using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

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ponderosa
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using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028) I'm considering using the iShares iBonds ETF series and/or the Invesco Bulletshares series to create term-certain bond ladders from a lump sum of capital, with each rung to be funded later this year.

The iBonds products are described at https://www.ishares.com/us/strategies/b ... nd-ladders; the Bulletshares products are described at https://www.invesco.com/us/financial-pr ... 3-products (you'll have to indicate to Invesco that you're an Individual Investor if prompted). The basic idea is that each ETF holds bonds maturing in a particular year, with a final payout in December of that year. I'd be using those payouts to fund a portion of my living expenses during the following calendar year.

In my particular scenario, in case it matters, I'll need approximately $51k, $48k, $46k, $43k, and $40k in each of 2024, 2025, 2026, 2027, and 2028 (with all values in 2020 dollars).

I've been planning on 50% Treasury, 30% Muni, and 20% Corporate for each rung but don't have any real reason for those percentages, other than that I thought since this will be "needed" income I should have roughly half of each rung in Treasuries.

What's a good way to think about appropriate allocations? Should high yield bonds be part of the mix? The higher expense ratios for the high-yield ETFs do give me pause, but maybe that's penny-wise and pound-foolish. Invesco even offers emerging market bonds (currently limited to ETFs paying out in 2021-2024) but I figure the volatility and risk associated with that asset class isn't a good fit for needed income. Maybe I should think otherwise.

I'll be assembling each year's set as a pie with M1 Finance so I'm perfectly happy to have a more-complex mix, including ETFs from both iShares and Invesco. For example:
  • iShares Treasury 40%
  • iShares Muni 10%
  • Invesco Muni 10%
  • iShares Corporate 10%
  • Invesco Corporate 10%
  • iShares High Yield 10%
  • Invesco High Yield 10%
(and maybe the auto-reinvestment of dividends by M1 into underweight securities will even offer some added return over time).

Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

Clearly there is, as with all investment decisions, a need to balance risk with reward, and I know I'm the only one who can make that determination, but I'd love to hear perspectives on how to pick the right allocation, for these types of ETFs, for term-certain spending needs. Thanks.
Last edited by ponderosa on Sat Oct 17, 2020 5:43 pm, edited 1 time in total.
hackingdragon
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by hackingdragon »

ponderosa wrote: Sat Oct 17, 2020 4:55 pm Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028)
Are these needs real or nominal?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

hackingdragon wrote: Sat Oct 17, 2020 5:12 pm
ponderosa wrote: Sat Oct 17, 2020 4:55 pm Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028)
Are these needs real or nominal?
Real. All values in 2020 dollars.
hackingdragon
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by hackingdragon »

If they are real needs wouldn’t it be a good idea to incorporate real assets like I bonds and TIPS? I bonds are currently returning 1.06%
000
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by 000 »

I think it's a good idea, but the prospect of high inflation (which could plausibly happen over even just a few years) gives me pause.

With duration matching, the only issue with corporates and high yield bonds is bankruptcy risk, not liquidity risk of needing to sell before maturity on the secondary market.

So, do you feel lucky?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

hackingdragon wrote: Sat Oct 17, 2020 5:43 pm If they are real needs wouldn’t it be a good idea to incorporate real assets like I bonds and TIPS? I bonds are currently returning 1.06%
Yes, and I'm currently contributing as much as possible to Series I Bonds, but the interest and principal from those assets, including contributions to be made in future years, is earmarked for spending needs from 2029-2035. At this time, the real returns available from auctioned TIPS are uncompelling. And since I'm building an allocation to inflation-indexed securities (the I Bonds) I figured it might be wise to go with traditional bonds for my 2024-2028 spending needs.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by spdoublebass »

I’m no expert, so please know that when you read my suggestion.

These are large dollar amounts. Your first amount is 51K by 2024. I mean if you get 1%, it’s not that much difference, it would mean you could save a few bucks less per month.

You could just add up what you need to save per month to reach your goals and put it in VTINX or VASIX (target retirement funds) and just over fund it.

Otherwise I wouldn’t go crazy trying to have a lot of different etfs for little gain.

