I am retired and 73 years old, where can you park
cash safely and get income? My bank pays around .30%
the MM funds pay nothing. I have thought about a mutual fund in income stocks. But this is the longest bull market in history, it has to drop some day but at my age I may never recover the loss. Any sugestions.
= new reply since forum marked as read
There is a lot more out there than just CDs but many of these are accessible only via financial brokerage firms. Here is a subset of some of my accounts. I grayed out the account #s and $ for privacy. Look at the guaranteed returns.
Those are financial instruments (annuities) managed by the financial firm where my money is parked. Basically they guarantee to pay out 3 % and some years if it goes well you get more (like right now, you can see two of those accounts have additional yields)
I will invest it for you. You can trust me I am a Republican. 
Some of an annuity's yield (the regular monthly or quarterly or annual payments when one begins to collect payments) is return of principal.
Whereas with a bond (or CD), the yield is the interest part only. The entire principal is available (without penalty) at the end of the term.
I know you understand this, but I fear some might decide between annuities and other fixed income investments based largely on which has the higher yield.
The yield on an annuity, and especially a deferred annuity is and should be a lot higher than bond and CD yields --
Speaking of the simplest annuity, a simple fixed income annuity that ends with the annuitants death (the life-only option) --
For example, for a 65 year old female, and using Fidelity's annuity estimator, which is based on insurance companies' quotes, the yield for an immediate annuity (payments begin a month after purchase) is 5.63%
Currently (May 2021 dividend), the Vanguard Long-Term Corporate Bond Index Fund Admiral (VLTCX) is yielding 3.26%
Yeah! annuities win, and bonds suck eggs.
But not so fast. The bond's yield is just the interest part.
Whereas the annuity's yield effectively includes return of principal, since with such an annuity (Life-only option), there's no return after death of any of the initial cost.
Unlike a bond, where one's entire initial principal -- like in the case of a new bond that is held to maturity -- you get your entire initial outlay back (less commissions).
(I'm comparing to long-term bonds, since an annuity is inherently a long-term investment because of heavy surrender charges. I know I'm not supposed to call an annuity an "investment", since it's an insurance product. But plunking down tens or hundreds of thousands of dollars up front on an annuity sure seems a lot like an investment to me).
(In this post, I use the term "yield" or "annual yield" for just the regular annual payments from the annuity or the bond (Or the monthly payments times 12). If the yield is given as a percentage, it’s the annual yield as a percent of the initial $100,000 investment. Similar to the dividend yield of a stock. It is *not* a total return or annualized total return number -- that (in dollars) would be the annual yield times the number of years the regular annual payments are received PLUS whatever one gets back at the end).
A deferred annuity's yield should be even higher than an immediate annuity's yield -- a lot higher. For example, for a 65 year old female, and using Fidelity's annuity estimator, based on insurance companies' quotes (obtained June 6), the yield for an immediate annuity (payments begin a month after purchase) is 5.63% as stated previously.
But deferring the income stream for 8 years results in a 9.54% yield, a 1.69-fold increase, according to the same Fidelity annuity estimator which is based on insurance company quotes. That big increase in yield is because one collects for 8 fewer years of their life. So yeah, anyone with a deferred annuity like that, and looking only at annual yields, is going to beat the pants off the interest rate of any bond.
If comparing an annuity bought in 2011 or 2012 with today's yields, one must remember that interest rates then were about 45% higher than currently (e.g. Vanguard Long Term Corporate Bond Fund yield was about 4.74% then compared to 3.26% in May 2021). So I'm guessing yields on simple fixed income annuities were also 45% higher than currently.
If an annuity has an equity component (e.g. an indexed annuity or variable annuity tied to the performance of the S&P 500), then its yield and performance should be compared to a balanced fund (combination equities + bonds) rather than a pure bond fund.
I realize there are a virtually infinite number of kinds of annuities, e.g. ones that continue paying after death for a set number of years "period certain", to a beneficiary. Or that promise a "refund" if one dies before a certain number of years -- ensuring that at the worst, you and your beneficiaries get back in total what was put in -- the "get back in total" includes payments previously received. Such provisions result in getting quoted a lower yield, but still beating yields of bonds.
Annuities also have a risk factor -- if one dies early (and particularly if it’s a life-only annuity), the return can suck (at least consider getting that period certain or "refund" option so that it isn't a negative return). If gotten when interest rates and annuity yields are low, such an annuity locks in low yields for life. On the other hand, they certainly beat bonds if one way outlives their life expectancy. And annuities function as a kind of longevity insurance -- a considerable benefit.
