SPIA at 6.2% no COLA vs SCHD at 2.88%

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mtmingus
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SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by mtmingus »

An A++ rated insurance now pay 6.22% for a SPIA joint life starting 3 years from now without COLA, or invest in Schwab dividend etf (with potential to beat inflation), now yield close to 3%?

In 8 years, our dual SS will pay basic living expenses IF no benefits cut by the government.

From portfoliovisulizer, SCHD did reach payouts 6+% FROM the original amount in year 8, So if history repeats, SCHD would pay as much or more after year 7, and you keep the capitals. This means you would have a leaner income year from year 3 thru year 7. Hopefully year 1 thru year 3 incomes would compensate the next 4 years.

SCHD has increased its dividend every year in its 10 years short history.
quietseas
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by quietseas »

A retiree without a COLA'd pension could do some of both rather than choosing one.
exodusNH
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by exodusNH »

mtmingus wrote: Sun Jun 19, 2022 9:14 am An A++ rated insurance now pay 6.22% for a SPIA joint life starting 3 years from now without COLA, or invest in Schwab dividend etf (with potential to beat inflation), now yield close to 3%?

In 8 years, our dual SS will pay basic living expenses IF no benefits cut by the government.

From portfoliovisulizer, SCHD did reach payouts 6+% FROM the original amount in year 8, So if history repeats, SCHD would pay as much or more after year 7, and you keep the capitals. This means you would have a leaner income year from year 3 thru year 7. Hopefully year 1 thru year 3 incomes would compensate the next 4 years.

SCHD has increased its dividend every year in its 10 years short history.
How old are you? Common wisdom here says SPIAs are something you should look into in your 70s. A good portion of a SPIA is them giving your your own money back.

Stock dividends are the same. As a stock holder, you have claim to all of the assets if a company, including the cash in the bank. The dividend is just them taking cash out of their account -- which you already have a claim to -- and putting it in yours. It's the equivalent of moving money from your left pocket to your right pocket. If this is held in a taxable account, it also generates a tax liability on you.

Focusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.

Stock dividends are not interest payments. They were helpful back in the day when it was very expensive to sell stocks, much more so if you weren't selling multiples of 100. ("Odd lots")

There are lots of discussions on this board. Search for irrelevance of dividends. Ben Felix has a great 12 minute YouTube video on this.
retireIn2020
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by retireIn2020 »

SPIA payout percentage is based on age. I'm 62 and a A++ no cola SPIA I saw on Blueprint last week was paying just out over 7% (single).

I do like SCHD, however, the main difference is that the SPIA is guaranteed for life!

Are you planning to purchase SCHD using fixed income assets? You are comparing a SPIA(low risk) to stocks even though it pays a dividend its still high risk.
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informal guide
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by informal guide »

The comparison in your headline is misleading. The SPIA payout includes principal, interest, and a mortality factor, whereas SCHD is a dividend rate on an equity ETF. The relevant number on the SPIA is the imputed interest rate, along with the assumed mortality. In the SPIA, you are locking in that imputed rate ---as others said, a very different risk profile than an equity ETF. Future inflation and stock price movement has no impact on the SPIA but significant impact (both positive and negative) on the ETF.

One other factor: SPIA imputed interest is taxed as ordinary income, whereas the ETF dividends are taxed (mostly, if not entirely) at the lower dividends tax rate.
Last edited by informal guide on Sun Jun 19, 2022 11:37 am, edited 1 time in total.
randomguy
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by randomguy »

mtmingus wrote: Sun Jun 19, 2022 9:14 am An A++ rated insurance now pay 6.22% for a SPIA joint life starting 3 years from now without COLA, or invest in Schwab dividend etf (with potential to beat inflation), now yield close to 3%?

In 8 years, our dual SS will pay basic living expenses IF no benefits cut by the government.

From portfoliovisulizer, SCHD did reach payouts 6+% FROM the original amount in year 8, So if history repeats, SCHD would pay as much or more after year 7, and you keep the capitals. This means you would have a leaner income year from year 3 thru year 7. Hopefully year 1 thru year 3 incomes would compensate the next 4 years.

SCHD has increased its dividend every year in its 10 years short history.
If SCHD is paying out 30% LESS than it does right now in 10 years, would you be ok with that? Sure we might have another huge bull market like we had over the previous 10 years but we could also have a down market. If you can't handle the downside, you can't handle the risk.