I mean ALLY savings account at .6% isn’t bad compared to the treasury ETFs you mention.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by UpperNwGuy »

OP, your mix is so incredibly complicated. I could never do that.
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by UpperNwGuy »

ponderosa wrote: Sat Oct 17, 2020 6:44 pm
UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
Why do you duplicate all your iShares holdings with Invesco holdings?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

UpperNwGuy wrote: Sat Oct 17, 2020 6:48 pm
ponderosa wrote: Sat Oct 17, 2020 6:44 pm
UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
Why do you duplicate all your iShares holdings with Invesco holdings?
Same expense ratio, but probably not the same underlying assets. Since either option might outperform, and there’s no way I’d know that in advance, why not own both offerings to minimize regret should I have ended up choosing the wrong one?

M1 truly makes this no additional hassle, but I agree that I would be choosing simplicity (and not duplicating offerings) if I were with a traditional broker and placing manual orders.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by gjlynch17 »

Here are a few initial thoughts:

1. Generally, I like the idea of defined maturity ETFs from iShares or Invesco. I especially like the corporate ETFs because of their lower costs (0.10%) and much lower risk of default compared to the high yield defined maturity ETFs. Your proposal may be more complex than necessary and I am not sure you need more than the corporate ETFs.

2. I am not as high in the muni ETFs. Their expense ratio (0.18%) is high relative to their yields. On an after-tax basis, even at the highest tax bracket of 40.8% (37% + 3.8% NIIT), corporate defined maturity ETFs have a better SEC yield than munis, albeit with higher credit risk.

3. I would not use high yield defined maturity ETFs for liability matching purposes because of high expenses and the greater variance on the exact amounts received due to defaults.

4. Note that the high yield category is different for Invesco and iShares as iShares includes some BBB bonds.

5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

gjlynch17 wrote: Sat Oct 17, 2020 7:08 pm
5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by mega317 »

As long as you’re ok with complexity, treasuries don’t make a lot of sense right now. Use savings accounts or CDs. Or use the cash to open accounts for bonuses.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ivgrivchuck »

My two cents.

1) I'm not sure if with the current yields building long bond ladders really makes sense. Especially with treasuries the yields are really close to zero.

2) Have you considered something like 85% CDs, 15% stocks? I'd expect that with this combination (just by adjusting percentages) you can build an investment with a higher expected return and similar volatility as your ladder.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by investor.saver1 »

vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

vineviz wrote: Mon Oct 19, 2020 8:34 am
ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Thanks for this reply. Advice like "leave municipal bonds out of the mix" is exactly what I was wanting to hear. I was particularly hoping that you, vineviz, would be one of the commenters here. I appreciate your help.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

investor.saver1 wrote: Mon Oct 19, 2020 11:31 am
vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?
I’m not familiar with all the mechanics of how M1 works, but I believe it would automatically reinvest proportionately across all the rings. If so, that’s what I’d suggest since if the pie was initially set up to produce equal real income for each rung you’d stay closest to that.

Otherwise, I’d probably reinvest into the current rung.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

investor.saver1 wrote: Mon Oct 19, 2020 11:31 am
vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?

Yeah, this is an interesting question. I'm planning on using M1 Finance to construct the rungs, so it'll automatically reinvest dividends to the most "underweight" securities within each rung, but of course I have control over the weightings of each individual rung.

With a lump-sum contribution later this year of approximately $215k, and estimating real growth of 1% per year, I'd been planning on the following percentages for each rung...

2024 - 23%
2025 - 22%
2026 - 20%
2027 - 18%
2028 - 17%

...which would reflect that my further-out rungs have additional time to grow. If the longer-dated bonds were, in a particular year, to significantly outperform the shorter-dated bonds, M1 would be applying dividends to the lower-performing assets to bring them back to target percentages.

Thinking about the future, when 2024 comes around and I withdraw that year's funds, I'd re-weight each rung depending on how much growth had actually occurred. So, for example...

