$1 million to be spent down $50k/year over 20 years?

[moneyman11]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

[jtdavid]

Vanguard Target Retirement Income should do the trick.

[Monsterflockster]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

How do you advise them to invest it? What are the pros and cons of your advice?

Tesla!

Seriously though... doesn’t need money left after 20 years? Why not a saving account?

Why not buy an annuity?

None of those are what I’d do though.

[student]

Just a very naive opinion. Does inflation-linked bond serve this purpose?

[moneyman11]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

How do you advise them to invest it? What are the pros and cons of your advice?

Tesla!

Seriously though... doesn’t need money left after 20 years? Why not a saving account?

Why not buy an annuity?

None of those are what I’d do though.

Hmmm ... thanks for the reply, but I did specifically ask for what you would do (other than change the “requirements” posted) and to provide pros/cons (answer, not ask, the “why not”).

[moneyman11]

Just a very naive opinion. Does inflation-linked bond serve this purpose?

Perhaps. What specific instrument would you use? What do you think the cons of that could be, with regards to the investor reaching the stated goals?

[anon_investor]

Vanguard Target Retirement Income should do the trick.

+1 to this!

Vanguard Target Retirement Income Fund (VTINX)
https://investor.vanguard.com/mutual-fu ... file/VTINX

[student]

Just a very naive opinion. Does inflation-linked bond serve this purpose?

Perhaps. What specific instrument would you use? What do you think could be the cons of that could be, with regards to the investor reaching the stated goals?

The options are to buy TIPS directly from the treasury https://www.treasurydirect.gov/indiv/pr ... glance.htm or from an inflation-linked bond mutual funds or ETF. So ideally, this will preserve your purchasing power of $50k per year for the next 20 years. However, the concern is how accurate is the inflation-linked measure. TIPS uses the Consumer Price Index. The CPI has its own issues. https://www.investopedia.com/articles/0 ... eindex.asp https://www.bls.gov/opub/btn/volume-1/c ... us-cpi.htm I assume that senior citizens may have higher medical cost, which the CPI may not be a good measure.

[Svensk Anga]

Just a very naive opinion. Does inflation-linked bond serve this purpose?

Prior to last spring, TIPS would have worked fo this. Since then, yields out to 20 years have been less than inflation, so one would lose some purchasing power every year.

I bonds would work except for the likely tax bill, but it takes a lot of time to accumulate one million in I bonds.

[livesoft]

Avoid expenses that are subject to inflation.

[geerhardusvos]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

You can’t do much better than somewhere between 60/40 and 80/20 in VTI/VTEB.

[qwertyjazz]

The problem is the set up has issues. But with the rules defined, 250k in 4 banks to meet FDIC rules. 50k a year withdrawn for twenty years. Risk is only theft and default of the USA. No other answer will have as low risks. So with that, you might want to change your rules.

[ram]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

You can’t do much better than somewhere between 60/40 and 80/20 in VTI/VTEB.

I am inclined to believe that for his objectives he will do better with a stock allocation between 25 to 50%.
Perhaps VTI/ VTEB between 50:50 to 25:75 if we want to use the same above choices.

I would also consider Vanguard wellington.

[59Gibson]

25/75 probably safest option w/ inflation protection

[FinancialDave]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

1. To actually attempt to do this problem we must first make sure we understand the conditions. Unless I missed it I don't see where they are spelled out in enough detail to complete the task.

2. The First assumption, to be confirmed, is that the $50k inflation-adjusted number given is your budget and NOT the withdrawal from the $1m.

3. So to find the withdrawal we need to know your tax status (single or married, or Head of household) which we will have to assume for the 20 years unless noted otherwise.

4.Then we need to know which State is involved and/or State tax rate and whether it is essentially flat or not and the state tax deduction. 9% State tax like in New York or CA is 9% extra income you need even if Federal tax is zero.

Dave

[delamer]

You can only determine what the “necessary risk” was after-the-fact.

It also depends on what type of risk you want to minimize.

Some combination of an annuity and equities would be my choice.

[dru808]

How about cd ladder. If you don’t need money after 20 years.

[klaus14]

Nice puzzle, the challenge is to catch inflation with minimal risk.