Odds are investing in stocks will beat the annuity but it is also likely to be a bumpy ride with a chance of failure.
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by CyclingDuo »

exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
"Save like a pessimist, invest like an optimist." - Morgan Housel
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JoMoney
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by JoMoney »

Stocks are risky. They offer the potential for growth that a fixed income investment (like a SPIA) doesn't.
Dividends do tend to be sticky, but in 2009 dividends on the S&P 500 took a -25% haircut, which isn't as big a cut as the market price took, and maybe a focus on the income helped an investor to "stay the course", but the net impact on the portfolio and it's future portfolio return whether the withdrawal came as a dividend or a capital gain wasn't that different. Admittedly, there are characteristics of stocks that pay a dividend I like more so than some new growth tech stock ;)
I can imagine having a combination of a SPIA and some stocks for growth potential.
Personally, I would consider a SPIA over a bond portfolio in withdrawals, but it's not at all comparable to a stock portfolio. The risk (and potential return) profiles are very different. There's no reason someone can't use a combination of several different things. When there's a decision the answer isn't clear on, "diversification" is usually the better choice rather than all-in on one thing or another.
Last edited by JoMoney on Mon Jun 20, 2022 8:21 am, edited 1 time in total.
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exodusNH
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by exodusNH »

CyclingDuo wrote: Mon Jun 20, 2022 7:58 am
exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
OP is not suggesting buying the S&P 500. And there are 3500 other companies out there in the US.

Focusing on dividends adds uncompensated risk to your portfolio. There is no historical evidence that dividends alone are better than no dividends. Maybe it's a weak meta factor of value and quality. But no research shows that dividends alone are not worth pursuing.

There is a behavioral component to it that some might find comforting. That can be a valid argument if it helps avoid worse investing behavior.

This has been rehashed hundreds of times. We really should have a dividends mega thread to concentrate the noise.

Edit to stress that I meant focusing solely on dividends. They a part of total market return.
Last edited by exodusNH on Mon Jun 20, 2022 10:07 am, edited 1 time in total.
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CyclingDuo
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by CyclingDuo »

exodusNH wrote: Mon Jun 20, 2022 8:20 am
CyclingDuo wrote: Mon Jun 20, 2022 7:58 am
exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
OP is not suggesting buying the S&P 500. And there are 3500 other companies out there in the US.

Focusing on dividends adds uncompensated risk to your portfolio. There is no historical evidence that dividends are better than no dividends. Maybe it's a weak meta factor of value and quality. But no research shows that dividends alone are not worth pursuing.

There is a behavioral component to it that some might find comforting. That can be a valid argument if it helps avoid worse investing behavior.

This has been rehashed hundreds of times. We really should have a dividends mega thread to concentrate the noise.
Well aware of everything you are saying, was just pointing out the high percentage of dividend paying stocks in probably the most common index fund found in 401k/403b/457b plans today. Was wondering if you, based on your statement, felt that the S&P 500 index fund was too concentrated? That's all...
"Save like a pessimist, invest like an optimist." - Morgan Housel
JackoC
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by JackoC »

exodusNH wrote: Mon Jun 20, 2022 8:20 am
CyclingDuo wrote: Mon Jun 20, 2022 7:58 am
exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
OP is not suggesting buying the S&P 500. And there are 3500 other companies out there in the US.

Focusing on dividends adds uncompensated risk to your portfolio. There is no historical evidence that dividends are better than no dividends. Maybe it's a weak meta factor of value and quality. But no research shows that dividends alone are not worth pursuing.

There is a behavioral component to it that some might find comforting. That can be a valid argument if it helps avoid worse investing behavior.

This has been rehashed hundreds of times. We really should have a dividends mega thread to concentrate the noise.
I assume you mean 'no research shows that dividends alone *are* worth pursuing'. If so I basically agree. Concentration of risk would depend how high dividend payers you seek, and also a person holding a globally diversified portfolio of dividend payers might be less concentrated than someone who held 'whole market' but insisted on defining that as just one country's stock market, any one country. But yeah all else equal moving from a whole index to just 'dividend payers' in that index is going in the wrong direction from a diversification POV.