2025 - 26%
2026 - 25%
2027 - 25%
2028 - 24%

...and I'd run a similar calculation yearly thereafter.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

gjlynch17 wrote: Sat Oct 17, 2020 7:08 pm Here are a few initial thoughts:

1. Generally, I like the idea of defined maturity ETFs from iShares or Invesco. I especially like the corporate ETFs because of their lower costs (0.10%) and much lower risk of default compared to the high yield defined maturity ETFs. Your proposal may be more complex than necessary and I am not sure you need more than the corporate ETFs.

2. I am not as high in the muni ETFs. Their expense ratio (0.18%) is high relative to their yields. On an after-tax basis, even at the highest tax bracket of 40.8% (37% + 3.8% NIIT), corporate defined maturity ETFs have a better SEC yield than munis, albeit with higher credit risk.

3. I would not use high yield defined maturity ETFs for liability matching purposes because of high expenses and the greater variance on the exact amounts received due to defaults.

4. Note that the high yield category is different for Invesco and iShares as iShares includes some BBB bonds.

5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
+1
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

CRTR wrote: Mon Oct 19, 2020 5:55 pm
ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

ponderosa wrote: Mon Oct 19, 2020 10:02 pm
CRTR wrote: Mon Oct 19, 2020 5:55 pm
ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
I can’t conceive of any reason to use a MYGA in your situation. You would indeed pay a penalty on the income given your age, with little offsetting benefit.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by patrick013 »

ponderosa wrote: Sat Oct 17, 2020 4:55 pm
In my particular scenario, in case it matters, I'll need approximately $51k, $48k, $46k, $43k, and $40k in each of 2024, 2025, 2026, 2027, and 2028 (with all values in 2020 dollars).

.............

Clearly there is, as with all investment decisions, a need to balance risk with reward, and I know I'm the only one who can make that determination, but I'd love to hear perspectives on how to pick the right allocation, for these types of ETFs, for term-certain spending needs.
There is a portfolio spreadsheet which shows par value for each
Fund for target dating the ending distribution. As it is updated
you could track that related to the ending distribution expected.
Some reallocation may or not be needed.
age in bonds, buy-and-hold, 10 year business cycle
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

ponderosa wrote: Mon Oct 19, 2020 10:02 pm
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
So, I wasn't clear about the nature of the 10% penalty. Opinions differ, depending on the website, whether it applies to only earnings or entire value. So, I went to the horse and looked at the code:
"If any taxpayer receives any amount under an annuity contract, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income."
https://www.law.cornell.edu/uscode/text/26/72
That matches my understanding. Your return of principal is not included in gross income. The penalty does not apply to the entire value as mistakenly stated on some websites. The 10% reduction on interest earnings might not interfere with their being useful in your situation given the rate spread between MYGAs and other options. (for example, 3 year MYGA. A+ rated issuer, 1.85%, A- issuer 2.4%; Best 3 year CD rate, 1.21%). The rate differential more than covers the 10% tax hit.

Apropos to 1035 exchange, it also might be worthwhile considering for years 2027, 2028. You could purchase a 3 year MYGA and reassess when it matures. If the rate environment is similar to today's, you could perform a 1035 to another MYGA and defer the tax hit or go with something else at that time.

The biggest risk, of course, would be failure/bankruptcy of the insurance company and your state's ability to cover it. I'm not sure how to quantify that.
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

CRTR wrote: Tue Oct 20, 2020 12:47 pm
ponderosa wrote: Mon Oct 19, 2020 10:02 pm
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
So, I wasn't clear about the nature of the 10% penalty. Opinions differ, depending on the website, whether it applies to only earnings or entire value. So, I went to the horse and looked at the code:
"If any taxpayer receives any amount under an annuity contract, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income."
https://www.law.cornell.edu/uscode/text/26/72
That matches my understanding. Your return of principal is not included in gross income. The penalty does not apply to the entire value as mistakenly stated on some websites. The 10% reduction on interest earnings might not interfere with their being useful in your situation given the rate spread between MYGAs and other options. (for example, 3 year MYGA. A+ rated issuer, 1.85%, A- issuer 2.4%; Best 3 year CD rate, 1.21%). The rate differential more than covers the 10% tax hit.

