How much to invest in Fund that has guaranteed 4% return?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

I have a "stability of principal" annuity in a 403B that I got into over 25 years ago when I was a faculty member. It has a variable interest rate that can go up or down, but the lowest it can go is 4%. That's what it has been at (obviously!) for a number of years. I have a few percent of my portfolio in it now. I have always considered it part of my bond allocation. As I approach retirement, I am considering transferring other tax deferred monies into this fund to increase it to about 20% of my portfolio and having it be a large fraction of my "bond" allocation. I am able to transfer as much in as I want for the time being, and there are no withdrawal penalties. The fund is held by a major insurance company (a competitor of TIAA). Other than "putting all (most of) my (bond) eggs in one basket" does anyone see a big downside to this? The only thing I can think of is that the company would go belly-up and then I would be backstopped by the state guarantee levels, which is $250K. I would initially have more than that, but it would go down below that after a few years because of RMDs. Thoughts BHs?

Wrench
User avatar
David Jay
Posts: 9415
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: How much to invest in Fund that has guaranteed 4% return?

Post by David Jay »

What is your stage of life?

4% is a superb rate at this time but it is not a great historic rate. A good intermediate bond fund has historically outperformed 4%. So it is a great fund to take advantage of at this time but I would not foreclose other alternatives (think surging inflation).

I would also be concerned that the issuer would look for a way to close off access to the fund in order to stop “the bleeding” (it is not financially sustainable in the current low-interest-rate environment).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
tadamsmar
Posts: 9078
Joined: Mon May 07, 2007 12:33 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by tadamsmar »

Wrench wrote: Tue Sep 15, 2020 3:46 pm I have a "stability of principal" annuity in a 403B that I got into over 25 years ago when I was a faculty member. It has a variable interest rate that can go up or down, but the lowest it can go is 4%. That's what it has been at (obviously!) for a number of years. I have a few percent of my portfolio in it now. I have always considered it part of my bond allocation. As I approach retirement, I am considering transferring other tax deferred monies into this fund to increase it to about 20% of my portfolio and having it be a large fraction of my "bond" allocation. I am able to transfer as much in as I want for the time being, and there are no withdrawal penalties. The fund is held by a major insurance company (a competitor of TIAA). Other than "putting all (most of) my (bond) eggs in one basket" does anyone see a big downside to this? The only thing I can think of is that the company would go belly-up and then I would be backstopped by the state guarantee levels, which is $250K. I would initially have more than that, but it would go down below that after a few years because of RMDs. Thoughts BHs?

Wrench
Is the 4% inflation adjusted? If not then inflation will eat away at the guarantee
langlands
Posts: 573
Joined: Wed Apr 03, 2019 10:05 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by langlands »

You can transfer in as much as you want and there are no withdrawal penalties? Maybe I'm being naive but isn't there a huge arbitrage opportunity here? I'd attempt to borrow as much money as possible at close to 1-2% interest and stuff it all into this fund. Assuming you own stocks, another way to do this is to withdraw money from from your brokerage account. There are places (like IBKR) where you can get very favorable margin rates. Notice that there is no risk here since all your money is still safe generating 4% and where you can withdraw penalty free and put it back into the stock account if you're ever in danger of getting margin called.

Edit: Oh, now I see you're worried about the company going belly up. So it's not risk free (makes sense now) and more akin to a corporate bond.
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

David Jay wrote: Tue Sep 15, 2020 4:04 pm What is your stage of life?

4% is a superb rate at this time but it is not a great historic rate. A good intermediate bond fund has historically outperformed 4%. So it is a great fund to take advantage of at this time but I would not foreclose other alternatives (think surging inflation).
Will retire in early 2023, currently age 66. SS at 70. DW will take SS at the same time or one year later at age 69 or 70. SS + infl. adjusted annuity we have will meet 80-90% of our income needs. Low 7 figure net worth. I would probably withdraw the interest (and RMDs) from this account in my 70s to fund "extras" or gifts to children.

