High net worth, volatility phobic investor seeking help

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 9:58 am

nigel_ht wrote:
Wed Jul 29, 2020 9:05 pm
Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Actually I said she could do nearly anything short of burying it in the ground. And before she only wanted $75K from $20M but this is still only 0.38% WR.

The $1.5M in stocks + $1M in VSIGX and $2M VAIPX at 2.2% WR (below the 2.5% perpetual WR) gives her $99K...she's already fine and could afford to bury $22M in the ground.

It's such an easy scenario I dunno why you would create a thread about it.

The interesting question is what can you do with $22M since your basic necessities are covered by the $4.5M already invested and that's outside the scope of a financial site unless it's to create multi-generational wealth.
I'm having a hard time following you. First, what's WR?
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

lakpr
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Re: High net worth, volatility phobic investor seeking help

Post by lakpr » Thu Jul 30, 2020 9:59 am

Robot Monster wrote:
Thu Jul 30, 2020 9:58 am
I'm having a hard time following you. First, what's WR?
Withdrawal Rate

KlangFool
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Re: High net worth, volatility phobic investor seeking help

Post by KlangFool » Thu Jul 30, 2020 10:00 am

Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
KlangFool wrote:
Thu Jul 30, 2020 9:28 am
Robot Monster wrote:
Thu Jul 30, 2020 9:19 am
KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Robot Monster,

Why does this matter? It does not. She has more than enough money that even if the worst happened, it won't matter to her.

KlangFool
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
Robot Monster,

Let's assume that is true and it still won't matter to Vera. So, why does this matters?

Money is a nice tool but a lousy master. Our goal in life is to live our lives. Not to make money.

KlangFool

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 10:15 am

nedsaid wrote:
Thu Jul 30, 2020 12:59 am
Truth is, a 20% stock/80% bond portfolio is less risky that a 100% bond portfolio. It is counterintuitive but that is what the research says. Also people who are ultra conservative don't even think about the corrosive effects of inflation. I think your friend should increase her stock allocation to 20% and consider the use of TIPS for the fixed income portion. Not sure of the percentage as TIPS are not tax efficient so a lot depends upon how much is in taxable accounts and how much is in tax deferred accounts.
Is a 20% stock/80% bond portfolio really less risky that a 100% bond portfolio if the bond portfolio is 100% TIPS (let's say individually held)? That is indeed counterintuitive.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by LadyGeek » Thu Jul 30, 2020 10:16 am

In Re: How did you determine risk tolerance?, you posted a hypothetical situation:

Subject: How did you determine risk tolerance?
Robot Monster wrote:
Tue Jul 28, 2020 12:39 pm
...I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
One day later, the person's name is changed and there's no mention of $1,000,000 in Total World ETF.
Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Is this also a hypothetical situation? Please PM me to explain the discrepancy.

(Thread locked until this is resolved.)
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Re: High net worth, volatility phobic investor seeking help

Post by LadyGeek » Thu Jul 30, 2020 12:12 pm

^^^ Robot Monster has explained the discrepancy. The thread as "Laura" was hypothetical.

This thread is helping someone and is now unlocked to continue the discussion.
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Re: High net worth, volatility phobic investor seeking help

Post by pkcrafter » Thu Jul 30, 2020 1:05 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash.

Robert, does "Vera" have a financial advisor? Has she asked for your input? She will have a very low withdrawal rate, so there isn't too much of a problem; however, her spending power and overall portfolio will be severely reduced with the current allocation. I like Nedsaid's input above.


This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income.

The spending power of the portfolio will be reduced by a factor of 4 over the next 40 years
As we saw the Average annual inflation rate is 3.22%. That doesn't sound too bad until we realize that at that rate prices will double every 20 years. That means that every two bars on average prices have doubled or about 5 doublings since they began keeping records.


https://inflationdata.com/Inflation/Inf ... lation.asp


She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

It may last, but the overall spending/buying power will buy much less.


