How can I acheive 2% using fixed income instrutments

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orenishi
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How can I acheive 2% using fixed income instrutments

Post by orenishi » Mon Sep 09, 2019 12:49 pm

If I were hoping to achieve a simple 2% return for the remainder of my life, what would be the best way to achieve this? With the recent (and inevitable future additional) rate cut/s, attaining 2% is not possible in most money market funds/high yield savings accounts (from what I understand). So, how could one achieve 2% in a low interest rate environment by using fixed income investments. Consider me mid-60’s and retired and unwilling to put more in the equities market. Any specific examples would be greatly appreciated (ex - name of CD and rate). Thank you!

dbr
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Re: How can I acheive 2% using fixed income instrutments

Post by dbr » Mon Sep 09, 2019 12:56 pm

orenishi wrote:
Mon Sep 09, 2019 12:49 pm
If I were hoping to achieve a simple 2% return for the remainder of my life, what would be the best way to achieve this? With the recent (and inevitable future additional) rate cut/s, attaining 2% is not possible in most money market funds/high yield savings accounts (from what I understand). So, how could one achieve 2% in a low interest rate environment by using fixed income investments. Consider me mid-60’s and retired and unwilling to put more in the equities market. Any specific examples would be greatly appreciated (ex - name of CD and rate). Thank you!
If your query is to anticipate future rate cuts I don't know how to supply specific examples of a future CD. It isn't very hard to find 2% interest rates on money today. Bankrate.com lists current CD rates.

If, as you should, you should specify real interest rates, then there aren't any today at 2%, but the current real rates on US Treasuries range from about zero up to .4% for thirty year TIPS.

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greg24
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Re: How can I acheive 2% using fixed income instrutments

Post by greg24 » Mon Sep 09, 2019 12:59 pm

Someone started a similar thread today at: viewtopic.php?p=4741209

Maybe the best answer from that thread: Prime Alliance bank's 5 year CDs are currently yielding 3.15%.

dbr
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Re: How can I acheive 2% using fixed income instrutments

Post by dbr » Mon Sep 09, 2019 1:05 pm

It might or might not be that an alternative answer to the question, when you specify only fixed income and for the rest of your life, that your objectives would be better served by using some of the money to buy a single premium immediate fixed (inflation indexed) annuity.

The question is what do you want this money to do for you?

mptfan
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Re: How can I acheive 2% using fixed income instrutments

Post by mptfan » Mon Sep 09, 2019 1:51 pm

Vanguard short term investment grade fund, VFSUX.

transient_academic
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Re: How can I acheive 2% using fixed income instrutments

Post by transient_academic » Mon Sep 09, 2019 4:00 pm

You're very limited in the amounts you can buy annually, but Series I Savings Bonds via Treasury Direct ($10k/person/year) and via your tax return ($5k/person/year) get close to that. They pay a fixed rate plus an inflation indexed rate. The fixed rates are set by Treasury and are set in stone for the life of that bond. Currently the fixed rate is at .5% and with the inflation index it is around 1.9%. You have until the end of October to buy at the .5% fixed rate. I learned about them on these forums and according to some posters they were a great replacement for savings accounts after 2008.

retiredflyboy
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Re: How can I acheive 2% using fixed income instrutments

Post by retiredflyboy » Mon Sep 09, 2019 4:11 pm

To achieve 2% return for the rest of your life you are left with fixed income immediate annuity or perhaps purchase 30 year treasury bonds. Every thing else would not be a guarantee for the rest of your life. CD for 5 years is just for 5 years. Can you pay off a mortgage or something that would eliminate a greater then 2% interest payment?
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Artful Dodger
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Re: How can I acheive 2% using fixed income instrutments

Post by Artful Dodger » Mon Sep 09, 2019 5:01 pm

dbr wrote:
Mon Sep 09, 2019 1:05 pm
It might or might not be that an alternative answer to the question, when you specify only fixed income and for the rest of your life, that your objectives would be better served by using some of the money to buy a single premium immediate fixed (inflation indexed) annuity.

The question is what do you want this money to do for you?
To tag onto this, are you looking for just monthly income for life, or earning 2% on an amount of capital that you don't want to deplete, or are you looking for a inflation protected 2% return? I don't know about the last, but the first two are attainable for now.