But the bigger mistake in OP's basic view is equating stocks to what's basically a form of bond investment with some credit enhancement* and an insurance product added on top, aka SPIA. It's basically apples vs. oranges. The cumulative $'s that can be taken from a stock portfolio (dividend payer or general index, US only or globally diversified) before it melts away entirely will vary very widely with future market and economic conditions but does not depend at all on the lifespan of the initial holder. The cumulative $'s you get from an SPIA depends directly on your lifespan and otherwise is a binary outcome each year: highly likely you get exactly what they promised in nominal $'s, no more or less, much less likely they default. It's a fundamental misunderstanding IMO to think of those as things you'd rank 1 and 2 then do 1 but not 2.

*the insurance company will invest that money mainly in bonds, mainly good quality but not strictly government. However you have an additional cushion in that the owners of the ins company seek profit but most forgo profit to make good on the SPIA if losses in the investment portfolio are higher than expected. Though of course the SPIA is priced to make them a profit if things go as expected, it's not a free lunch. Additionally the insurance company is generally backed by a guarantee association of insurance companies in the same state, so failure of multiple insurance companies would usually have to happen for you not to get paid in full, though not absolutely necessarily.
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CyclingDuo
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by CyclingDuo »

JackoC wrote: Mon Jun 20, 2022 8:48 amBut the bigger mistake in OP's basic view is equating stocks to what's basically a form of bond investment with some credit enhancement* and an insurance product added on top, aka SPIA. It's basically apples vs. oranges.
Correct and gets back to the OP's quest. It probably should have been asked in such a manner as "How much money in investments outside of the SPIA would I need to create my own DIY COLA for the SPIA to keep pace with inflation?" - or something to that effect.

I would point the OP to this series and the math behind creating a DIY COLA -whether it is to a non COLA SPIA or a pension, it requires a similar treatment...

https://grumpusmaximus.com/pension-seri ... eate-cola/

Scott Burns wrote about it in a similar manner way back when as well calling the DIY COLA an inflation immunization model using I Bonds. I am short for time this morning to come up with the link as I am heading off to work, but here's the graphic from Scott's article (available on the web):

Image

Either way, the OP's thinking regarding having a guaranteed payout from a SPIA would need some sort of DIY COLA to maintain purchasing power. I would agree that focusing on total return, rather than dividends alone, would be the avenue to pursue to come up with a formula of how to combine a non COLA pension or SPIA with an investment portfolio that cold provide the DIY COLA.

CyclingDuo
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dbr
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by dbr »

You can't compare things as different as an SPIA and investing in some bonds. A better approach would be to model the entire retirement income using one of the usual tools and then make a change from including an SPIA income stream starting at some point or just including that money in the portfolio at some asset allocation.

In any case the SPIA cannot be for all the assets a person has. It can be for a fraction of the assets and it does not have to best be something purchased now. It could also be that if SS is the major fraction of future income and between now and then the portfolio is going to be spent down to a huge degree, that a limited term annuity or bond ladder should bridge the gap -- or maybe not.

The unltimate vision should be of income from portfolio withdrawals plus income from Social security and then deciding if there is advantage to also having a "fixed pension" using up some of the portfolio starting at some time.

I have a fixed pension that started without a lump sum option when I retired, have SS that started later, and have a portfolio and find it most rationale to just model the combination altogether over time. What accounts for income changes a lot over time. In numbers our portfolio withdrawal rate started at 5%-6% for a little bit and eventually dropped closer to 3% and less.
exodusNH
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by exodusNH »

CyclingDuo wrote: Mon Jun 20, 2022 8:30 am
exodusNH wrote: Mon Jun 20, 2022 8:20 am
CyclingDuo wrote: Mon Jun 20, 2022 7:58 am
exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
OP is not suggesting buying the S&P 500. And there are 3500 other companies out there in the US.

Focusing on dividends adds uncompensated risk to your portfolio. There is no historical evidence that dividends are better than no dividends. Maybe it's a weak meta factor of value and quality. But no research shows that dividends alone are not worth pursuing.

There is a behavioral component to it that some might find comforting. That can be a valid argument if it helps avoid worse investing behavior.

This has been rehashed hundreds of times. We really should have a dividends mega thread to concentrate the noise.
Well aware of everything you are saying, was just pointing out the high percentage of dividend paying stocks in probably the most common index fund found in 401k/403b/457b plans today. Was wondering if you, based on your statement, felt that the S&P 500 index fund was too concentrated? That's all...
Ah. Those companies are in the S&P 500 for many reasons. They weren't selected just due to the dividends screen.