Put $100k in a 1% checking account (TMobile Money). With this, buy I Bonds in the first 10 years and withdraw it in the last 10 years. This covers $10k of $50k in the last 10 years. I wish we could do that for more than $10k. So do the same for your spouse if you have one and now $20k is covered.

From the remaining, place N% into a 1% checking account. 1% is still better than 5-7y treasury bonds (5-7 years is the average duration for your first 10-15 years)

With the rest buy 50% VTI and 50% VXUS. When you are out of cash you will start spending from this bucket. Hopefully after 10-15 years they will retain their value. There is some risk but unfortunately, there is no other instrument other than I-Bonds today that guarantees non-negative real returns so stocks are the most reasonable bet if you have 10-15+ years investment horizon.

now, determination of N. since you only need a small amount of extra returns over 1% to catch inflation, i feel like it should be around 75%, but some modeling could provide the optimal N.

if inflation and rates rise, interest rate on checking/savings account should also go up. so that risk is minimal IMHO.

[Triple digit golfer]

If just one fund, Vanguard Target Retirement Income or LifeStrategy Income.

The former has a bit more equities, but also some short term inflation protected bonds.

The latter has fewer equities, but all bonds are in total bond funds.

[pasadena]

So the person already has the whole $1M? And they want $0 after 20 years? Right?

Without inflation, they wouldn't need to invest it at all. So they only need to protect against inflation. I'm not super familiar with them, but I would think TIPS are exactly what the person needs. Any stock wouldn't meet the "only want to take as much risk as necessary to achieve the above goal, and no more" premise.

[Ferdinand2014]

The problem is the set up has issues. But with the rules defined, 250k in 4 banks to meet FDIC rules. 50k a year withdrawn for twenty years. Risk is only theft and default of the USA. No other answer will have as low risks. So with that, you might want to change your rules.

Or brokerage at Fidelity. They automatically distribute each 250,000 to a unique bank up to 1.25 million all in one account to maintain FDIC.

[Triple digit golfer]

So the person already has the whole $1M? And they want $0 after 20 years? Right?

Without inflation, they wouldn't need to invest it at all. So they only need to protect against inflation. I'm not super familiar with them, but I would think TIPS are exactly what the person needs. Any stock wouldn't meet the "only want to take as much risk as necessary to achieve the above goal, and no more" premise.

Depends on the investor's rate of inflation, I suppose.

[7eight9]

Some combination of I-bonds, TIPs, fixed annuities and period certain annuities would likely be a good risk-adverse way of approaching the problem.

[aristotelian]

Have you looked at a 20 year annuity? Appears your initial income would be closer to $60k, well in excess of your $50k threshold.

[corn18]

I would do what I am doing to bridge SS (55-70):

60/40 w/ 25% international in a 3 funds portfolio.

I seriously considered annuitizing, but rates are too low and inflation would kill the plan.

I considered a bond tent so I had 15 years of safe money, but I couldn't figure out the pros and cons of that, so I aborted.

I looked at liability matching but I don't want TIPS. No real reason, just think they are silly right now.

Maybe I looked at something else.

But I always come back to the 60/40 3 fund portfolio. 5% WR for 20 years vs. 30 should be good to go. And it is likely you will have more money at the end of 20 years than not.

[retire57]

Avoid expenses that are subject to inflation.

Interesting! What are those?

[livesoft]

Avoid expenses that are subject to inflation.

Interesting! What are those?

You should not have to pay for sunlight nor air. And once you buy your land, you should not have pay for it. Your land might be taxed, but if you get elected to a political office, then you can always vote yourself an exception to taxes. You know, all the usual stuff.

[retire57]

Avoid expenses that are subject to inflation.

Interesting! What are those?

You should not have to pay for sunlight nor air. And once you buy your land, you should not have pay for it. Your land might be taxed, but if you get elected to a political office, then you can always vote yourself an exception to taxes. You know, all the usual stuff.

LOL! OK, livesoft, you've got me bending my brain trying to determine what expenses are not subject to inflation. (Sorry - don't want to hijack this thread.)

[corn18]

Avoid expenses that are subject to inflation.

Interesting! What are those?

