MYGA/TIPS ladder as bridge to SS

[Atticus713]

Hi Forum,
Would love to hear your thoughts about creating a ladder as a bridge to delaying SS with each “rung” being 50% MYGA and 50% TIPS—a “MYTI Ladder”— if you will. Not sure if it would indeed be “mighty” or not but that’s why I’m posting. All funds would be from our IRA/401k’s so they would all be “qualified” and could be moved back from the MYGA into the IRA at the end of the contract period.

My rationale is as follows:

1) If I knew inflation in the coming years would be higher than the fed predicts, I’d buy 100% TIPS for the ladder.

2) If I knew inflation would be lower than the fed predicts, I’d buy Treasury Notes instead of TIPS

3) As I’m looking at the current yields on Treasury Notes maturing in the coming years and comparing the maturity year matched MYGA, the MYGA rates are consistently higher by about 0.5 - 1% with ‘A’ rated companies.

4) So, why not combine these tools like a double-stranded DNA helix (if you will excuse my geeky science metaphor) so that each “rung” is 50% inflation protected (through TIPS) against higher than expected inflation and is 50% protected against lower than expected inflation (with MYGAs instead of T Notes, only due to the higher yields of the MYGA).

5) I realize I would be introducing “insurance company solvency” risk by utilizing a MYGA for each rung instead of a treasury note. However, when I asked google if any US life insurance (not car or home) company with an ‘A’ (not A-, or B++) or higher rating has ever become insolvent, the almighty google said no. Bogleheads: I could use your help here—is that true?

6) My understanding is that each state has its own limit on insuring against life insurance company insolvency (I believe my state insures it up to $250k per carrier) so I’d obviously stay below that figure.

7) At rung maturity, my TIPS inflation adjusted principal and last coupon payment would be deposited into my IRA. Likewise, at the MYGA contract expiration, the compounded funds could be transferred back into my IRA.

8) I understand that the MYGA, unlike the T note or TIPS, would carry stiff penalties if I wanted to break the contract early. However, my plan would be to not end the contract early—just as I am planning to hold the corresponding TIPS to maturity and not sell it ahead of time on the secondary market at a potential loss. We’d have enough other liquid assets to sustain us through an unexpected large expense so I’m as confident as I can be that we’d be able to allow everything to reach maturity.

9) Specifics: we have $370k in a money market fund at Fidelity (FDRXX). Our rungs would be from retirement at age 62 in 2030 to (about) when we turn 70 in 2038. Each of the 9 rungs would be $70k split 50/50 between the MYGA and TIPS vehicles. I was thinking of buying the 2030 TIPS this year at auction along with the 2035 TIPS. 2031-2034 TIPS would be bought on the secondary market and each year we’ll have $70k more contributed to the IRA so we could purchase the remaining 2036-2038 rungs yearly at auction over the next few years. This way, we’d avoid the task of trying to buy duration-matched TIPS to cover the “TIPS black hole years” (which TIPSladder.com actually seems to handle quite well). The maturity matched MYGA we’d then likely buy at the same time that we buy each $35k TIPS.

OK, what am I missing, misunderstanding, or not considering with this potential strategy. Any thoughts?

Thanks for your help!
Atticus713

[alec]

I think you’re over complicating things. The whole point of TIPS is that you’re taking inflation risk totally out of the equation.

So what if inflation is low and nominal bonds or MYGAs perform better.

[babystep]

Hi Forum,
Would love to hear your thoughts about creating a ladder as a bridge to delaying SS with each “rung” being 50% MYGA and 50% TIPS—a “MYTI Ladder”— if you will. Not sure if it would indeed be “mighty” or not but that’s why I’m posting. All funds would be from our IRA/401k’s so they would all be “qualified” and could be moved back from the MYGA into the IRA at the end of the contract period.

My rationale is as follows:

1) If I knew inflation in the coming years would be higher than the fed predicts, I’d buy 100% TIPS for the ladder.

2) If I knew inflation would be lower than the fed predicts, I’d buy Treasury Notes instead of TIPS

3) As I’m looking at the current yields on Treasury Notes maturing in the coming years and comparing the maturity year matched MYGA, the MYGA rates are consistently higher by about 0.5 - 1% with ‘A’ rated companies.