In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

She needs TIPS, but she also needs a reasonable amount of equity to deal with inflation. Twenty percent, as Ned suggested, is reasonable. 20% equity does not make an aggressive portfolio and Vera needs to look at the volatility of the entire portfolio, not just the equity side.

How much tax-advantaged space does Vera have? If mostly taxable, she could use Vanguard's tax-managed balanced fund 50/50 (VTMFX), which would hide a direct view of equity volatility. If Vera has tax-advantaged space, Vanguard Lifestrategy income fund (20% stock) would be a good option.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: High net worth, volatility phobic investor seeking help

Post by Escapevelocity » Thu Jul 30, 2020 1:49 pm

adamthesmythe wrote:
Wed Jul 29, 2020 9:26 pm
The post reads like this person just never ever wants to see a smaller number than the month before. And is not concerned at all with what the number can buy.

Not much reason to discuss or advise because it's just a choice between one no-growth bondlike investment and another.

Maybe spread it out into CDs in, what, 88 different banks?
That reminds me of the Russ Hanneman character on the HBO show Silicon Valley. He was completely freaked out when his net worth fell below a billion dollars. He was all about getting back the "Tres Coma" :D

“Without risk, there can be no reward. Without reward, there can be no billionaires. There is only one tequila created for the very rich, and those on the cusp of greatness. A tequila that was imagined by a visionary and raised by boldness. Tres Comas. Finally, a tequila crafted just for those mavericks ready to crush their third comma,” the release said.

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Re: High net worth, volatility phobic investor seeking help

Post by Ramjet » Thu Jul 30, 2020 1:54 pm

Annuitize to get to 95K after SS/pension(s), keep everything else as is

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Re: High net worth, volatility phobic investor seeking help

Post by 7eight9 » Thu Jul 30, 2020 1:59 pm

Annuitize some now to get $95K+.

Put the rest of the cash into MYGAs.

Roll forward until 59.5 (to avoid penalty).

At that time annuitize more.

Continue annuitizing every x years.

No need to participate in the equity markets if not desired.
I guess it all could be much worse. | They could be warming up my hearse.

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Re: High net worth, volatility phobic investor seeking help

Post by 9-5 Suited » Thu Jul 30, 2020 2:00 pm

I’m pretty worried about Vera being able to achieve her financial goals. She needs to go back to work. Maybe if she had saved more prudently, she could relax in a financially secure retirement.

pasadena
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Re: High net worth, volatility phobic investor seeking help

Post by pasadena » Thu Jul 30, 2020 2:01 pm

If I had 25 millions at age 46, I would either be have the same portfolio as she does (just trying to protect it from inflation), or 99% stocks.

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 2:07 pm

pkcrafter wrote:
Thu Jul 30, 2020 1:05 pm
Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash.

Robert, does "Vera" have a financial advisor? Has she asked for your input? She will have a very low withdrawal rate, so there isn't too much of a problem; however, her spending power and overall portfolio will be severely reduced with the current allocation. I like Nedsaid's input above.


This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income.

The spending power of the portfolio will be reduced by a factor of 4 over the next 40 years
As we saw the Average annual inflation rate is 3.22%. That doesn't sound too bad until we realize that at that rate prices will double every 20 years. That means that every two bars on average prices have doubled or about 5 doublings since they began keeping records.


https://inflationdata.com/Inflation/Inf ... lation.asp


She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

It may last, but the overall spending/buying power will buy much less.


In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

She needs TIPS, but she also needs a reasonable amount of equity to deal with inflation. Twenty percent, as Ned suggested, is reasonable. 20% equity does not make an aggressive portfolio and Vera needs to look at the volatility of the entire portfolio, not just the equity side.

How much tax-advantaged space does Vera have? If mostly taxable, she could use Vanguard's tax-managed balanced fund 50/50 (VTMFX), which would hide a direct view of equity volatility. If Vera has tax-advantaged space, Vanguard Lifestrategy income fund (20% stock) would be a good option.