I looked on ImmediateAnnuities.com and a SPIA will give you about 6.5% for life with a 10 year certain. But, when you die, it's over and there is no remainder other than the first 10 years. That's also just for a 65 year old male. If you want a second to die to include spouse, the rate will be a little lower.

If you want to lock in 2%~ for 5 years, there should be plenty of CD options. Fidelity has 2 year CDs paying 1.9%. I've been buying 2 and 3 year CDs, and they were previously 2.10 to 2.25%, but interest rates have adjusted. Two year AA rated corporates will get you in the 2.1% range.

fru-gal
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Re: How can I acheive 2% using fixed income instrutments

Post by fru-gal » Mon Sep 09, 2019 5:03 pm

depositaccounts.com and local credit unions' rate pages show five year cds at better than 2%.

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willthrill81
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Re: How can I acheive 2% using fixed income instrutments

Post by willthrill81 » Mon Sep 09, 2019 5:12 pm

I agree that a single premium immediate annuity might be just what you're looking for. Another option is to buy 30 year nominal Treasuries and/or TIPS.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

delamer
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Re: How can I acheive 2% using fixed income instrutments

Post by delamer » Mon Sep 09, 2019 5:19 pm

You are going to be in trouble in 10 years (if not sooner) if you don’t consider inflation in your plan.

$10,000 in spending today will require $12,190 in 10 years with 2% annual inflation.

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orenishi
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Re: How can I acheive 2% using fixed income instrutments

Post by orenishi » Wed Sep 11, 2019 7:56 am

All great suggestions. Thank you for the responses. I have never used depositaccounts.com or immediateannuities.com but these are great resources. Thank you for sharing. Regarding Single Premium Annuities, I have always been somewhat hesitant with these instruments (mostly because I am unfamiliar). Is there any benefit to diversifying between different insurance companies? Is there anything else that I should look for when shopping/considering a SPIA?

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elcadarj
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Re: How can I acheive 2% using fixed income instrutments

Post by elcadarj » Wed Sep 11, 2019 8:05 am

mptfan wrote:
Mon Sep 09, 2019 1:51 pm
Vanguard short term investment grade fund, VFSUX.
+1

Or, same idea but in ETF space, iShares 0-5 Year Investment Grade Corporate Bond ETF, SLQD, https://www.etf.com/SLQD#overview
Last edited by elcadarj on Wed Sep 11, 2019 8:08 am, edited 1 time in total.

Jack FFR1846
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Re: How can I acheive 2% using fixed income instrutments

Post by Jack FFR1846 » Wed Sep 11, 2019 8:07 am

Not forever, but I just looked at Ally and a 5 year CD is 2.5%. I also know that a Redneck Megamoney account (no hoops to jump through) is currently paying 2.4% up to $50k. Their Jump Through Hoops checking account pays 3%.
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Cyanide123
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Re: How can I acheive 2% using fixed income instrutments

Post by Cyanide123 » Wed Sep 11, 2019 8:22 am

My savings account at vio bank is paying 2.52 percent right now. Can't get any safer than that.

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vineviz
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Re: How can I acheive 2% using fixed income instrutments

Post by vineviz » Wed Sep 11, 2019 9:10 am

orenishi wrote:
Wed Sep 11, 2019 7:56 am
Is there any benefit to diversifying between different insurance companies?
It depends on how much you are putting into the annuity and which state you reside in. Every state operates a guaranty fund that will protect your annuity up to certain limits. Below those limits, there are arguably no benefits to using multiple insurance companies. Above those limits it might be prudent.
orenishi wrote:
Wed Sep 11, 2019 7:56 am
Is there anything else that I should look for when shopping/considering a SPIA?
Apart from counter-party risk (i.e. the risk that the insurer will fail, which is what the state guaranty fund is designed to guard against), the main risk with any form of annuity is inflation risk: if you buy an SPIA which lacks an inflation adjustment, every year your purchasing power will go down by the rate of inflation. Social Security can help offset this, but buying a SPIA with an inflation adjustment (or least a COLA) is probably smart.