4) So, why not combine these tools like a double-stranded DNA helix (if you will excuse my geeky science metaphor) so that each “rung” is 50% inflation protected (through TIPS) against higher than expected inflation and is 50% protected against lower than expected inflation (with MYGAs instead of T Notes, only due to the higher yields of the MYGA).

5) I realize I would be introducing “insurance company solvency” risk by utilizing a MYGA for each rung instead of a treasury note. However, when I asked google if any US life insurance (not car or home) company with an ‘A’ (not A-, or B++) or higher rating has ever become insolvent, the almighty google said no. Bogleheads: I could use your help here—is that true?

6) My understanding is that each state has its own limit on insuring against life insurance company insolvency (I believe my state insures it up to $250k per carrier) so I’d obviously stay below that figure.

7) At rung maturity, my TIPS inflation adjusted principal and last coupon payment would be deposited into my IRA. Likewise, at the MYGA contract expiration, the compounded funds could be transferred back into my IRA.

8) I understand that the MYGA, unlike the T note or TIPS, would carry stiff penalties if I wanted to break the contract early. However, my plan would be to not end the contract early—just as I am planning to hold the corresponding TIPS to maturity and not sell it ahead of time on the secondary market at a potential loss. We’d have enough other liquid assets to sustain us through an unexpected large expense so I’m as confident as I can be that we’d be able to allow everything to reach maturity.

9) Specifics: we have $370k in a money market fund at Fidelity (FDRXX). Our rungs would be from retirement at age 62 in 2030 to (about) when we turn 70 in 2038. Each of the 9 rungs would be $70k split 50/50 between the MYGA and TIPS vehicles. I was thinking of buying the 2030 TIPS this year at auction along with the 2035 TIPS. 2031-2034 TIPS would be bought on the secondary market and each year we’ll have $70k more contributed to the IRA so we could purchase the remaining 2036-2038 rungs yearly at auction over the next few years. This way, we’d avoid the task of trying to buy duration-matched TIPS to cover the “TIPS black hole years” (which TIPSladder.com actually seems to handle quite well). The maturity matched MYGA we’d then likely buy at the same time that we buy each $35k TIPS.

OK, what am I missing, misunderstanding, or not considering with this potential strategy. Any thoughts?

Thanks for your help!
Atticus713

Does you specifics above match with your signature?

I wish your description was a bit more clear to understand.

[Atticus713]

I think you’re over complicating things.

Thank you babystep and alec for your responses. I laughed because, right after I pressed "submit" to send the original post, I glanced down at my signature line and thought to myself, "eek, that's not in keeping with 'simplicity'!" Thanks for the reminder!
Cheers,
Atticus713

[snic]

I think you’re over complicating things. The whole point of TIPS is that you’re taking inflation risk totally out of the equation.

So what if inflation is low and nominal bonds or MYGAs perform better.

So what? Well, you end up with less money...

I kind of like the OP's idea. You get the best and worst of both worlds, so if the worst happens to one, the other will at least do OK.

One thing to watch out for with MYGAs is that if an insurance company does go bust and you have to get reimbursed from the state, it might take a while - like, years. And you might not get the interest the insurance company promised.

[Airco_DH2_pilot]

I agree, this idea has a certain appeal & it's a plan I've modeled. If inflation is higher than expected, it is diversified by having the TIPS ladder to capture that. If inflation is less than expected, it's got the MYGA providing a good yield for income. No interest rate risk to the bond face value if the TIPS ladder rungs are held to maturity. The best part; neither of these are correlated with the stock market so using these tools as the fixed income portfolio blunts sequence of returns risk with stocks. In my case, I wouldn't be able to size these to fully cover our essential expenses, but a TIPS ladder & MYGA would cover a lot of it and I'd only need another very conservative 1% withdrawal rate from the stock index funds to cover essential expenses. Fun / go-go / discretionary expenses would come from higher withdrawals from the stock index funds.

[CletusCaddy]

An A rated insurer may have never defaulted. But what about an A rated insurer that was later downgraded to A-, and then later downgraded to B++, and then…

[snic]

An A rated insurer may have never defaulted. But what about an A rated insurer that was later downgraded to A-, and then later downgraded to B++, and then…

Good point. I imagine it often takes a while for an insurance company's liabilities to grow to the point where they are at risk for default. That's a pretty good argument for only buying shorter-term MYGAs - but then the interest rates will tend to be lower.