I have an annuity, so I'm not ideologically opposed. I appreciate the nearly $21,000 annual checks. (It's a charitable gift annuity that I got in return for donating my farm in December 2016. It's yield is 4.7%. (The equivalent on an annuity purchased on the marketplace at that time would have been 6.5%).
I'm also in the "market" to consider an annuity given the catastrophically low yield of one of my bond funds (which is too heavily weighted in low-yielding Treasuries).
These CD-like annuities, "Fixed Annuities" also known as a multi-year guaranteed annuity or MYGA, look pretty good to me:
3 year: 2.40%, 4 year: 2.80%, 5 year: 3.00%, 7 year: 3.10%, 10 year: 3.20% (as of 6/11/21 at https://www.blueprintincome.com/ ). For someone who doesn't want to get locked into today's low rates for decades or life. (But is this going to result in yet more accounts heirs will have to deal with? Or a declining cognitive skills me?)
I'm just cautioning anyone comparing an annuity to a bond or CD that it's an apples and oranges comparison as they are two very different products, and reaching conclusions from just comparing yields (the sizes of the monthly or annual payments) is simply wrong.
The below compares the total return of an immediate annuity yielding 5.63%, and for a deferred annuity (8 year deferral) yielding 9.54%, as a function of "N", the number of years since the purchase until death..
These are quotes for a 65 year old female in Minnesota, per the Fidelity annuity estimator obtained on June 6.
I've checked quotes at USAA and BluePrintIncome.com and IncomeSolutions.com and they are practically the same (except USAA doesn't seem to offer deferred annuities).
All my examples below assume a $100,000 annuity is purchased in year zero.
IMMEDIATE ANNUITY: An income stream of $5,630/year for N years is received. There is no residual amount received in year N at death.
DEFERRED ANNUITY, deferred for 8 years: No income is received for 8 years, and then for the next N - 8 (N minus 8) years, $9,540/years is received. There is no residual amount received in year N at death. So for example, if N=20, then for 8 years, no income is received, and then for the next 12 years, $9,540 is received.
The yields I quoted above for the annuities: 5.63% for the immediate annuity and 9.54% for the deferred annuity were based on simple life-only with no refund guarantee and no fixed period N guarantee (aka "period certain" ).
If I had gotten quotes with either one of these provisions, the quoted yields would have been lower. But since my table starts at N=20, neither of these provisions would have helped: The longest guarantee period I've seen is 20 years, which we've already reached at the beginning of my table.
And as for the "refund guarantee", both of these annuities have paid back the full $100,000 investment in yearly payments by year 20, so the refund guarantee has already been met and exceeded (for the immediate annuity: 20 years * $5,630 = $112,600. For the deferred annuity: 12 years * $9,540 = $114,480).
Total Rates of Returns (Annualized) for An Immediate and
a Deferred Annity (deferred by 8 years)
Quoted yields obtained 6/6/21 for a 65 year old woman
N is the number of years since purchase until death.
Methodology: The Excel IRR function was applied to the stream of cash flows. Results were also checked using the Excel NPV and PV and FV functions (net present value, present value, and future value).
The average life expectancy of a 65 year old woman is about 21 years. I realize that an annuity is not an investment, but rather insurance. The yields are quite decent for someone who lives well past their life expectancy, but not eye-popping. Still they are reasonably guaranteed by the strength of the insurance company and the backing of state guaranty funds (check for details for limitations and maximums).
them compared to today.
If your yield was 1.45 X today's rate (8.164% instead of 5.63%), I find that the rate of return for the immediate annuity is much better: for example 5.20% for N=20, 7.13% for N=30, and 7.75% for N = 40, quite a lot more than shown in my table:
1.16% for N=20, 3.78% for N=30, and 4.75% for N=40.
Edited to add - I didn't bother doing similar for the deferred annuity, yet.
I wasn't trying to compare to what you bought 10 years or so ago, but rather what's available now at today's rates. As the bond fund yields upthread were today's rates. And I have no idea what you bought, frankly. Just a warning to others that the yield and the rate of return are very different things with income annuities.
The 4% rule that is often quoted as safe is where one takes 4% out the first year. Then each year after the dollar amount that is taken out is increased by the rate of inflation. So if one has a million dollar nest egg, one can safely (if the future is like the past) take out $40,000 the first year, then $41,000 the second year, then $42,025 the 3rd year and so on, By the 20th year one can take out $65,545. By the 30th year, $83,903. My numbers above is an example assuming a 2.5% inflation rate (midway between the 2% of the last 2 decades and the 3% that we averaged before that).
