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More on the Grangaard Strategy

By JLP | August 28, 2006

Judging by the lack of comments, I gather that retirement withdrawal strategies are not the most exciting thing to blog about. But, that shouldn’t take away from the importance of thinking about it. I posted a Simple Example of the Grangaard Strategy earlier today. In that example I assumed that the income ladder was invested in bonds with a 5% yield.

Tonight I went on the Vanguard website and put together a hypothetical for a fixed immediate annuity with a 10-year fixed period certain. What “10-year fixed period certain” means is that the payments are guaranteed for 10 years whether or not the annuitant lives the entire period. This is a nice feature for married retirees because it adds a bit of stability to the retirement plan.

After plugging in some numbers on the Vanguard Instant Quote page, I got the following quote:

Vanguard Fixed Immediate Annuity Quote

For this quote, I used the following inputs:

DOB: 01/01/1942
Gender: M
State of Residence: Texas

Joint Annuitant’s DOB: 01/01/1942
Joint Annuitant’s Gender: F

Qualified Assets

Monthly income payment you want to receive: $4,167
Fixed income payment with a 3% graded payment option
Guaranteed period only 10 years
Annual payments
Date you want your payments to begin: 07/01/2007

This works out to about a 5.47% yield on the invested amount, which isn’t too shabby and actually better than the 5% yield I used in the last example. This means that not as much capital is required at the beginning of retirement:

Vanguard Fixed Immediate Annuity Quote

Topics: Retirement Planning | 5 Comments »


5 Responses to “More on the Grangaard Strategy”

  1. Todd Brill Says:
    August 29th, 2006 at 4:53 pm

    It has taken me some time to absorb and think about your numbers, JLP. I’ve done a bit of homework on the subject and here’s what I’ve come up with:

    This chart shows the performance of the S&P 500 over the past 5 years:

    http://finance.yahoo.com/q/bc?s=%5EGSPC&t=5y&l=on&z=l&q=l&c=

    When we look at the returns on the S&P 500 during that period, we’re talking about -0.03%. So, if you had a straight S&P500 portfolio of stocks, you would expect this kind of return (loss) during the past 5 years. Historically (from 1970-1998, 28 years), the S&P stocks have returned 13.47% and 20-year treasuries (fixed income) have returned 9.66% (source: The Intelligent Asset Allocator (2001), Jay Bernstein, Table 2-2, pg.20, ISBN:0-07-136236-3).

    What does this all mean? Let’s plug some numbers into Excel. I love Excel. Unfortunately, I can’t show you a screen shot in these comment sections, so you’ll have to bear with me.

    EG: A retiree with $1,000,000 portfolio and no stomach for high-risk or hedge strategies wants maximum return for minimum risk…

    Scenario #1 (Balanced):
    Asset Class %of Portfolio(Weight) Asset Class Expected ROR Total Portfolio ROR
    Fixed Income 50% 9.66%
    Equities (S&P) 50% 13.47% 10.37%

    Scenario #2 (More Equities):
    Asset Class %of Portfolio(Weight) Asset Class Expected ROR Total Portfolio ROR
    Fixed Income 40% 9.66%
    Equities (S&P) 60% 13.47% 10.67%

    Scenario #3 (More Fixed Income):
    Asset Class %of Portfolio(Weight) Asset Class Expected ROR Total Portfolio ROR
    Fixed Income 60% 9.66%
    Equities (S&P) 40% 13.47% 10.06%

    What do we learn from this? First you have to understand that there is much greater volatility in equities than in fixed income products. Once you understand that concept, you’ll learn something significant about risk/return relationships. Namely, that for LESS risk, you can maintain your returns by investing more of your portfolio in fixed income. Also, although you gain more (0.30%) from investing more of your portfolio in equities, you are also assuming MUCH more risk. At the cost of -0.31% of your potential return, your risk diminishes significantly.

    I’m certainly not advocating 100% fixed income here. I’m advocating a strategy based on a (albeit hypothetical) common investment goal amongst retirees: safety of principle. Income is usually a close second-place, too, so investing more heavily in fixed income products just makes more sense in this case.

    I hope this is clear enough given this limited medium. Readers are invited to swing by our forums (http://www.myfinanceforum.com) to discuss further, too.

  2. Rick Says:
    August 31st, 2006 at 11:08 pm

    I agree with Todd. Income investing is where it is at. It really isn’t that hard to come up with a portfolio of mutual funds that have a beta of roughly 0.5, and an alpha of 8 or 9. Investing really isn’t rocket science, but also is less an art than a strategy to be followed without emotion. Easy for a Vulcan to say, i know.

  3. Fly Navy Says:
    October 25th, 2006 at 8:48 pm

    Rather than use the conventional method of calculating what you need to retire on, I like this alternative: Plan on retiring completely debt free, then calculate what expenses you will have that are “fixed”, i.e. taxes, utilities, insurance, etc. Plan on covering this amount with “fixed” income, i.e. social security, company pension, fixed annuity, etc. Everything over and above this fixed expense is variable, (even food is variable…how often do you eat out, etc) and this is the real amount you need to cover with variable income; that is income from investments which tend to be variable from month to month and certainly from year to year. If you want to travel a lot, or dine out a lot, or have expensive hobbies, you can adjust your “nest egg” accordingly…in most cases this model will allow you to be a lot more aggressive in your investments, i.e. more equities as long as you’re willing to adjust your variable lifestyle from year to year to match the market, knowing that your fixed expenses are covered with fixed income. Play with it and see how this might change your pre-conception(s) of how much is enough.

  4. Michele Says:
    February 12th, 2007 at 8:00 pm

    Do the above numbers include social security and pensions or just $$$ saved? In other wowrds, would social security adn pa pension be over and above the “$50,000 desired at retirement”? also, doesn’t that $50,000 need to have taxes taken out? so if you actually needed $50,000, than you would have to take more out due to taxes. Am I following this correctly? thanks so much for a most wonderful website, michele

  5. Al D'Anna Says:
    June 14th, 2007 at 4:09 am

    I have been retired since I was 57. Am now 60.
    I like the Grangaard approach very much. I like Excel very much. I use CD’s in my 5 yr income ladder. As these
    CD’s mature, I take out the amount I need for income and reinvest the rest in a new 5 yr CD. I have made Jan-Dec spending plans from 2007 thru 2013. This allows me to input new income streams (such as social security @ 62) in the month I will start receiving them. Instead of using an standard inflation multiplier, I actually estimate income and spending on a monthly basis. Another major factor is the required minimum IRA distributions starting when your 70. This can have a major tax implication if you live long enough. I am looking right now at alternatives to CD’s which would provide more income and be as safe. My ratio of CD’s to stock mutual funds is 60/40. I don’t see any reason to have more than 40% in stocks if my projections say I don’t need to. I am projecting a 10% annual return on my stocks. If they return substantially more than that in any 1 year, I move excess returns into CD’s. This will have the effect of increase the CD’s to greater than 60%, but I believe that’s good as long as I keep my stock fund growing at 10%. Of course if my stock fund suffers a loss in any year I won’t take any money out of it. I think everyone should learn Excel.

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