Personally, I would probably modify the OP's strategy to 50% TIPS, 50% US treasury bonds, and forego the extra 1% or so.

[babystep]

An A rated insurer may have never defaulted. But what about an A rated insurer that was later downgraded to A-, and then later downgraded to B++, and then…

State Guaranty Association covers that case up-to the limits.

https://www.annuityadvantage.com/resour ... ociations/

[alec]

I think you’re over complicating things. The whole point of TIPS is that you’re taking inflation risk totally out of the equation.

So what if inflation is low and nominal bonds or MYGAs perform better.

So what? Well, you end up with less money...

Again, so what. With TIPS, I have the same real income no matter what inflation is. You ended up with more income because inflation ended up being low. Good for you. Your bet paid off. But that’s what it is. A bet. It’s not hedging anything .

[babystep]

So what? Well, you end up with less money...

Again, so what. With TIPS, I have the same real income no matter what inflation is. You ended up with more income because inflation ended up being low. Good for you. Your bet paid off. But that’s what it is. A bet. It’s not hedging anything .

+1.

But if you are taking the bet then you are better off with MYGA. The difference b/w the nominal and TIPS is showing you the expected inflation. MYGA returns are expected to be higher than the corresponding nominal bonds and the corresponding TIPs.

Just to be clear this is based on the expectation and reality may be different i.e. TIPS may beat MYGA. You are taking slightly higher risk, loss of liquidity with MYGA and in exchange you are awarded with slightly higher return.

[Atticus713]

I would respectfully disagree with alec’s most recent post. A “bet” would be 100% TIPS (betting or being concerned that inflation would be higher than fed expectations) or 100% MYGA or treasuries (betting inflation would be on target or lower than expectations).

Buying both TIPS and either T Bills or MYGAs is precisely what “hedging” is. If inflation is higher than expected you win (but not as much as if you were all TIPS). If inflation is lower than expected, you win (but not as much as if you were all MYGA or T Bills).

I’m not saying everyone should do this. I posted to see if the forum could point out issues that I’ve misunderstood, haven’t addressed, or am incorrect on in my original post.

So far, the only concerns have been:

1) more complexity compared with all TIPS or all treasuries/MYGAs, (a valid criticism—yes it is more complicated than going “all in” on one or the other); and

2) potential insurance company insolvency (which can be addressed with: a) picking an A rated or better company, and b) understanding your specific state’s ability to reimburse you if the life insurance company becomes insolvent (see post with link to each state’s coverage).

Any other concerns or issues folks see with this approach that I haven’t mentioned?
Many thanks!
Atticus713

[Atticus713]

loss of liquidity with MYGA and in exchange you are awarded with slightly higher return.

Agree with babystep. This would be the third concern/issue raised with this approach:

3) less liquidity with MYGA vs. TIPS or T Bills. (True: MYGA has big penalties if you want your money back earlier than the set term vs. TIPS or T Bills which are easier to sell on the secondary market if an emergency came up)

[Airco_DH2_pilot]

loss of liquidity with MYGA and in exchange you are awarded with slightly higher return.

Agree with babystep. This would be the third concern/issue raised with this approach:

3) less liquidity with MYGA vs. TIPS or T Bills. (True: MYGA has big penalties if you want your money back earlier than the set term vs. TIPS or T Bills which are easier to sell on the secondary market if an emergency came up)

Hi Atticus713,
When I've been looking at a similar strategy; I did realize that I wanted some portion of my fixed income asset allocation in a money market fund as a liquid cash reserve to address the issue above, as well as to provide cash for rebalancing when stocks drop. So in my current simulation; I've got a money market fund, the MYGA's, and a TIPs ladder. For the MYGA portion, I do think you want to stay with A rated companies (higher the better), and you want to split up your MYGA allocation into contracts that stay within your state's guaranty fund protection limit. As an additional liquidity tool, a lot of MYGA offers I have seen allow you to tap into as much as 10% of the premium without penalty. Hope this helps.

[Atticus713]

When I've been looking at a similar strategy; I did realize that I wanted some portion of my fixed income asset allocation in a money market fund as a liquid cash reserve to address the issue above, as well as to provide cash for rebalancing when stocks drop. So in my current simulation; I've got a money market fund, the MYGA's, and a TIPs ladder. For the MYGA portion, I do think you want to stay with A rated companies (higher the better), and you want to split up your MYGA allocation into contracts that stay within your state's guaranty fund protection limit. As an additional liquidity tool, a lot of MYGA offers I have seen allow you to tap into as much as 10% of the premium without penalty. Hope this helps.