Good point about historical returns. But since this is variable interest rate, its rate should go up if bond rates go up. Returns initially were 6 or 7% and came down slowly over the years. There is a lag, though. As I remember it, they only adjust annually, or maybe even at their discretion. (I don't remember since it has been so long since the last adjustment).
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

langlands wrote: Tue Sep 15, 2020 4:13 pm You can transfer in as much as you want and there are no withdrawal penalties? Maybe I'm being naive but isn't there a huge arbitrage opportunity here? I'd attempt to borrow as much money as possible at close to 1-2% interest and stuff it all into this fund. Assuming you own stocks, another way to do this is to withdraw money from from your brokerage account. There are places (like IBKR) where you can get very favorable margin rates. Notice that there is no risk here since all your money is still safe generating 4% and where you can withdraw penalty free and put it back into the stock account if you're ever in danger of getting margin called.

Edit: Oh, now I see you're worried about the company going belly up. So it's not risk free (makes sense now) and more akin to a corporate bond.
Also, can only transfer in tax-advantaged money, i.e., from tIRA,403B, etc.
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

tadamsmar wrote: Tue Sep 15, 2020 4:09 pm
Wrench wrote: Tue Sep 15, 2020 3:46 pm I have a "stability of principal" annuity in a 403B that I got into over 25 years ago when I was a faculty member. It has a variable interest rate that can go up or down, but the lowest it can go is 4%. That's what it has been at (obviously!) for a number of years. I have a few percent of my portfolio in it now. I have always considered it part of my bond allocation. As I approach retirement, I am considering transferring other tax deferred monies into this fund to increase it to about 20% of my portfolio and having it be a large fraction of my "bond" allocation. I am able to transfer as much in as I want for the time being, and there are no withdrawal penalties. The fund is held by a major insurance company (a competitor of TIAA). Other than "putting all (most of) my (bond) eggs in one basket" does anyone see a big downside to this? The only thing I can think of is that the company would go belly-up and then I would be backstopped by the state guarantee levels, which is $250K. I would initially have more than that, but it would go down below that after a few years because of RMDs. Thoughts BHs?

Wrench
Is the 4% inflation adjusted? If not then inflation will eat away at the guarantee
Not inflation adjusted. But, then again, neither are bonds (unless they are iBonds or TIPS). I actually have built a model similar to the Trinity study but with a fixed 4% annual return (instead of 60/40 stock bond return). In the worst case (1972 as I remember it) I can still withdraw~2.75% or the initial principal per year and inflation adjust every year, except capping the maximum increase at 10% if inflation is ever above that*. With such a scenario the money runs out in this worst case after ~30 years and there is only about a 10% reduction in buying power when it runs out. In the best case, I end up after 30 years with more than I started with. Of course, RMDs throw a monkey wrench into actually doing it that way unfortunately.

* Edit - mistyped - in model increase is capped at 1/2 inflation rate if inflation is above 10%.
Last edited by Wrench on Tue Sep 15, 2020 6:59 pm, edited 1 time in total.
User avatar
willthrill81
Posts: 20988
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How much to invest in Fund that has guaranteed 4% return?

Post by willthrill81 »

Wrench wrote: Tue Sep 15, 2020 3:46 pmThe fund is held by a major insurance company (a competitor of TIAA).
Would you mind revealing the name of this company? I'm not sure why you wouldn't. That may help elucidate the situation.
“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
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

willthrill81 wrote: Tue Sep 15, 2020 4:50 pm
Wrench wrote: Tue Sep 15, 2020 3:46 pmThe fund is held by a major insurance company (a competitor of TIAA).
Would you mind revealing the name of this company? I'm not sure why you wouldn't. That may help elucidate the situation.
Voya, formerly ING, formerly Aetna.
User avatar
willthrill81
Posts: 20988
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How much to invest in Fund that has guaranteed 4% return?