You should not have to pay for sunlight nor air. And once you buy your land, you should not have pay for it. Your land might be taxed, but if you get elected to a political office, then you can always vote yourself an exception to taxes. You know, all the usual stuff.

LOL! OK, livesoft, you've got me bending my brain trying to determine what expenses are not subject to inflation. (Sorry - don't want to hijack this thread.)

P&I on a mortgage is the only one I can think of.

[moneyman11]

Nice puzzle, the challenge is to catch inflation with minimal risk.

Put $100k in a 1% checking account (TMobile Money). With this, buy I Bonds in the first 10 years and withdraw it in the last 10 years. This covers $10k of $50k in the last 10 years. I wish we could do that for more than $10k. So do the same for your spouse if you have one and now $20k is covered.

From the remaining, place N% into a 1% checking account. 1% is still better than 5-7y treasury bonds (5-7 years is the average duration for your first 10-15 years)

With the rest buy 50% VTI and 50% VXUS. When you are out of cash you will start spending from this bucket. Hopefully after 10-15 years they will retain their value. There is some risk but unfortunately, there is no other instrument other than I-Bonds today that guarantees non-negative real returns so stocks are the most reasonable bet if you have 10-15+ years investment horizon.

now, determination of N. since you only need a small amount of extra returns over 1% to catch inflation, i feel like it should be around 75%, but some modeling could provide the optimal N.

if inflation and rates rise, interest rate on checking/savings account should also go up. so that risk is minimal IMHO.

So far, I’d say this is my favorite answer in that you actually tried to answer the question as asked.

[SuzBanyan]

Have you looked at a 20 year annuity? Appears your initial income would be closer to $60k, well in excess of your $50k threshold.

This. And the excess in the early years could be reinvested in I bonds and then those I bonds could be cashed in as needed in later years to maintain spending power. Of course, it depends on the age of investor. A 30 year old might not be able to buy an immediate annuity.

[moneyman11]

The annuity response is interesting in that 1) no inflation indexed annuities currently exist, and 2) a one million dollar annuity would be FAR above most states’ guarantee limits, so many different annuity companies would have to be used - assuming enough could even be found.

[moneyman11]

The concept of I-Bonds are interesting but the annual purchase limit limits the ability to put meaningful money in them, and the govt doesn’t appear to be interested in increasing the limit with inflation, so, in real terms, the annual amount you can put in gets lower every year.

[JoMoney]

looking at some "20 year period certain annuities" quotes over here
$850,000 could buy $4,219/mo (just over $50k/yr) nominal
With $150k remaining to try and keep up with inflation

Assuming a 2% inflation adjustment each year on the initial $50k you'd need an additional $215k to have an additional 2% compounded on $50k 19 more years.. . To turn $150k to $215k across 20 years needs a 1.82% growth rate, it looks like one could build a ladder of 'Fixed Annuities' to do that, or one could probably buy a '20 year period certain annuity' to begin with that had the 2% adjustment built into it each year.

If there were expenses I could assume would be needed to come out of that $50k/yr that could be pre-payed now, or reduce impacts of inflation on (like owning home instead of renting, or at least locking in a fixed mortgage rate) I might consider that. If one owned the home or had a bit of equity in it over time they might be able to draw on that to make up some additional "inflation" adjustment needed in the income stream.

EDIT:
So I had to create an account to get a quote, but BluePrintIncome.com quoted me a 20 year period certain annuity paying $4,167/mo with a +2% annual adjustment from several different insurers starting at $957,985.03
A 3% annual adjustment quote starts at $1,038,002.28

[MotoTrojan]

I would likely use a majority of TIPS with a little equity kicker (10-25%) to help offset the fact that while the TIPS will adjust for CPI increases, other factors of inflation (healthcare) can rise at a higher rate.

[aristotelian]

The annuity response is interesting in that 1) no inflation indexed annuities currently exist, and 2) a one million dollar annuity would be FAR above most states’ guarantee limits, so many different annuity companies would have to be used - assuming enough could even be found.

Correct, the number I quoted would not be inflation adjusted but starts with a pretty big buffer. Back of napkin, it would last assuming 2% inflation and any return at all on the surplus built up in the early years.