Since the S&P 500 represents something like 85% of the market cap in the US, wherever it goes, the market will follow. It is technically more concentrated than total market, but I don't think it matters in the long run. I have the 500 in my 401k since there isn't a TSM option. In taxable, I use VTI.
exodusNH
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by exodusNH »

JackoC wrote: Mon Jun 20, 2022 8:48 am
exodusNH wrote: Mon Jun 20, 2022 8:20 am
CyclingDuo wrote: Mon Jun 20, 2022 7:58 am
exodusNH wrote: Sun Jun 19, 2022 9:33 amFocusing on dividend companies also increases your concentration by reducing the number of companies you can invest in. This increases uncompensated risk.
84%, or rather - over 400 companies in the S&P 500 Index pay dividends.

Are S&P 500 Index investors too concentrated and increasing uncompensated risk?
OP is not suggesting buying the S&P 500. And there are 3500 other companies out there in the US.

Focusing on dividends adds uncompensated risk to your portfolio. There is no historical evidence that dividends are better than no dividends. Maybe it's a weak meta factor of value and quality. But no research shows that dividends alone are not worth pursuing.

There is a behavioral component to it that some might find comforting. That can be a valid argument if it helps avoid worse investing behavior.

This has been rehashed hundreds of times. We really should have a dividends mega thread to concentrate the noise.
I assume you mean 'no research shows that dividends alone *are* worth pursuing'. If so I basically agree. Concentration of risk would depend how high dividend payers you seek, and also a person holding a globally diversified portfolio of dividend payers might be less concentrated than someone who held 'whole market' but insisted on defining that as just one country's stock market, any one country. But yeah all else equal moving from a whole index to just 'dividend payers' in that index is going in the wrong direction from a diversification POV.

But the bigger mistake in OP's basic view is equating stocks to what's basically a form of bond investment with some credit enhancement* and an insurance product added on top, aka SPIA. It's basically apples vs. oranges. The cumulative $'s that can be taken from a stock portfolio (dividend payer or general index, US only or globally diversified) before it melts away entirely will vary very widely with future market and economic conditions but does not depend at all on the lifespan of the initial holder. The cumulative $'s you get from an SPIA depends directly on your lifespan and otherwise is a binary outcome each year: highly likely you get exactly what they promised in nominal $'s, no more or less, much less likely they default. It's a fundamental misunderstanding IMO to think of those as things you'd rank 1 and 2 then do 1 but not 2.

*the insurance company will invest that money mainly in bonds, mainly good quality but not strictly government. However you have an additional cushion in that the owners of the ins company seek profit but most forgo profit to make good on the SPIA if losses in the investment portfolio are higher than expected. Though of course the SPIA is priced to make them a profit if things go as expected, it's not a free lunch. Additionally the insurance company is generally backed by a guarantee association of insurance companies in the same state, so failure of multiple insurance companies would usually have to happen for you not to get paid in full, though not absolutely necessarily.
Correct. I added a clarification. Thank you for pointing out the ambiguity.
sandan
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by sandan »

retireIn2020 wrote: Sun Jun 19, 2022 9:41 am SPIA payout percentage is based on age. I'm 62 and a A++ no cola SPIA I saw on Blueprint last week was paying just out over 7% (single).

I do like SCHD, however, the main difference is that the SPIA is guaranteed for life!

Are you planning to purchase SCHD using fixed income assets? You are comparing a SPIA(low risk) to stocks even though it pays a dividend its still high risk.
Thank you for pointing us to Blueprint. Hopefully, I am many years out but its great to see updated quotes for some advanced planning. Currently I am planning on a mix of SPIA, eebond, and capital gains (selling & dividend) withdrawals between 60ish & 70. The ACA subsidy rule is probably going to be a big factor in determining the size of my SPIA before and after 65.
gougou
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by gougou »

mtmingus wrote: Sun Jun 19, 2022 9:14 am An A++ rated insurance now pay 6.22% for a SPIA joint life starting 3 years from now without COLA, or invest in Schwab dividend etf (with potential to beat inflation), now yield close to 3%?
Starting 3 years from now makes it sound like a terrible deal. You can buy high quality long term municipal bonds at about 4% yield to maturity today. If you give it 2 more years to compound you’ll get about 4.32% yield to maturity. 6.22% pretax isn’t much better than 4.32% tax-free depending on your tax rate. Plus you get to keep all the principal if you buy the munis.
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mtmingus
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by mtmingus »