Post by willthrill81 »

Wrench wrote: Tue Sep 15, 2020 6:25 pm
willthrill81 wrote: Tue Sep 15, 2020 4:50 pm
Wrench wrote: Tue Sep 15, 2020 3:46 pmThe fund is held by a major insurance company (a competitor of TIAA).
Would you mind revealing the name of this company? I'm not sure why you wouldn't. That may help elucidate the situation.
Voya, formerly ING, formerly Aetna.
With a company of that size and the ability to freely withdraw funds, I'd feel very comfortable with all of my fixed income holdings being in such a fund. If the yield drops too much in the future, just transfer your funds elsewhere.
“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
Boatguy
Posts: 45
Joined: Fri Apr 19, 2019 7:54 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Boatguy »

I see that you are 66, and I’d imagine that your spouse is 65. Will you, by any chance, turn 67 before the end of the year? I’m assuming you won’t be because of your Social Security claiming strategy, but thought it was worth asking as anyone turning 67 this year (born in 1953) has other SS options.
User avatar
arcticpineapplecorp.
Posts: 6220
Joined: Tue Mar 06, 2012 9:22 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by arcticpineapplecorp. »

what's the guaranteed term?

you have to leave the dollars there for that term or you won't get the 4%:

Guaranteed Terms. A guaranteed term is the period of time account dollars must be left in the Guaranteed Account in order to earn the guaranteed interest rate specified for that guaranteed term. We offer different guaranteed terms at different times. We may also offer more than one guaranteed term of the same duration with different guaranteed interest rates. Check with your local representative or the Company to learn the details about the guaranteed term(s) currently offered. We reserve the right to limit the number of guaranteed terms or the availability of certain guaranteed terms. The number of guaranteed terms offered may vary by state, we may not offer all guaranteed terms on all contracts, and the rates for a given guaranteed term may vary among contracts.

Guaranteed Interest Rates. We guarantee different interest rates, depending upon when account dollars are invested in the Guaranteed Account. For guaranteed terms one year or longer, we may offer different rates for specified time periods within a guaranteed term. The interest rate we guarantee is an annual effective yield; that means that the rate reflects a full year’s interest. We credit interest at a rate that will provide the guaranteed annual effective yield over one year. The guaranteed interest rate(s) is guaranteed for that deposit period and for the length of the guaranteed term.

source: https://www.sec.gov/Archives/edgar/data ... ro5115.pdf
also, know thy fees:
Fees and Other Deductions. We do not make deductions from amounts in the Guaranteed Account to cover mortality and expense risks. We consider these risks when determining the credited rate. The following other types of charges may be deducted from amounts held in, withdrawn or transferred from the Guaranteed Account:

•Market Value Adjustment (MVA). An MVA may be applied to amounts transferred or withdrawn prior to the end of a guaranteed term, which reflects changes in interest rates since the deposit period. The MVA may be positive or negative and therefore may increase or decrease the amount withdrawn to satisfy a transfer or withdrawal request. See “MARKET VALUE ADJUSTMENT (MVA).”

•Tax Penalties and/or Tax Withholding. Amounts withdrawn may be subject to withholding for federal income taxes, as well as a 10% penalty tax for amounts withdrawn prior to your having attained age 59½. See “OTHER TOPICS – FEDERAL TAX CONSIDERATIONS;” see also the “FEDERAL TAX CONSIDERATIONS” section of the contract prospectus.

•Early Withdrawal Charge. An early withdrawal charge, which is a deferred sales charge, may apply to amounts withdrawn from the contract, in order to reimburse us for some of the sales and administrative expenses associated with the contract. See “CONTRACT CHARGES;” see also the “FEES” section of the contractprospectus.
Voya Guaranteed Account 2

•Maintenance Fee. A maintenance fee of up to $30 may be deducted, on an annual basis, pro-rata from all funding options including the Guaranteed Account. See “CONTRACT CHARGES;” see also the “FEES” section of the contract prospectus.

•Transfer Fees. During the accumulation phase, transfer fees of up to $10 per transfer may be deducted from amounts held in or transferred from the Guaranteed Account. See “CONTRACT CHARGES;” see also the “FEES” section of the contract prospectus.