Apropos to 1035 exchange, it also might be worthwhile considering for years 2027, 2028. You could purchase a 3 year MYGA and reassess when it matures. If the rate environment is similar to today's, you could perform a 1035 to another MYGA and defer the tax hit or go with something else at that time.

The biggest risk, of course, would be failure/bankruptcy of the insurance company and your state's ability to cover it. I'm not sure how to quantify that.
OK, I'd like to make sure I'm understanding how this might work. A search on the ImmediateAnnuities.com website for my state (WA) shows that a 10-Year Guaranteed Annuity is available from a B++ issuer at a rate of 3.25%. Let's say rates hold steady, and I annuitize $215k in January 2021 (my state's Guaranty Associate covers up to $500k). My read of the brochure describing the product (https://www.immediateannuities.com/annu ... nnuity.pdf) is that I may make a withdrawal of up to 10% of the accumulation value at the start of the second contract year.

January 2021 - Initial contribution of $215k
January 2022 - no withdrawal, value of $221,987
January 2023 - no withdrawal, value of $229,202
January 2024 - no withdrawal, value of $236,651
January 2025 - withdraw $24,434, remaining value of $219,908
January 2026 - withdraw $22,705, remaining value of $204,350
January 2027 - withdraw $21,099, remaining value of $189,892
January 2028 - withdraw $19,606, remaining value of $176,458
January 2029 - withdraw $18,219, remaining value of $163,974
January 2030 - no withdrawal, value of $169,303
January 2031 - withdraw remaining balance of $174,805, or 1035 exchange it to another MYGA

Those withdrawal values for 2025-2029 are approximately half of what I'll actually need. So to get access to the amounts I'll need to cover spending, I'd need to actually annuitize approximately $430k? And, with the 10% penalty on earnings, the initial rate of 3.25% would effectively be about 2.92%?
CRTR
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

ponderosa wrote: Tue Oct 20, 2020 6:27 pm

OK, I'd like to make sure I'm understanding how this might work. A search on the ImmediateAnnuities.com website for my state (WA) shows that a 10-Year Guaranteed Annuity is available from a B++ issuer at a rate of 3.25%. Let's say rates hold steady, and I annuitize $215k in January 2021 (my state's Guaranty Associate covers up to $500k). My read of the brochure describing the product (https://www.immediateannuities.com/annu ... nnuity.pdf) is that I may make a withdrawal of up to 10% of the accumulation value at the start of the second contract year.

January 2021 - Initial contribution of $215k
January 2022 - no withdrawal, value of $221,987
January 2023 - no withdrawal, value of $229,202
January 2024 - no withdrawal, value of $236,651
January 2025 - withdraw $24,434, remaining value of $219,908
January 2026 - withdraw $22,705, remaining value of $204,350
January 2027 - withdraw $21,099, remaining value of $189,892
January 2028 - withdraw $19,606, remaining value of $176,458
January 2029 - withdraw $18,219, remaining value of $163,974
January 2030 - no withdrawal, value of $169,303
January 2031 - withdraw remaining balance of $174,805, or 1035 exchange it to another MYGA

Those withdrawal values for 2025-2029 are approximately half of what I'll actually need. So to get access to the amounts I'll need to cover spending, I'd need to actually annuitize approximately $430k? And, with the 10% penalty on earnings, the initial rate of 3.25% would effectively be about 2.92%?
So, I'm neither an insurance guy nor a CPA so I recommend some due diligence re: what I'm going to say. In fact, you can say that I'm anti-insurance . . . except for MYGA in special situations, and I believe yours is one where they could make sense.