Thanks Airco_DH2_pilot!

Yes, that does help to address the liquidity issue and is a nice idea to keep some MM in reserve for unexpected expenses as a part of your non-equity portfolio. In addition, I've also noticed that many of the MYGA products allow between 5-10% withdrawal per year if desired at no penalty (typically after the first year).

I'll wait about another week to see if anyone else chimes-in with any additional thoughts, suggestions, corrections, or concerns and then will start a new thread directed at folks considering or already employing a similar type of approach where we can talk about lessons learned and logistics of setting up a "MYTI Ladder" (MYGA/TIPS Ladder).

Best,
Atticus713

[CletusCaddy]

An A rated insurer may have never defaulted. But what about an A rated insurer that was later downgraded to A-, and then later downgraded to B++, and then…

State Guaranty Association covers that case up-to the limits.

https://www.annuityadvantage.com/resour ... ociations/

I’m not suggesting it wouldn’t be covered.

I’m suggesting the ratings are meaningless.

[babystep]

State Guaranty Association covers that case up-to the limits.

https://www.annuityadvantage.com/resour ... ociations/

I’m not suggesting it wouldn’t be covered.

I’m suggesting the ratings are meaningless.

Sorry, but I disagree. The ratings can change but they are not meaningless.

[snic]

When I've been looking at a similar strategy; I did realize that I wanted some portion of my fixed income asset allocation in a money market fund as a liquid cash reserve to address the issue above, as well as to provide cash for rebalancing when stocks drop. So in my current simulation; I've got a money market fund, the MYGA's, and a TIPs ladder. For the MYGA portion, I do think you want to stay with A rated companies (higher the better), and you want to split up your MYGA allocation into contracts that stay within your state's guaranty fund protection limit. As an additional liquidity tool, a lot of MYGA offers I have seen allow you to tap into as much as 10% of the premium without penalty. Hope this helps.

Thanks Airco_DH2_pilot!

Yes, that does help to address the liquidity issue and is a nice idea to keep some MM in reserve for unexpected expenses as a part of your non-equity portfolio. In addition, I've also noticed that many of the MYGA products allow between 5-10% withdrawal per year if desired at no penalty (typically after the first year).

I'll wait about another week to see if anyone else chimes-in with any additional thoughts, suggestions, corrections, or concerns and then will start a new thread directed at folks considering or already employing a similar type of approach where we can talk about lessons learned and logistics of setting up a "MYTI Ladder" (MYGA/TIPS Ladder).

Best,
Atticus713

I looked into MYGA rates and found they vary by state. In my state, the best MYGA rates for A-rated companies are barely more than US treasury bond rates of similar maturity. In other states, the rates are about 0.5% higher than treasuries. Even if I lived in one of those states, I don't think I'd consider that extra bit of interest worth the risk vs treasuries.

[Atticus713]

I looked into MYGA rates and found they vary by state. In my state, the best MYGA rates for A-rated companies are barely more than US treasury bond rates of similar maturity. In other states, the rates are about 0.5% higher than treasuries.

Good point, snic. You bring up another issue to consider and I’ll add it to our list…

#4: MYGA’s are regulated at the state level and so their rates vary by state.

Folks need to look up the rate they would receive in their particular state and compare it to the corresponding maturity date T Bill. In my state, the increase in rate for a 5 year MYGA vs. a maturity matched T Bill was 0.98% with an ‘A’ rated company.

It is then a personal decision whether that additional return justifies adding insurance company risk. Again, using an ‘A’ or above rated company and staying under your state’s protection limit (mine is $250k per company) can somewhat mitigate that risk. There is not a right or wrong answer here—it’s a personal choice—for some, the extra return is not worth the risk—and that is perfectly ok and a reasonable position to take. I would just encourage folks to do some investigating so they are armed with the facts they need to make an informed decision.

By the way, a cool website I came across offers a very easy to use MYGA annuity quote tool. You don’t need to enter any personal information other than listing what state you are in and the term (number of years for the MYGA) you’d like them to quote:

https://www.stantheannuityman.com/annui ... ators/myga

Thanks snic for your post!
Best,
Atticus713