Paul
Regarding financial advisors, she has been given financial advice in the past which she has ignored because of her anxieties, mainly about stocks. TIPS have sadly never been emphasized or possibly even mentioned. She could speak to Vanguard again...maybe she will.

Regarding the inflation data, you have to take into account that interest rates generally hover near inflation, if not above. Examples:
1960: Inflation 1.4%, Fed Funds Rate 2%
1970: Inflation 5.6%, Fed Funds 5%
1980: Inflation 12.5%, Fed Funds 18%
1990: Inflation 6.1%, Fed Funds 7%
2000: Inflation 3.4%, Fed Funds 6.5%
2010: Inflation 1.5% Fed Funds 0.25%
https://www.thebalance.com/u-s-inflatio ... st-3306093

So, when it comes to cash, the risk is not inflation per se, but the disparity between inflation and rates. The open question is how large that disparity could be over 60 years. Her portfolio can just make it at a 4% disparity. That might be a very, very possibly outrageous disparity to maintain over that period of time...but who knows. TIPS could very well work as insurance if the disparity is presumably also present in the rest of the yield curve i.e. 10yr yield at 1%, inflation at 5%. Obviously nominal bonds are going to be punished by the disparity same as cash if the disparity is throughout the curve. Stocks, normally unhappy when the Fed hiked rates would presumably enjoy rates being suppressed. I guess that is a plus for stocks here in this "large disparity" scenario.

I hope that all makes sense. Please tell me if an I somehow getting this wrong, or not making myself clear. Thank you for the feedback you've already given!
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Wricha » Thu Jul 30, 2020 2:10 pm

Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
KlangFool wrote:
Thu Jul 30, 2020 9:28 am
Robot Monster wrote:
Thu Jul 30, 2020 9:19 am
KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Robot Monster,

Why does this matter? It does not. She has more than enough money that even if the worst happened, it won't matter to her.

KlangFool
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
Anything can happen it’s a smorgasbord of death out there pay your money and take your choice. I would not interfere she will probably be fine. Anyway, I would bet either you or her will be dead before the money runs out so why do you care?

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Re: High net worth, volatility phobic investor seeking help

Post by HomerJ » Thu Jul 30, 2020 2:20 pm

Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She could put $10 million in SPIAs (use 5 different insurance companies) and get 3.5% returned for life.

That's $350,000 a year. Using just $10 million of her $25 million.

Sure, it's not inflation-adjusted, but she only wants $95,000 a year, so there's plenty of room for this to handle inflation.

No volatility at all. $29,000 a month deposited into her bank account every month.

For as long as she lives. Keep the extra money in the bank

Is that enough certainty for her?

After 30 years, even with 4% inflation, she's now only spending $300,000 a year... She still has $350,000 coming in.

The money from the previous 30 years that she didn't spend would be equal to more than $5 million at that point (that's with 0% growth). And she could buy another SPIA to give her more money to take care of future inflation.

SPIAs at age 76 would pay a ton... like 8%... So that $5 million would bump her up another $400,000 to $750,000 a year... And she would only be spending $300,000 at 76. With $750,000 coming in.

She would no problem making it to 106, even with 4% inflation and 0% growth, and there would be zero volatility. She can do it with just $10 million.
Last edited by HomerJ on Thu Jul 30, 2020 2:21 pm, edited 1 time in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 2:21 pm

nigel_ht wrote:
Wed Jul 29, 2020 9:05 pm
Actually I said she could do nearly anything short of burying it in the ground. And before she only wanted $75K from $20M but this is still only 0.38% WR.

The $1.5M in stocks + $1M in VSIGX and $2M VAIPX at 2.2% WR (below the 2.5% perpetual WR) gives her $99K...she's already fine and could afford to bury $22M in the ground.

It's such an easy scenario I dunno why you would create a thread about it.

