

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by AlwaysLearningMore »

Cah wrote: Sun Feb 25, 2024 12:27 am
AlwaysLearningMore wrote: Sat Feb 24, 2024 3:33 pm
Cah wrote: Fri Feb 23, 2024 10:32 pm
WolfgangPauli wrote: Sat Feb 10, 2024 10:36 am I have toyed with an annuity as I do not have any "guaranteed" income besides Social Security in my plan. I recently looked and saw I can get 4.75% on a 20 year Bond through the US Treasury. This would mean, if I bought $500K I would get $23,750 per year or $1979 per month. Seems like a good augmentation and once I hit 70, between this and SS I would be getting over $60K per year in guaranteed income.

Seems like a good strategy but would be interested in thoughts here. I like building my own v. buying as if I were to pass then all the money goes to heirs v. just "losing the bet".

Thoughts?
Great thought, almost never raised on these boards. I provided the entire retirement income for the 1st six years that way. Purchased 3 bond funds . Amortized the principle plus estimated income for 72 months of withdrawal and bingo instant 0 cost annuity.
Would you mind providing some details such as which funds you used, and the process? (not the exact amount of course). Thank you.
Vanguard short term Corp. Vangaurd high yield Corp. Doubleline total return.
Thank you for your response.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
ManMan
Posts: 6
Joined: Sun Sep 12, 2021 9:49 am

Re: Time to Build my Own Annuity with 20 year Bonds??

Post by ManMan »

WolfgangPauli wrote: Sat Feb 10, 2024 9:32 pm
KlangFool wrote: Sat Feb 10, 2024 3:41 pm OP,

What is your annual expense?

What is your portfolio size?

KlangFool
Annual expense is about $150K max and portfolio (not counting houses) is about $7.5M.. I know, no big deal but I am planning on leaving a sizeable amount to my son, on purpose, just what I want to do.

I understand about the what if on inflation but that is why I have quite a bit in stocks.. just don't want it all there. This would be money that is just sitting in a HYSA today.
Music to my ears. Am currently doing something similar.

I have loaded up on Treasuries in Fidelity with the purpose for the Income generated to pay my bills (HOA, Property Taxes, Utilities, Insurance…). I’ve done it since 2020 and working fine. The Treasuries are the way to go, predictable and non-callable. I started in 2020 with brokered CDs but they would call them, and it was a challenge to predict the income flow. The portfolio is not all 20-year because those don’t auction monthly.

I do have Stocks, I-Bonds, TIPs in the remainder of the portfolio for the rest of my expenses. If I need additional money to flow into the Billpay account, I just turn off auto-reinvest on some dividends.

Your portfolio is big enough to do your proposed plan easily.
Post Reply