If you have the resources, building ladder of individual TIPS sufficient to cover your non-discretionary expenses (food, clothing, shelter, taxes, etc.) and using the rest of your wealth to buy an SPIA would be a simple strategy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

dbr
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Re: How can I acheive 2% using fixed income instrutments

Post by dbr » Wed Sep 11, 2019 12:14 pm

orenishi wrote:
Wed Sep 11, 2019 7:56 am
All great suggestions. Thank you for the responses. I have never used depositaccounts.com or immediateannuities.com but these are great resources. Thank you for sharing. Regarding Single Premium Annuities, I have always been somewhat hesitant with these instruments (mostly because I am unfamiliar). Is there any benefit to diversifying between different insurance companies? Is there anything else that I should look for when shopping/considering a SPIA?
An annuity is a completely different kind of solution to what you might be trying to do than is depositing money at 2% for a lifetime. So what to look out for is to be specific regarding what you want to do and see what options are a good fit. The annuity was suggested by people on this thread because we are reading between the lines that your query is about how to supply income for your lifetime and that leads to considering an annuity as an option.

A first consideration regarding annuities is because an annuity abandons assets in favor of income most people would not annuitize everything because a reserve needs to be kept for unanticipated spending. A second consideration regarding annuities is inflation. A solution to that is rarer and harder to find inflation indexed annuities. Note that your plan of taking 2% from a fixed investment is also at risk to inflation. To solve that problem you can only spend return that exceed inflation and you reinvest the rest. If inflation is 1.5%, for example, you can spend only .5%. If inflation is 2.5%, you can't spend anything and have to add .5% from somewhere else. That is why TIPS come into the discussion, and current TIPS real yield is about .5% at best. On the other hand if you are ok with spending down the savings that is an entirely different conversation.

megabad
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Re: How can I acheive 2% using fixed income instrutments

Post by megabad » Wed Sep 11, 2019 12:20 pm

orenishi wrote:
Mon Sep 09, 2019 12:49 pm
So, how could one achieve 2% in a low interest rate environment.
I would think any inflation protected instrument would work. Not sure why anyone would want a negative real return though for more than a few years?

Admiral
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Re: How can I acheive 2% using fixed income instrutments

Post by Admiral » Wed Sep 11, 2019 12:29 pm

Total Bond Admiral yield has, admittedly, been falling lately but it's still over 2%.

I think the rate cuts have likely been priced in by now. What will happen if rates continue to fall is anyone's guess. It's possible the mix of holdings will shift to higher yield bonds from gov't debt, but we can't say that for sure.

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dratkinson
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Re: How can I acheive 2% using fixed income instrutments

Post by dratkinson » Wed Sep 11, 2019 3:19 pm

Depending upon your tax brackets (fed+state), could use a muni fund.

N.B. Due to slightly more risk, munis not recommended in <30% effective fed tax bracket. I ignore this advice.

I'm in 22% fed tax bracket and use VWLUX (Vanguard's long-term national muni bond fund) for after-tax income >2%.

Might do better if you have access to a single-state muni fund for the triple tax benefits (fed+state+city). But you incur additional risk due to single-state default risk. (Search internet for "death spiral" states before going the single-state muni route.)
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Re: How can I acheive 2% using fixed income instrutments

Post by ruud » Wed Sep 11, 2019 8:32 pm

Wouldn't buying 30-year Treasury bonds right now lock in an interest rate of just above 2% for 30 years? (Don't have experience with this so I don't know how practical this is for a retail investor)
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willthrill81
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Re: How can I acheive 2% using fixed income instrutments

Post by willthrill81 » Wed Sep 11, 2019 8:34 pm

ruud wrote:
Wed Sep 11, 2019 8:32 pm
Wouldn't buying 30-year Treasury bonds right now lock in an interest rate of just above 2% for 30 years? (Don't have experience with this so I don't know how practical this is for a retail investor)
Yes, 2.22% as of today. It was 1.95% last Tuesday, 9/3/19.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: How can I acheive 2% using fixed income instrutments

Post by dbr » Thu Sep 12, 2019 3:53 pm

ruud wrote:
Wed Sep 11, 2019 8:32 pm
Wouldn't buying 30-year Treasury bonds right now lock in an interest rate of just above 2% for 30 years? (Don't have experience with this so I don't know how practical this is for a retail investor)
It locks it in, true; the investor will get the 2%. What is also locked in is that there is no guarantee of getting back the principal invested except when one waits to the end of the thirty years. Trying to sell the bond before maturity could be costly. Also, one should note the bond might be purchased at a premium meaning some of the interest is in effect return of principal, in a sense. The other disadvantage is locking out the opportunity to invest money at a future higher interest rate.

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