Isn't the amount of residual value in the contract? Or does it depend on the performance of some bond or equity index?
I'm not dissing your financial adviser. Besides emphasizing diversity, you've written that your equities are all in equity funds, the choice of which were designed to have relatively low portfolio volatility. Sounds very sensible to me, but then I am biased. I only have one individual stock - a utility stock (Sempra, SRE) that I inherited. I've thought of selling it for portfolio simplification, but the capital gains tax would be quite large (a first world problem
). Individual stocks are way too volatile for me, and would take me way to much time and attention to do well at it.
Thank you for getting me to look into annuities. (So many varieties!)
Edited to add "besides emphasizing diversity" in the 2nd to last paragraph.
They were purchased in 2012. They included a guaranteed minimum return, which was locked into the sum used to calculate my payout. That can't go down. (I'll ignore the possibility of something truly catastrophic happening.)
I just ran the numbers using this calculator: https://www.calcxml.com/calculators/how-long-will-my-money-last?skn=#results
If there is no growth whatsoever in the current value of annuity 1, it will last 17 years, at which point they are still obligated to pay my guaranteed benefit. At 6% growth, it would last pretty much forever. Annuity 2 will last 19 years with zero growth, as it's worth slightly more at this point, although the same sum of money was invested in each. Any residual value depends on the performance of each fund while I am still alive. On one hand, it would be nice to live long enough to get into their money, as my financial guy has said, but on the other I wouldn't mind leaving a bit to my son. Although I seriously doubt I will have spent down all my assets by the end of my life, and even if I do there would be a life insurance policy with a reasonable, although not huge payout.
What I don't get about the 4% rule, is increasing your payout each year depending on that year's inflation. I only every few years find a need to slightly increase what I take from my investment portfolio. My investments are in three different accounts. Currently I'm taking money out each month from the largest of the three. Right now the value of that fund is such that my draw is just over 4% of that sum. The other two are a Roth IRA, and a regular retirement account. I'm now doing RMDs from that second one.
Anyone looking at buying an annuity today only needs to be concerned about exactly what you can purchase today, at today's rates. What I could get nine years ago doesn't matter any more. I just want people to understand that all annuities are not a rip-off, which is the sentiment I often see here.
Sounds like you are doing quite well with your investments. Keeping just the one individual stock makes absolute sense. Especially if it's generating a reasonable income from it. Will it to your children, or whoever, but advise them to sell soon after inheriting it.
They are saying that 4% of the first year amount, and increasing that first year dollar amount by the inflation rate is safe from running out in 30 years, given one has their nest egg invested in 50% stocks and 50% bonds, based on simulations of the past market and inflation history over rolling 30 year periods.
It's not a suggestion or requirement, if one can take out less than that, all the better
.
It's for people who are really dependent on their nest egg ... if they consistently withdraw much more than the thumb rule allows, then there is a real risk of that nest egg running out before 30 years, based on simulations AAII (American Association of Individual Investors) and others do. (They also look at longer periods and look at different stock-bond allocations too). Some say you can do 4.5% + inflation instead of 4.0% + inflation. Others caution that with stock valuations higher than ever and the bond yields being so dang low, 3.5% + inflation is probably the prudent maximum.
I have no idea what my withdrawal rate was or is, now with the charitable gift annuity (payments began December 2017, on top of Social Security (which began in March 2017) I'm pretty sure I'm putting money in, not taking money out of my investment/retirement accounts.
I'm glad you seem to be experiencing almost zero inflation. But most people I think I can safely say are not -- certainly there are and have been loud lamentations about price increases on DU since I've been around. (EDIT- More broadly, the CPI is based not just on prices of some list of items, but actual sales - i.e. what people actually buy and how much, so in aggregate they are experiencing these price increases).
I know I'm not experiencing near-zero inflation. I keep seeing rising dental bills for the basic cleaning and checkup, property taxes going way up, home owner association dues going way up (80% in 17 years which equates to 3.5%/year), my Medicare Supplement premium up 27% in 4 years (equates to 6.16%/year ). Medicare Part B premiums have increased from $78.20/month in 2005 to 148.50 now, which is a 4.1%/year increase). Car prices ...
According to the experts, the CPI-E for elderly people exceeds the basic CPI, mostly because out of pocket healthcare costs are exceeding the general rate of inflation, and it certainly seems to be true judging from medical premiums.
Fidelity does a study every 2 years on what an elderly 65 year old couple can expect to spend on average on out-of-pocket medical costs including Medicare premiums, and its up to $300,000 now (more specifically the amount they would need to have saved now to cover costs in the future).
May your good luck hold