The interesting question is what can you do with $22M since your basic necessities are covered by the $4.5M already invested and that's outside the scope of a financial site unless it's to create multi-generational wealth.
"...75K from $20M but this is still only 0.38% [withdrawal rate]"

That's only true if 75K is constant, not inflation-adjusted. Unsure how you calculated the perpetual 2.5% withdrawal rate above off of the $4.5M...
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 2:24 pm

Wricha wrote:
Thu Jul 30, 2020 2:10 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
KlangFool wrote:
Thu Jul 30, 2020 9:28 am
Robot Monster wrote:
Thu Jul 30, 2020 9:19 am
KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Robot Monster,

Why does this matter? It does not. She has more than enough money that even if the worst happened, it won't matter to her.

KlangFool
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
Anything can happen it’s a smorgasbord of death out there pay your money and take your choice. I would not interfere she will probably be fine. Anyway, I would bet either you or her will be dead before the money runs out so why do you care?
Yes, probably the money will cover her till she dies, and there's no guarantees in life no matter what one, but, we should do our very best, no? I do get your general point, though.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 2:25 pm

HomerJ wrote:
Thu Jul 30, 2020 2:20 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She could put $10 million in SPIAs (use 5 different insurance companies) and get 3.5% returned for life.

That's $350,000 a year. Using just $10 million of her $25 million.

Sure, it's not inflation-adjusted, but she only wants $95,000 a year, so there's plenty of room for this to handle inflation.

No volatility at all. $29,000 a month deposited into her bank account every month.

For as long as she lives. Keep the extra money in the bank

Is that enough certainty for her?

After 30 years, even with 4% inflation, she's now only spending $300,000 a year... She still has $350,000 coming in.

The money from the previous 30 years that she didn't spend would be equal to more than $5 million at that point (that's with 0% growth). And she could buy another SPIA to give her more money to take care of future inflation.

SPIAs at age 76 would pay a ton... like 8%... So that $5 million would bump her up another $400,000 to $750,000 a year... And she would only be spending $300,000 at 76. With $750,000 coming in.

She would no problem making it to 106, even with 4% inflation and 0% growth, and there would be zero volatility. She can do it with just $10 million.
I'll look into that! Thank you!
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Thu Jul 30, 2020 4:18 pm

Robot Monster wrote:
Thu Jul 30, 2020 9:58 am
nigel_ht wrote:
Wed Jul 29, 2020 9:05 pm
Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Actually I said she could do nearly anything short of burying it in the ground. And before she only wanted $75K from $20M but this is still only 0.38% WR.

The $1.5M in stocks + $1M in VSIGX and $2M VAIPX at 2.2% WR (below the 2.5% perpetual WR) gives her $99K...she's already fine and could afford to bury $22M in the ground.

It's such an easy scenario I dunno why you would create a thread about it.

The interesting question is what can you do with $22M since your basic necessities are covered by the $4.5M already invested and that's outside the scope of a financial site unless it's to create multi-generational wealth.
I'm having a hard time following you. First, what's WR?
Withdrawal Rate.

With her portfolio as it is and no changes should allow her to safely draw $99K a year, adjusted for inflation, just based on the amounts in VTI (or whatever similar), VSIGX and VAIPX.

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Re: High net worth, volatility phobic investor seeking help

Post by muffins14 » Thu Jul 30, 2020 4:34 pm

So, why not invest some more in TIPs, some more in equities, as inflation hedges? Think about the lower bound of what you'd like to have in the future, rather than volatility in your daily values?

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Re: High net worth, volatility phobic investor seeking help

Post by KingRiggs » Thu Jul 30, 2020 4:40 pm

Why not just annuitize the entire thing? She never needs to look at what her portfolio is doing ever again?
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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Thu Jul 30, 2020 5:34 pm

Robot Monster wrote:
Thu Jul 30, 2020 2:25 pm
HomerJ wrote:
Thu Jul 30, 2020 2:20 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She could put $10 million in SPIAs (use 5 different insurance companies) and get 3.5% returned for life.

That's $350,000 a year. Using just $10 million of her $25 million.

Sure, it's not inflation-adjusted, but she only wants $95,000 a year, so there's plenty of room for this to handle inflation.

