EE bonds as annuity - limits

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Mel Lindauer
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

SnowBog wrote: Fri Oct 22, 2021 7:02 pm
exodusNH wrote: Fri Oct 22, 2021 4:18 pm After 20 years, it continues at whatever rate it was issued at, up to 30 years, when it matures and no longer collects interest.
Slight correction... They can adjust the rate for the final 10 years (years 20 - 30). If they do so, they need to provide notice prior to the 20 year mark, and the rate will apply until the bond reaches 30 years (or sold).

In practicality though, the "sweet spot" for EE Bonds is to redeem at exactly the 20 year mark. If you don't need the funds, you can defer up to 10 additional years, but you'll likely be making next to nothing during that time...
It should be pointed out that some of the older EE Bonds came with a guaranteed 4% for the final 10 years. However, those are maturing soon, so that only applies to those older EE Bonds and chances are the newer ones will, as was said, be paying next to nothing during those final 10 years.
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AlwaysLearningMore
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Re: EE bonds as annuity - limits

Post by AlwaysLearningMore »

000 wrote: Fri Oct 15, 2021 4:27 pm It's only stability if you have nominal expenses 20 years out. Otherwise we don't know what your purchasing power will be. YoY inflation is, what, like 5%+? Are EE rates changing to account for that?
An investor holding Vanguard Total Bond Market Fund (VBTLX) likely holds 20-year Treasuries within that fund. Here's what they're yielding: https://tinyurl.com/52fhfb4u

Image

So holding EE Bonds with an effective 3.53% rate doesn't seem like a mortal financial sin.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
000
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Re: EE bonds as annuity - limits

Post by 000 »

AlwaysLearningMore wrote: Sat Oct 23, 2021 8:23 pm
000 wrote: Fri Oct 15, 2021 4:27 pm It's only stability if you have nominal expenses 20 years out. Otherwise we don't know what your purchasing power will be. YoY inflation is, what, like 5%+? Are EE rates changing to account for that?
An investor holding Vanguard Total Bond Market Fund (VBTLX) likely holds 20-year Treasuries within that fund. Here's what they're yielding: https://tinyurl.com/52fhfb4u

Image

So holding EE Bonds with an effective 3.53% rate doesn't seem like a mortal financial sin.
I don't object to someone holding 20 yr nominal bonds, only to calling them an annuity.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

000 wrote: Sat Oct 23, 2021 8:38 pm
AlwaysLearningMore wrote: Sat Oct 23, 2021 8:23 pm
000 wrote: Fri Oct 15, 2021 4:27 pm It's only stability if you have nominal expenses 20 years out. Otherwise we don't know what your purchasing power will be. YoY inflation is, what, like 5%+? Are EE rates changing to account for that?
An investor holding Vanguard Total Bond Market Fund (VBTLX) likely holds 20-year Treasuries within that fund. Here's what they're yielding: https://tinyurl.com/52fhfb4u

Image

So holding EE Bonds with an effective 3.53% rate doesn't seem like a mortal financial sin.
I don't object to someone holding 20 yr nominal bonds, only to calling them an annuity.
Many folks consider an annuity to be a known stream of income for a period certain. Just because that income stream doesn't come from an insurance company is irrelevant. And, it should be pointed out that the EE Bond stream of income is guaranteed by the full faith and credit of the US whereas the insurance company paying out the annuity could go bankrupt.

You call it whatever you want, but I'll take the EE Bond annuity for a period certain any day.
Best Regards - Mel | | Semper Fi
000
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Re: EE bonds as annuity - limits

Post by 000 »

Mel Lindauer wrote: Sat Oct 23, 2021 8:50 pm Many folks consider an annuity to be a known stream of income for a period certain. Just because that income stream doesn't come from an insurance company is irrelevant. And, it should be pointed out that the EE Bond stream of income is guaranteed by the full faith and credit of the US whereas the insurance company paying out the annuity could go bankrupt.