•Premium Taxes. We may deduct a charge for premium taxes of up to 4.0% from amounts in the Guaranteed Account. See “CONTRACT CHARGES;” see also the “FEES” section of the contract prospectus.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
tibbitts
Posts: 11982
Joined: Tue Feb 27, 2007 6:50 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by tibbitts »

I would be somewhat surprised if this annuity allowed transfers in at the same 4% rate. Has that been verified?
bikechuck
Posts: 818
Joined: Sun Aug 16, 2015 9:22 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by bikechuck »

Interesting thread, I have a similar fixed annuity that I opened in the 1980s in an IRA with $2,000 that pays a guaranteed minimum 4.5%. I ignored it and pretty much forgot about it after opening it but rediscovered it 4 - 5 years ago. I was able to add money to it and the new money also earns a guaranteed 4.5%. Both the old and new money are fully liquid since it is x number of years past the time I opened it. I think that x was 7 but might have been 10, that no longer matters. Because there is a small risk that the insurance co. Could go bankrupt I stopped adding money to it after it became 20% of my portfolio. I will begin taking interest only payments this January at the age of 67.5 to stop it's slow but relentless growth.
User avatar
Stinky
Posts: 5591
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Stinky »

willthrill81 wrote: Tue Sep 15, 2020 6:46 pm
Wrench wrote: Tue Sep 15, 2020 6:25 pm
willthrill81 wrote: Tue Sep 15, 2020 4:50 pm
Wrench wrote: Tue Sep 15, 2020 3:46 pmThe fund is held by a major insurance company (a competitor of TIAA).
Would you mind revealing the name of this company? I'm not sure why you wouldn't. That may help elucidate the situation.
Voya, formerly ING, formerly Aetna.
With a company of that size and the ability to freely withdraw funds, I'd feel very comfortable with all of my fixed income holdings being in such a fund. If the yield drops too much in the future, just transfer your funds elsewhere.
I agree.

Insurance companies made 4% guarantees at a time when that seemed to be an exceptionally low rate. Now, they can’t duck out of those “high” guarantees.
It's a GREAT day to be alive - Travis Tritt
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

arcticpineapplecorp. wrote: Tue Sep 15, 2020 7:58 pm what's the guaranteed term?
Thank you. Good questions. No term, it is a fixed, lifetime contract that pays a variable interest rate with a 4% floor as long as there is money in the fund. No fees. But, I will confirm (again) before I move any more money in.

When I invested in this fund in the 80s this was considered a poor choice by many since the interest rate was low compared to the market rates at that time. No one could envision that rates would ever fall below 4% so it did not look attractive. I was young and naive at the time and I just liked the "stability" aspect of the fund so I put a small fraction of my contributions in it. Then, I more or less forgot about it and left it alone for decades. I wish I could say that I did that because I was so prescient to know that rates would fall as low as they are now. But I would be lying. It was just a little bit of laziness and a lot of dumb luck.
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

tibbitts wrote: Tue Sep 15, 2020 8:14 pm I would be somewhat surprised if this annuity allowed transfers in at the same 4% rate. Has that been verified?
Yes. Just this morning in fact, though they did say that "the windows to do that" is closing soon.
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

tibbitts wrote: Tue Sep 15, 2020 8:14 pm I would be somewhat surprised if this annuity allowed transfers in at the same 4% rate. Has that been verified?
Yes. Just this morning in fact, though they did say that "the windows to do that" is closing soon.
Topic Author
Wrench
Posts: 136
Joined: Sun Apr 28, 2019 10:21 am

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Wrench »

Boatguy wrote: Tue Sep 15, 2020 7:27 pm I see that you are 66, and I’d imagine that your spouse is 65. Will you, by any chance, turn 67 before the end of the year? I’m assuming you won’t be because of your Social Security claiming strategy, but thought it was worth asking as anyone turning 67 this year (born in 1953) has other SS options.
No, unfortunately I missed that deadline by four months. I was planning to play the "file and suspend" game and have my wife file for her spousal benefits while letting hers grow. But alas, the feds changed the rules just as I was nearing the finish line! C'est la vie.
Boatguy
Posts: 45
Joined: Fri Apr 19, 2019 7:54 pm

Re: How much to invest in Fund that has guaranteed 4% return?

Post by Boatguy »

Timing is everything. I/we made it by 5 months, so my wife filed at age 63 and I filed for my spousal benefits. Lick of the draw!
Post Reply