No volatility at all. $29,000 a month deposited into her bank account every month.

For as long as she lives. Keep the extra money in the bank

Is that enough certainty for her?

After 30 years, even with 4% inflation, she's now only spending $300,000 a year... She still has $350,000 coming in.

The money from the previous 30 years that she didn't spend would be equal to more than $5 million at that point (that's with 0% growth). And she could buy another SPIA to give her more money to take care of future inflation.

SPIAs at age 76 would pay a ton... like 8%... So that $5 million would bump her up another $400,000 to $750,000 a year... And she would only be spending $300,000 at 76. With $750,000 coming in.

She would no problem making it to 106, even with 4% inflation and 0% growth, and there would be zero volatility. She can do it with just $10 million.
I'll look into that! Thank you!
4% inflation is unlikely in the near term but 40 years ago it was 13.5%. In Planning for “only” 4% over 60 years is ignoring the inflation risk based on historical values.

She has so much relative to her needs that SPIA buys her little over what she is doing now if she can live with her current risk profile with some minor mods. (Note even TIPS can lose money)

See if this makes sense in terms of background for withdrawal rates.

http://www.retirementoptimizer.com/arti ... 0Rates.pdf

In any case, at this level engaging a CPA to determine the tax implications of the various options is desirable. With $25M she needs one and law firm that can do both asset protection and estate planning.

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Re: High net worth, volatility phobic investor seeking help

Post by inbox788 » Thu Jul 30, 2020 6:22 pm

Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
No, that won't happen. A lot of cash will get wiped out if we had 10 years of 6% inflation and zero rates. Where would the poverty line be and how many folks will move below it? There will be a lot of pain, and before we reach 10 years, there will be many interventions. Vera will be in panic due to her phobia, but financially, she'll be fine.

Practically, it would be very good for Vera to take a little risk.

How much would an inflation adjusted (COLA) annuity that covered her minimum living expenses cost? Would that be a sufficient security net to take a tiny bit of risk with the remaining amount?

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Thu Jul 30, 2020 7:13 pm

inbox788 wrote:
Thu Jul 30, 2020 6:22 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
No, that won't happen. A lot of cash will get wiped out if we had 10 years of 6% inflation and zero rates. Where would the poverty line be and how many folks will move below it? There will be a lot of pain, and before we reach 10 years, there will be many interventions. Vera will be in panic due to her phobia, but financially, she'll be fine.

Practically, it would be very good for Vera to take a little risk.

How much would an inflation adjusted (COLA) annuity that covered her minimum living expenses cost? Would that be a sufficient security net to take a tiny bit of risk with the remaining amount?
From recollection on other threads you can’t find inflation adjusted annuities anymore...

Rates wouldn’t likely be 0 if inflation was 6%...

Worst case scenario is Venezuela. The odds of that are so low even I don’t bother worrying about it. We’d have more indicators things are going pear shaped than currently exists.

If I did then I’d have a 2nd citizenship somewhere and a get out of dodge plan. With $25M a 2nd citizenship is a pretty small percentage of her net worth...enough it might just be fun to have.

I’d park 100K CHF in Zürcher Kantonalbank just for fun too...a numbered Swiss bank account.

With $25M is get a nice little place in Nice or Monaco...nothing too expensive, we don’t have Oprah money after all...more like Felicity Huffman ($20M)...

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HomerJ
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Re: High net worth, volatility phobic investor seeking help

Post by HomerJ » Thu Jul 30, 2020 7:24 pm

nigel_ht wrote:
Thu Jul 30, 2020 5:34 pm
Robot Monster wrote:
Thu Jul 30, 2020 2:25 pm
HomerJ wrote:
Thu Jul 30, 2020 2:20 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She could put $10 million in SPIAs (use 5 different insurance companies) and get 3.5% returned for life.

That's $350,000 a year. Using just $10 million of her $25 million.

Sure, it's not inflation-adjusted, but she only wants $95,000 a year, so there's plenty of room for this to handle inflation.