You call it whatever you want, but I'll take the EE Bond annuity for a period certain any day.
Every bond meets the definition of "a known stream of income for a period certain".
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Re: EE bonds as annuity - limits

Post by SnowBog »

000 wrote: Sat Oct 23, 2021 9:09 pm
Mel Lindauer wrote: Sat Oct 23, 2021 8:50 pm Many folks consider an annuity to be a known stream of income for a period certain. Just because that income stream doesn't come from an insurance company is irrelevant. And, it should be pointed out that the EE Bond stream of income is guaranteed by the full faith and credit of the US whereas the insurance company paying out the annuity could go bankrupt.

You call it whatever you want, but I'll take the EE Bond annuity for a period certain any day.
Every bond meets the definition of "a known stream of income for a period certain".
But the difference with EE Bonds is I can fairly safely plan on purchasing them and getting a minimum of 3.53%/year interest averaged over 20 years for as many years as I wish to purchase them. Or put more simply, I can purchase $10k/year to return $20k/year in 20 years for as many years as I want.

Good luck finding non-callable individual bonds with the same guaranteed return this year, next year, and all the years after that. To try to produce the same income stream with individual bonds, I'd need to buy more (maybe less in some years) to get the same $20k/return depending on what the current interest rates are at that time/year. So it's much harder (and likely more expensive) to string together the "period certain" coverage.
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Re: EE bonds as annuity - limits

Post by Grt2bOutdoors »

Thesaints wrote: Fri Oct 22, 2021 2:17 pm
Grt2bOutdoors wrote: Fri Oct 22, 2021 2:03 pm
Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Ask those who receive a nominal pension if they would give them up today if they could? While the recipients likely do not have nominal liabilities, there is nothing to say that one could not build a COLA into their nominal ladder of bonds. Pair it with the Series I bond. Now you have your COLA.
So you are saying they do not have nominal liabilities far in the future. I could come up with a couple of examples, but overall people do not have that kind of liabilities, especially later in life, therefore EE bonds at ~0% +3.5% nominal bonus at 20 years are a risky investment for almost everyone.
Do you see them bailing out of Long Term bond funds? Have you heard of any long term bond funds being liquidated and shut down on account of it being a poor investment? No. My point is, as part of a diversified portfolio, holding a tranche of 20 year securities is not likely to crash it. On the other hand, holding 100 percent equity for 20 years is not for the faint of heart either.
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Re: EE bonds as annuity - limits

Post by Grt2bOutdoors »

000 wrote: Sat Oct 23, 2021 8:38 pm
AlwaysLearningMore wrote: Sat Oct 23, 2021 8:23 pm
000 wrote: Fri Oct 15, 2021 4:27 pm It's only stability if you have nominal expenses 20 years out. Otherwise we don't know what your purchasing power will be. YoY inflation is, what, like 5%+? Are EE rates changing to account for that?
An investor holding Vanguard Total Bond Market Fund (VBTLX) likely holds 20-year Treasuries within that fund. Here's what they're yielding: https://tinyurl.com/52fhfb4u

Image

So holding EE Bonds with an effective 3.53% rate doesn't seem like a mortal financial sin.
I don't object to someone holding 20 yr nominal bonds, only to calling them an annuity.
What does an insurance company call it when you select a 10 year period certain payout? A regulated company is calling it by its approved term. It’s an annuity. Do you object to that?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: EE bonds as annuity - limits

Post by Hebell »

My understanding is that what makes something an annuity, is whether mortality credits are involved. So it's not because it's an insurance company per se, but it's because the rate of return by the issuer takes into account actuarial data on the lifespan of those buying the product. Laddered EE bonds are most certainly not an annuity. Laddered TIPS are not an annuity. (Of course, it most often is an insurance company making those calculations, but it need not be. We could start the bogleheads tontine for that matter)
Last edited by Hebell on Sat Oct 23, 2021 11:01 pm, edited 1 time in total.
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Re: EE bonds as annuity - limits

Post by CletusCaddy »