[xxsocraticxx]

Avoid expenses that are subject to inflation.

or go to Thailand for some years and live like a king for $40K per year. Be careful, if married, there is some risk to the marriage.

[sandan]

The concept of I-Bonds are interesting but the annual purchase limit limits the ability to put meaningful money in them, and the govt doesn’t appear to be interested in increasing the limit with inflation, so, in real terms, the annual amount you can put in gets lower every year.

I think this imaginary investor is going to struggle living on $50k a year if $10k annual contributions is a non-meaningful sum and its too much of a hassle to set up a couple of annuities.

[Tamales]

You're going to need to account for taxes on gains, whether interest or cap gains, and as far as accounting for "inflation," while you may account for a bulk population inflation number using TIPS or whatever, that may be vastly different from your personal inflation rate, depending on what categories your expenses are in.

If you had a way to determine with fairly high confidence that your personal inflation rate is x% higher than a bulk population inflation after 20 years, you'd definitely need an equity position in order to get enough headroom (inflation premium + taxes) to cover 20 years. But that's not very realistic to project over 20 years, so you'll have to make periodic re-assessments, say every 2-3 years.
I don't see this as a one-and-done exercise. The initial numbers are just too close for that, and too much uncertainty across 20 years.

In years when you get an equity premium well above inflation, skim some of those gains into a HY savings account or CD. Also possible that in a couple-few years, the better 5 year CDs get back to rates that exceed inflation by a comfortable margin so at that point some portion invested in risk assets could be moved into those. Maybe the goal would be to manage the portfolio such that at 15 years in, you have a bigger safety margin than the initial conditions, and at that point the risk assets could be scaled back further.

[frugalprof]

I would start with the following:
$200,000 TIAA Traditional (3% guarantee)
$800,000 TIPS

On January 1 of each year, $50,000 is transferred from TIPS into TIAA Traditional. $50,000 comes out of TIAA Traditional each year in monthly installments. When TIPS funds run out, pay out of TIAA Traditional.

[hudson]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

Maybe purchase a non rolling ladder of individual TIPS.
or
50% Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX) and 50% PIMCO 15+ Year US TIPS Index Exchange-Traded Fund
NYSEARCA: LTPZ (I'm not an expert, but I am strongly considering doing one of these. If interested, read Vineviz's contributions. viewtopic.php?p=5404087#p5404087


Pros: low risk and inflation protected
Cons: TIPS are currently expensive

[Thesaints]

The OP wants a short term tips fund. Alternatively, with a million he can build a ladder of 20 50k TIPS with expiration from 2022 to 2042.

[Scooter57]

A five year ladder of high yield Credit Union CDs held at several institutions. If the institution allows POD accounts or Totten Trusts (the same thing) more than $250 can be protected by NCUA insurance, just by adding heirs as beneficiaries once the account is opened.

With a 5 year rolling ladder, if inflation ramps up, interest rates will rise and each year the investor will roll his maturing CDs into a higher yielding 5 yr CD. If rates plummet, the additional gain from the CDs will come in handy to make up for any previous lag.

If inflation really takes off, roll some of the maturing CDs into a Money Market Fund as they tend to adjust to skyrocketing rates faster than any other investment.

There is NO reason an investor with limited means and no additional income should be investing in the stock market. Target Date funds buy stocks and bonds, both of which risk capital. There is too high a chance that his principal held in stock or bonds might see prices drop in ways that when he took out his $50,000, he was taking out what had been, say, $75,000 when he first invested.

Stock investments and bond fund investments are only suitable for someone unable to earn should only be for money that they can afford to lose.

[Godot]

I would start with the following:
$200,000 TIAA Traditional (3% guarantee)
$800,000 TIPS

On January 1 of each year, $50,000 is transferred from TIPS into TIAA Traditional. $50,000 comes out of TIAA Traditional each year in monthly installments. When TIPS funds run out, pay out of TIAA Traditional.

Might be wrong, but I was under the impression that non-govt./non-profit employees did not have access to TIAA Traditional.

[moneyman11]

The concept of I-Bonds are interesting but the annual purchase limit limits the ability to put meaningful money in them, and the govt doesn’t appear to be interested in increasing the limit with inflation, so, in real terms, the annual amount you can put in gets lower every year.

