I have written about annuities a few times. I am not a big fan of them, among other reasons they are wildly expensive. There are other issues too but I have said before that anyone I know who has an annuity seems to take great comfort from it.
You might have heard about some new funds called Income Replacement Funds that on first glance resemble annuities.
The basic idea is that if you want an income stream for 15 years, you would buy the fund dated for 2022. If you put in $100,000 the fund would pay you $637 per month to start out, the payment would go up slowly every year based on inflation and performance (no guarantee as best as I can tell which makes it different than an annuity) and at the end of the 15 years your principal will be exhausted. You can sell the fund anytime you want.
The 15 year example generates a 7.6% income in year one which is obviously more than the safer 4% discussed many time in past posts. The difference is that with these funds there will be no principal at the end.
A possible application might be for a 60 year old who wants to get off the 50 hour treadmill. Assume he has a $1,000,000 portfolio and makes $10,000 a month but lives below his means (which is a key ingredient to most creative retirement ideas). $200,000 into a ten year fund (actually eleven years because the funds are dated even years only) would start out paying $1596 per month. He would be able to add in social security a couple of years later. That combined with some well planned part time work ideas until age 70 would allow the other $800,000 to grow without paying an income. Assuming ten years and 7% (so below average) annual returns the remaining $800,000 would just about double by the time the Income Replacement Fund exhausts.
It would be easy to pick my idea apart and there are obviously other strategies for these funds but the main takeaway for me for now is that it is a source of a relatively secure income without the expense and restrictions of an insurance product.
You can visit their web site for more info as I am sure there are a few more moving parts than I have outlined. Whether this turns out to be a great thing or a mediocre thing it seems to open the door for copy cat ideas that could be a little better than this one.
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12 comments:
Vanguard has filed for three similar funds. These Managed Payout Real Growth, Moderate Growth and Capital Presdervation funds will be targeted for 3%,5% and 7% annual payouts respectively. I will be interested to see how they compare with the Fidelity funds. Looks like a good idea to this retiree.
Willing to loose principal at maturity? My wife loves the payout, but loss of principal is hard for me. The weird thing is that I assume sub-consciously that I'm still going to be around when the time comes. Yeah, sure.
The structured notes go out for only a few years and there's the entertainment aspect of picking sectors. Principal is secure but not liquid for trading, I believe.
anonymous 8:02AM: I was planning to spend down principal and interest in a 401K stable value fund paying 5%. I plan to spend this down to zero over 20 years. Given those facts, a Fidelity or Vanguard fund that could pay me 5% or more INFLATION ADJUSTED over that time period would be great. I understand you can stop the payouts or change the funds anytime you want. Much better than the restrictions of my 401K and likely to be a higher payout over the time period.
to be clear the design is not that you lose principal its that it gets returned as part of the payout. If you explore the site (i think this was on the video demo) a $100,000 deposit paid out $200k over some time period that I do not recall.
You could put the principal somewhere else I suppose but if it goes as intended you would not be losing over the life of the fund.
I am retired and I have all my money in a portfolio representing about 60% as risky as the S&P 500. I believe this 60% risk allocation is quite similar to a typical pension fund which is designed to last forever. Is there any argument saying it is not true?
Roger..changing topics...I have the s.african etf/eza. I adopted it as a long term hold but with some timing involved that has worked out. In concept I focused on this as part of the commodity/gold/emerging mkts theme. A plus is that it does not get good reviews and for the life of me when it makes good moves I can not comprehend why...I even look at the currency/rand. Recently, a few days ago, volume spiked 6x 90day average. Any buzz that might be of interest?
i doubt i have any buzz about south africa but it is a little different than a lot of other em countries. it is a deficit country, the gdp, i don't believe, as as strong as other em commodity producers they may not be doing a great job manging inflation.
inflation is a common problems but my perception is that SA does not manage it as well as the others.
boy oh boy. i can't believe my eyes. if you have a calculator that can calculate IRR, you know that you will make out much, much less than 7.6% in the fund Roger mentioned. if you know a little about math and financial planning, you will know this kind of funds don't make any sense. take one example, if you divide $100k by 15 and buy equal amount 1 year, 2 years to 15 years inflation adjusted t-bills, you can make out much better. varying amount you buy, you can mimic this kind of funds with better performance.
I thought a lot roger said on this blog made sense, but this one doesn't.
um yeah, I said the payout in the first year was 7.6%, not the return. The payout is intended to go up every year but it does not appeared to be guaranteed to do so.
I was pretty clear that the fund is paying you principal too and that at the end there is no principal left.
Anon 10 AM,
He is not trying to sell the product and is simply throwing out tidbits that may be interesting to some. I think he made perfect sense in explaining the product. Thanks Roger.
Thanks Roger. Ditto re clarity.
As with other investments, risk is an important consideration here. For some of the expected timelines (20+ years), will we expect Fidelity to remain in business? Similar to annuities, you have to judge the company backing the investment product. Still, I applaud Fidelity for the innovation here. Think of the first ETFs and what has come since...
-Bongo
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