Couple of things I want to discuss before I start . . .
First, what you've shown is a 10 year SPIA. What I was referring to was a MYGA. They're different products. Think of a MYGA as a CD or a ST bond. It has a "coupon rate" and a set maturity date. The difference is that the interest accrues and compounds tax-deferred (assuming there are no annual withdrawals as in your example) with a MYGA as opposed to distributions with a CD or bond. When the MYGA "matures", you have 3 choices: take a lump sum distribution of the earned interest and principal (pay tax + 10% on earnings) or do a 1035 to another MYGA or a 1035 to a SPIA (or another annuity product - ugh).
Second, personally, I would be reluctant to get a long term annuity (or any insurance product) from a company with a rating below "A". These companies do fail and then you're at the mercy of your state guarantee agency. I'm from California and don't trust my state to get anything right these days. My guess is the longer the term of the product, the higher the failure risk. I'm pretty conservative at this point in my life and would chicken out and go for the lower interest rate with a safer company. You have to decide your own risk tolerance. If you do decide to use MYGAs from lower rated companies in your plan, you cold use multiple insurance companies to reduce that risk via diversification. My final point is make sure you don't need the $$ until the MYGA matures (separate emergency fund/plan set and stable!!!). I've heard the surrender charges are predatory!

With the above caveats out of the way, if I were you, I would use the following plan. This is just ONE way you could set things up:

2024 - Purchase 3 year MYGA now (A+ rated company @1.85%, or if feeling braver, A- @2.35)
2025 - Purchase 4 year MYGA now (A @1.75% or if feeling braver, A- @2.40) or purchase a 3 year and use a CD/ST bond fund for last year
2026 - Purchase 5 year MYGA now (A@2.30%)
2027- Purchase 3 year MYGA now (A+ company @1.85%), then reassess: 1035 to another MYGA or CD/DMF/Bond (longer guarantee product rates aren't very good)
2028 - same plan as 2027

I got the rates from https://www.stantheannuityman.com/myga-rates. Stan also gives away some quick, easy read books that explain various insurance products. I heard of him through other BH posts and he has a good rep here.

https://www.advisorperspectives.com/art ... nvironment
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

vineviz wrote: Tue Oct 20, 2020 7:05 am
ponderosa wrote: Mon Oct 19, 2020 10:02 pm
CRTR wrote: Mon Oct 19, 2020 5:55 pm
ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
I can’t conceive of any reason to use a MYGA in your situation. You would indeed pay a penalty on the income given your age, with little offsetting benefit.
Why not? What's your thingking?

I was thinking that given the 10% penalty only applies to the interest, the rate gap between MYGAs and other options right now more than covers the 10%.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

CRTR wrote: Wed Oct 21, 2020 12:14 pm I was thinking that given the 10% penalty only applies to the interest, the rate gap between MYGAs and other options right now more than covers the 10%.
Because there are other options (e.g. combinations of the iShares and Invesco ETFs mentioned above) which can produce the same yield as the MYGA without the penalty and without sacrificing liquidity.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

vineviz wrote: Wed Oct 21, 2020 12:22 pm
CRTR wrote: Wed Oct 21, 2020 12:14 pm I was thinking that given the 10% penalty only applies to the interest, the rate gap between MYGAs and other options right now more than covers the 10%.
Because there are other options (e.g. combinations of the iShares and Invesco ETFs mentioned above) which can produce the same yield as the MYGA without the penalty and without sacrificing liquidity.
But, three are market and default risks in the other options. I'm not sure taking on the risk given the short time horizons and definite need for the $$ is the right thing to do.

I think I understand what you're saying but not sure I agree completely. . .

The only way I can see beating the current MYGA yields with those products is by going heavy with the high yield DMFs. I'm not sure the OP's situation is amenable to that risk. Let's use BSJK (BulletShares 2020 High Yield Corporate Bond) as an example:
1. As of today, BSJK, per Morningstar, the total return over past 3 years is 1.76% (a far cry from the "yield"). Real returns will be less due to tax drag on dividends . . .
2. As you also probably already know, the yields in all DMF funds drop precipitously during their last year as the bonds mature and the assets are converted to TBills (BSJK current yield is -0.11).
3. There is liquidity in MYGAs but with a cost. There's also liquidity in bond funds but that too may come with a cost, depending on the NAV at redemption . . . may be even more or less expensive MYGA depending.