Thanks everyone for all your inputs!
Wrench
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by Wrench »

CyclingDuo wrote: Mon Jun 20, 2022 9:05 am
JackoC wrote: Mon Jun 20, 2022 8:48 amBut the bigger mistake in OP's basic view is equating stocks to what's basically a form of bond investment with some credit enhancement* and an insurance product added on top, aka SPIA. It's basically apples vs. oranges.
Correct and gets back to the OP's quest. It probably should have been asked in such a manner as "How much money in investments outside of the SPIA would I need to create my own DIY COLA for the SPIA to keep pace with inflation?" - or something to that effect.

I would point the OP to this series and the math behind creating a DIY COLA -whether it is to a non COLA SPIA or a pension, it requires a similar treatment...

https://grumpusmaximus.com/pension-seri ... eate-cola/

Scott Burns wrote about it in a similar manner way back when as well calling the DIY COLA an inflation immunization model using I Bonds. I am short for time this morning to come up with the link as I am heading off to work, but here's the graphic from Scott's article (available on the web):

Image

Either way, the OP's thinking regarding having a guaranteed payout from a SPIA would need some sort of DIY COLA to maintain purchasing power. I would agree that focusing on total return, rather than dividends alone, would be the avenue to pursue to come up with a formula of how to combine a non COLA pension or SPIA with an investment portfolio that cold provide the DIY COLA.

CyclingDuo
Inflation adjusting a nominal income has been addressed in various topics on BH. Here are two:
viewtopic.php?p=6339810#p6339810
viewtopic.php?p=3518464#p3518464
What I have not seen addressed here or elsewhere is the sequence of return risk in inflation. Just as there is a "bad" sequence for investment returns for safe withdrawal rates, there is a "bad" sequence of inflation rates for nominal pensions. If inflation is high for a number of years at the beginning of retirement, one needs to save far more money to provide a DIY COLA. I have looked at this question in some depth. According to my calculations, for a retiree who retired in 1973, when the 25 year mean inflation rate is about the worst, and the first few years had very high inflation, the required savings would be about twice that listed in the above table, more like $12,000 per $1000 of nominal income for a 1% real return. On the other hand, retiring in a period when the initial years have deflation or very, very low inflation like 1895, one would only need to have $1875 per $1000 nominal income for 1% real return. FWIW, it seems to me 1990 has a sequence of inflation rates in subsequent years that might be similar to today, with a few years of high inflation, followed by inflation ranging from 1-3%. In that case, the amount required would be ~$6.6K per $1000 nominal income at 1% real return, close to that in Burns table. Bottom line, a DIY COLA for a nominal income is not so easy, at least with any confidence that it will provide complete protection. OTOH, some protection is better than none!

Wrench
AlwaysLearningMore
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by AlwaysLearningMore »

This April 2022 post by Wrench is very intersting:
Wrench wrote: Sat Apr 16, 2022 10:25 am Found this old thread that exactly answers my questions about inflation protecting a nominal income stream! Thank you to all the contributors, and especially to #Cruncher. To more visually appreciate what is required, I created a spreadsheet based upon #Cruncher's post above, then generated a chart that shows the initial investment in TIPS or iBonds required to inflation protected $1000 nominal income as a function of a fixed inflation rate, assuming 0% YTM on the iBond or TIPS. Thought others might be interested.
Image
So for example, to protect $25,000 of nominal income assuming 2.5% inflation for 25 years with 0% iBonds, a 25 x ~$6710 = ~$167,750 initial investment would be required. Although this amount seems daunting, with foresight it should be doable for most Bogleheads, for example by investing $25K in iBonds ($10K individual, $10K trust or spouse, $5K tax refund) for the ~7 years prior to the initial payout of the nominal income stream. If the iBond rate is not zero, the amount required would be less, for example more like $142K with a 1% rate.

Wrench
viewtopic.php?p=6624151#p6624151
Retirement is best when you have a lot to live on, and a lot to live for.
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mtmingus
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Re: SPIA at 6.2% no COLA vs SCHD at 2.88%

Post by mtmingus »

Thanks Wrench and AlwaysLearningMore!
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