No volatility at all. $29,000 a month deposited into her bank account every month.

For as long as she lives. Keep the extra money in the bank

Is that enough certainty for her?

After 30 years, even with 4% inflation, she's now only spending $300,000 a year... She still has $350,000 coming in.

The money from the previous 30 years that she didn't spend would be equal to more than $5 million at that point (that's with 0% growth). And she could buy another SPIA to give her more money to take care of future inflation.

SPIAs at age 76 would pay a ton... like 8%... So that $5 million would bump her up another $400,000 to $750,000 a year... And she would only be spending $300,000 at 76. With $750,000 coming in.

She would no problem making it to 106, even with 4% inflation and 0% growth, and there would be zero volatility. She can do it with just $10 million.
I'll look into that! Thank you!
4% inflation is unlikely in the near term but 40 years ago it was 13.5%. In Planning for “only” 4% over 60 years is ignoring the inflation risk based on historical values.
My plan was for just $10 million.

If inflation goes higher, she can use the other $15 million to make the up the difference or buy new SPIAs that will pay out far more (because interest rates will have risen)
She has so much relative to her needs that SPIA buys her little over what she is doing now if she can live with her current risk profile with some minor mods. (Note even TIPS can lose money)
SPIAs buys her zero volatility which was a stated goal.

Obviously this investor will never run out of money.

Obviously, using SPIAs is sub-optimal. Far less return than she would otherwise get.

But it gives her income for life, with zero volatility. Plenty left over (in CDs) that she can use to purchase more SPIAs as needed.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: High net worth, volatility phobic investor seeking help

Post by Seasonal » Fri Jul 31, 2020 4:49 am

inbox788 wrote:
Thu Jul 30, 2020 6:22 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:38 am
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
No, that won't happen. A lot of cash will get wiped out if we had 10 years of 6% inflation and zero rates. Where would the poverty line be and how many folks will move below it? There will be a lot of pain, and before we reach 10 years, there will be many interventions.
It seems highly unlikely the Fed would allow 6% inflation for an extended period. Central bankers tend to be inflation hawks at heart. Consider the amount of time the Fed has undershot its 2% target compared to overshooting it.

That being said, it would seem the pain would be largely limited to those who rely almost exclusively on cash holdings and there are not many of those. Most retirees rely on Social Security, which adjusts for inflation. Lots of workers would get higher wages and businesses would get higher prices, largely insulating themselves from inflation problems. Remember that for everyone who is paying more, there is someone receiving more. The extra amounts paid due to higher inflation won't just disappear.

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Fri Jul 31, 2020 8:17 am

nigel_ht wrote:
Thu Jul 30, 2020 5:34 pm
4% inflation is unlikely in the near term but 40 years ago it was 13.5%. In Planning for “only” 4% over 60 years is ignoring the inflation risk based on historical values.
The 4% is meant to be the average disparity between inflation and interest rates. So, while inflation was 13.3% in 1979, interest rates were 12% that same year, making for a 1.3% disparity. So, it seems to me, when it comes to cash, the risk is not inflation per se, but the disparity between inflation and rates. Here's a sampling of other year's inflation and interest rates:

1960: Inflation 1.4%, Fed Funds Rate 2%
1970: Inflation 5.6%, Fed Funds 5%
1980: Inflation 12.5%, Fed Funds 18%
1990: Inflation 6.1%, Fed Funds 7%
2000: Inflation 3.4%, Fed Funds 6.5%
2010: Inflation 1.5% Fed Funds 0.25%
https://www.thebalance.com/u-s-inflatio ... st-3306093

The open question is how large that disparity could be over 60 years. Her portfolio can just make it at a 4% disparity. That might be a very, very possibly outrageous disparity to maintain over that period of time...but who knows.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Fri Jul 31, 2020 8:30 am

inbox788 wrote:
Thu Jul 30, 2020 6:22 pm
Practically, it would be very good for Vera to take a little risk.