I think one can make a case for some of the $$ the OP needs a few years from now for the the more aggressive strategy you prefer but have a hard time reconciling for <5 years.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

CRTR wrote: Wed Oct 21, 2020 4:11 pm But, three are market and default risks in the other options. I'm not sure taking on the risk given the short time horizons and definite need for the $$ is the right thing to do.
The thing is, there are market and default risks with the MYGA as well.

The insurance company generates the yield on the MYGA by investing in an underlying portfolio of assets much like the one the OP is considering (i.e. Treasury and corporate bonds). Inserting a B-rated insurance company between the corporate bonds and the investor doesn't reduce default risk so much as transfer and concentrate it.

I think a MYGA can be a great tool in the right circumstance, but given the age of the OP here I just don't agree that owning the bonds directly via an ETF is "more aggressive" than paying an insurance company to own them for you.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

CRTR wrote: Wed Oct 21, 2020 4:11 pm
vineviz wrote: Wed Oct 21, 2020 12:22 pm
CRTR wrote: Wed Oct 21, 2020 12:14 pm I was thinking that given the 10% penalty only applies to the interest, the rate gap between MYGAs and other options right now more than covers the 10%.
Because there are other options (e.g. combinations of the iShares and Invesco ETFs mentioned above) which can produce the same yield as the MYGA without the penalty and without sacrificing liquidity.
But, three are market and default risks in the other options. I'm not sure taking on the risk given the short time horizons and definite need for the $$ is the right thing to do.

I think I understand what you're saying but not sure I agree completely. . .

The only way I can see beating the current MYGA yields with those products is by going heavy with the high yield DMFs. I'm not sure the OP's situation is amenable to that risk. Let's use BSJK (BulletShares 2020 High Yield Corporate Bond) as an example:
1. As of today, BSJK, per Morningstar, the total return over past 3 years is 1.76% (a far cry from the "yield"). Real returns will be less due to tax drag on dividends . . .
2. As you also probably already know, the yields in all DMF funds drop precipitously during their last year as the bonds mature and the assets are converted to TBills (BSJK current yield is -0.11).
3. There is liquidity in MYGAs but with a cost. There's also liquidity in bond funds but that too may come with a cost, depending on the NAV at redemption . . . may be even more or less expensive MYGA depending.

I think one can make a case for some of the $$ the OP needs a few years from now for the the more aggressive strategy you prefer but have a hard time reconciling for <5 years.
Thank you to both CRTR and vineviz for taking the time to explore the nitty-gritty of my situation.

CRTR, I appreciate that you explained where I'd gone wrong in my calculations. I was indeed looking at MYGAs, not SPIAs, but was thrown off by the language about withdrawing 10% of the value annually, starting in year 2. That's a "may" not a "must" and now I understand that I'd buy multiple MYGAs to cover the multiple years during which I'd need income.

gjlynch17 wrote upthread that "I am not sure you need more than the corporate ETFs". When I initially started thinking about iBond/Bulletshare allocations I was hesitant to include any of the high yield bonds. I'm still hesitant, despite vineviz's suggested allocation of Treasury/HY/Corp at 35%/40%/25%, as it just seems like I shouldn't be including risky assets when I'm thinking about funds that I will certainly need. But: vineviz has made extremely compelling arguments all across this board about the benefits of diversifying across sources of risk. And these particular products, with their term-certain distribution, are unlike typical high yield bonds.

So: MYGAs? Exclusively the corporate ETFs? A combination of Treasury/HY/Corp ETFs? A mix of Treasury/Corporate? I definitely value the advice I'm getting here. Thank you to all who have commented.
Last edited by ponderosa on Wed Oct 21, 2020 6:42 pm, edited 1 time in total.
000
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by 000 »

vineviz wrote: Mon Oct 19, 2020 8:34 am
ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
I thought you would do treasuries + stocks...
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

000 wrote: Wed Oct 21, 2020 6:37 pm
vineviz wrote: Mon Oct 19, 2020 8:34 am
ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
I thought you would do treasuries + stocks...
Normally I would, but the OP has a definite cash flow objective with a short- to intermediate term investment horizon. Since stocks aren't appropriate for this investment horizon, the return has to come from the bond credit spread instead of the equity risk premium.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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