I think this imaginary investor is going to struggle living on $50k a year if $10k annual contributions is a non-meaningful sum and its too much of a hassle to set up a couple of annuities.

OP didn't say anything about "living on 50k a year", just that he was going to "spend a million at 50k per year" - too many responders want to graft some overall financial planning onto this problem when there is none requested ... and the aversion to sending one million dollars to an insurance company didn't come from it being a "hassle", but I accept that it is a possible solution.

I-Bonds are a non-solution here because by the time the OP is able to get just 2 years of spending into I Bonds, half the 20 year spend down period will have passed.

[phxjcc]

Someone comes to you with the following:

• I have $1 million lump sum cash in a taxable account.

• I’m going to spend $50,000 per year from it over the next 20 years, and would like to maintain as much of that $50k/year purchasing power as possible over the 20 year period.

• I’m not necessarily risk averse, but only want to take as much risk as necessary to achieve the above goal, and no more.

• The possibility of money left over after 20 years is nowhere near as important as having that $50k (in today’s dollars) every year for the next 20 years.

• You can assume the I have no taxable income other than that generated by however this money is invested

How do you advise them to invest it? What are the pros and cons of your advice?

/*enters room; puts on flame proof suit*/

Why not buy rental properties?

2 @ $500K or 4 @ $250K should throw off $50,000/year net of costs, plus you get depreciation against the income that makes it all but untaxed, plus the rents will escalate with, or greater than, inflation and the principal (property values) should appreciate with, or greater than, inflation.

Cons: it's that four letter word: WORK, or just pay someone the 20% and don't work.

/*runs out of room, throwing suit off behind him, and jumps in pool*/

[#Cruncher]

Ignoring taxes [1] if TIPS yielded 0% or more, $1,000,000 invested in a 20-year ladder [2] of them could provide $50,000 per year of constant dollar withdrawals. Unfortunately they currently yield significantly less than 0%. So I'd take part of the $1M to buy a TIPS ladder of less than 20 years and invest the rest in stocks. After the TIPS ladder is over, I'd start withdrawing $50K each year from the stock portfolio.

The following table shows, for various length TIPS ladders, what real return would be needed on the stocks for this to work. For example, if stocks grew at least 1.6% annually over the 20 years, this approach would work with $814K invested in a 15-year TIPS ladder and the remaining $186K invested in stocks.

Code: Select all

Row                Col A      Col B    Col C    Col D    Col E    Col F    Col G  formula in column B
  1          Total years         20
  2     Total investment  1,000,000
  3    Annual withdrawal     50,000
  4      Years from TIPS          5       10       15       16       17       18
  5       TIPS return [3]   -1.250%  -1.125%  -1.000%  -1.000%  -1.000%  -1.000%
  6     Stocks return [4]   +0.100%  +0.433%  +1.645%  +2.456%  +4.223% +13.496%
  7      TIPS investment    259,655  532,382  813,559  872,282  931,598  991,513  =-PV(B5,B4,$B3,0,0)
  8     Stock investment    740,345  467,618  186,441  127,718   68,402    8,487  =$B2-B7
  9       Stocks grow to    744,046  488,285  238,124  188,299  138,171   82,870  =B8*(1+B6)^B4
 10  Withdrawal provided     50,000   50,000   50,000   50,000   50,000   50,000  =PMT(B6,$B1-B4,-B9,0,0)

1. Incorporating taxes would complicate the model considerably. For one thing it would be necessary to estimate inflation since the TIPS inflation-adjustment to principal is taxed.
2. Unfortunately one can't currently construct a TIPS ladder of more than 10 years with one TIPS maturing every year. However, it is possible to approximate such ladders by buying multiple amounts of some years (e.g., 2030, 2032, and 2040) to "cover" the years when no TIPS mature (2031 and 2033-2039). I did this using my TIPS Ladder Builder Excel workbook.
3. I got the TIPS returns shown on row 5 in the table from the Ladder Builder workbook for 5, 10, and 15 years.
4. I backed into the Stocks returns shown on row 6 in the table using Excel's Goal Seek tool to force the withdrawal on row 10 to come out to $50K.