How much would an inflation adjusted (COLA) annuity that covered her minimum living expenses cost? Would that be a sufficient security net to take a tiny bit of risk with the remaining amount?
To diversify at least somewhat into annuities seems like a good idea. I'll have to look into that, thanks.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Fri Jul 31, 2020 9:08 am

FrankTheViking wrote:
Wed Jul 29, 2020 6:19 pm
I'd say spread it out over everything she can think of. Start off with 6m in gold. At 95k a year, she's good unless she lives to 109+. After that 4m in silver. Why? No clue but why not... probably won't be volatile in a bad way and also 10m total is a nice round number. With the remaining 12m split 4 ways, 25% total stock market, 25% total bond market, 25% baseball cards, and burn the last 25% for style points.

The 3m in equities will likely pay her expenses for the rest of her life at a withdrawal rate UNDER 3.2%
All in on this strategy, especially the baseball cards, but as regards to burning the last 25%, do you recommend DCAing into that, or a straight out bonfire? Regardless, can't wait for those style points, which I assume can be used at Macy's.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by HomerJ » Fri Jul 31, 2020 9:17 am

Robot Monster wrote:
Fri Jul 31, 2020 8:30 am
inbox788 wrote:
Thu Jul 30, 2020 6:22 pm
Practically, it would be very good for Vera to take a little risk.

How much would an inflation adjusted (COLA) annuity that covered her minimum living expenses cost? Would that be a sufficient security net to take a tiny bit of risk with the remaining amount?
To diversify at least somewhat into annuities seems like a good idea. I'll have to look into that, thanks.
There are no inflation adjusted (COLA) annuities any more. They do have some that increase at a set amount (like 2% a year), but if inflation is higher, you'd still slowly lose purchasing power.

Still, putting at least some of her money into annuities (SPIA annuities, not the other kinds) is the right answer for this person.

She can cover all her needs with a small fraction of her net worth in SPIAs, and use the other money to handle inflation adjustments down the road.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: High net worth, volatility phobic investor seeking help

Post by poppa23 » Fri Jul 31, 2020 9:20 am

You said she was single...you got a phone number :)

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Fri Jul 31, 2020 9:35 am

HomerJ wrote:
Fri Jul 31, 2020 9:17 am
Robot Monster wrote:
Fri Jul 31, 2020 8:30 am
inbox788 wrote:
Thu Jul 30, 2020 6:22 pm
Practically, it would be very good for Vera to take a little risk.

How much would an inflation adjusted (COLA) annuity that covered her minimum living expenses cost? Would that be a sufficient security net to take a tiny bit of risk with the remaining amount?
To diversify at least somewhat into annuities seems like a good idea. I'll have to look into that, thanks.
There are no inflation adjusted (COLA) annuities any more. They do have some that increase at a set amount (like 2% a year), but if inflation is higher, you'd still slowly lose purchasing power.

Still, putting at least some of her money into annuities (SPIA annuities, not the other kinds) is the right answer for this person.

She can cover all her needs with a small fraction of her net worth in SPIAs, and use the other money to handle inflation adjustments down the road.
Very much appreciate your recommendation on that.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by TN_Boy » Fri Jul 31, 2020 9:50 am

nigel_ht wrote:
Thu Jul 30, 2020 5:34 pm
Robot Monster wrote:
Thu Jul 30, 2020 2:25 pm
HomerJ wrote:
Thu Jul 30, 2020 2:20 pm
Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She could put $10 million in SPIAs (use 5 different insurance companies) and get 3.5% returned for life.

That's $350,000 a year. Using just $10 million of her $25 million.

Sure, it's not inflation-adjusted, but she only wants $95,000 a year, so there's plenty of room for this to handle inflation.

No volatility at all. $29,000 a month deposited into her bank account every month.

For as long as she lives. Keep the extra money in the bank

Is that enough certainty for her?

After 30 years, even with 4% inflation, she's now only spending $300,000 a year... She still has $350,000 coming in.

The money from the previous 30 years that she didn't spend would be equal to more than $5 million at that point (that's with 0% growth). And she could buy another SPIA to give her more money to take care of future inflation.

SPIAs at age 76 would pay a ton... like 8%... So that $5 million would bump her up another $400,000 to $750,000 a year... And she would only be spending $300,000 at 76. With $750,000 coming in.

She would no problem making it to 106, even with 4% inflation and 0% growth, and there would be zero volatility. She can do it with just $10 million.
I'll look into that! Thank you!
4% inflation is unlikely in the near term but 40 years ago it was 13.5%. In Planning for “only” 4% over 60 years is ignoring the inflation risk based on historical values.

She has so much relative to her needs that SPIA buys her little over what she is doing now if she can live with her current risk profile with some minor mods. (Note even TIPS can lose money)

See if this makes sense in terms of background for withdrawal rates.

http://www.retirementoptimizer.com/arti ... 0Rates.pdf

In any case, at this level engaging a CPA to determine the tax implications of the various options is desirable. With $25M she needs one and law firm that can do both asset protection and estate planning.
I didn't read all the posts here ... obviously what "Vera" needs is more financial education. The desire for zero volatility is irrational and somehow, this point needs to be understood. Also inflation needs to be clearly understood. That said, I have found that some people just don't understand inflation versus investment returns. Even people that lived through the 70s .....

There is a limit to how much advice I would give someone who is unwilling to be rational before I would give up and hand the problem off to somebody else that might have better luck being heard. Actually, given that I have no experience managing 20+ million, I would not undertake to advise this person. That's enough money where getting the right kind of pro involved makes sense.

An SPIA seems like a terrible idea given the stated asset base and living expenses. It's throwing away money.

I agree with nigel_ht, the person needs financial counseling, plus tax and estate advice. Even if there are not children, perhaps "Vera" would become interested in a charity and wish to help that charity now, or when she leaves this earth.

(Were I recommending a portfolio, which I probably would not, my offhand suggestion would be something like 20% to 25% equities, the rest probably treasuries, likely a mix of TIPs and nominal. Such a portfolio is lower risk than an all fixed income portfolio and has modest volatility. And it should keep pace with inflation while throwing off plenty of income for living expenses. This is where tax planning might be useful .. and going forward as well.)

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Re: High net worth, volatility phobic investor seeking help

Post by MathWizard » Fri Jul 31, 2020 9:59 am

aristotelian wrote:
Wed Jul 29, 2020 7:44 pm
Escapevelocity wrote:
Wed Jul 29, 2020 6:30 pm
Is it safe to assume the OP is Vera?
I have a hard time believing Vera exists. Tough to accumulate $22M without taking risk.
The only risk is being born to the right parents , and inherit it.
$22M just happens to be about the amount of the estate tax
exemption, but maybe that is just a coincidence.

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Re: High net worth, volatility phobic investor seeking help

Post by inbox788 » Fri Jul 31, 2020 3:51 pm

HomerJ wrote:
Fri Jul 31, 2020 9:17 am
There are no inflation adjusted (COLA) annuities any more. They do have some that increase at a set amount (like 2% a year), but if inflation is higher, you'd still slowly lose purchasing power.

Still, putting at least some of her money into annuities (SPIA annuities, not the other kinds) is the right answer for this person.

She can cover all her needs with a small fraction of her net worth in SPIAs, and use the other money to handle inflation adjustments down the road.
Yeah, I've seen reference to 2%, and even 3, 4 or 5% annual adjustments [now even 6 and 10%]. Are these completely fixed now and not indexed at all to inflation? [found some differences, see below COLA/CPI] If you pay for a higher rate than inflation, you might gain purchasing power? Is it correct to call these SPIA with 3% adjustment? If you're buying 50+ years expected longevity, they're not going to appear cheap.
The most commonly selected percentage is a 3% per year adjustment, but you can select another rate of increase. Most companies permit level increases from 1% to 6% per year, though one carrier even permits 10% a year.
https://www.immediateannuities.com/imme ... ments.html

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