Thesaints wrote: Fri Oct 22, 2021 2:17 pm
Grt2bOutdoors wrote: Fri Oct 22, 2021 2:03 pm
Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Ask those who receive a nominal pension if they would give them up today if they could? While the recipients likely do not have nominal liabilities, there is nothing to say that one could not build a COLA into their nominal ladder of bonds. Pair it with the Series I bond. Now you have your COLA.
So you are saying they do not have nominal liabilities far in the future. I could come up with a couple of examples, but overall people do not have that kind of liabilities, especially later in life, therefore EE bonds at ~0% +3.5% nominal bonus at 20 years are a risky investment for almost everyone.
The obvious solution is to start an EE ladder when one is young, and then right as your first tranche matures at year 20, take out a new 30-year fixed mortgage on your home and invest the loan proceeds into inflation-sensitive assets. You’ve just converted a large inflation-sensitive cost (imputed rent) into an inflation-insensitive expense and also immunized yourself from any remaining inflation-sensitive expenses.
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Re: EE bonds as annuity - limits

Post by 000 »

I tire of the terminology discussion so I will simply observe that nowhere on the Treasury direct EE bond webpage does the term annuity appear nor do I believe it would be permissible for a broker or financial advisor to market any kind of bond ladder as an annuity.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

Hebell wrote: Sat Oct 23, 2021 10:59 pm My understanding is that what makes something an annuity, is whether mortality credits are involved. So it's not because it's an insurance company per se, but it's because the rate of return by the issuer takes into account actuarial data on the lifespan of those buying the product. Laddered EE bonds are most certainly not an annuity. Laddered TIPS are not an annuity. (Of course, it most often is an insurance company making those calculations, but it need not be. We could start the bogleheads tontine for that matter)
A term certain annuity from an insurance company has no mortality credits, but it's still an annuity. It's exactly the same as the EE Bond Annuity (a known income stream for a defined period of time). The big difference is that the EE Bond Annuity is backed by the full faith and credit of the US whereas he insurance company annuity is backed by a company who may or may not be able to honor the term certain payout because they had to declare bankruptcy.

Don't know about you, but I'll take my EE Bond term certain annuity over that of an insurance company any day.
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Re: EE bonds as annuity - limits

Post by AlwaysLearningMore »

000 wrote: Sat Oct 23, 2021 11:58 pm I tire of the terminology discussion so I will simply observe that nowhere on the Treasury direct EE bond webpage does the term annuity appear nor do I believe it would be permissible for a broker or financial advisor to market any kind of bond ladder as an annuity.
000 wrote: Fri Oct 15, 2021 12:57 am Bond ladders, whether made of EE bonds or otherwise, are not an annuity at all and I wish this terminology would fall out of use.
A New York Times financial writer disagrees: The New York Times published YOUR MONEY; SAVING BONDS AS AN ANNUITY https://tinyurl.com/yyr22npw

While some posters assert that "mortality credits" ("the dividend that comes from pooling your longevity risk with others and accepting the fact that other members of the pool might enjoy some of your savings after you die" https://tinyurl.com/y2yheg4q) are part and parcel of an immediate annuity, the SEC defines an annuity as "...a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time." https://tinyurl.com/y6nzs39p The SEC definition would seem to include the federally-guaranteed predictable income stream provided via an EE bond ladder. (As Mel has pointed out, the "claims-paying ability" of an insurance company is inferior to Uncle Sam.)

If there were no market for "period certain annuities," they would cease to exist.
Period certain is an annuity option that allows the customer to choose when and how long to receive payments, which beneficiaries can later receive. This is unlike the more conventional life, lifetime or pure life annuity option, in which the annuitant receives an income payment for the rest of their life, regardless of how long their retirement lasts.
A period certain annuity is also described as an "income for a guaranteed period." The insurance companies that create and market annuity products can employ a variety of names and descriptions.
https://tinyurl.com/yffyaobu

As a current example, a 65-year old male living in MO can purchase a $20k/year 20-year period-certain annuity for $323,853
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The cost of buying an annuity starting in 20 years (instead of the cost if payments began immediately) shows that $1,667 per month for 20 years beginning in 20 years would cost $183,419. You can compare the IRR of this to the 'EE Bond ladder period-certain annuity' and draw your own conclusion.
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This post is a good example of an investor who finds value in a period-certain, predictable income stream.
SnowBog wrote: Fri Oct 22, 2021 12:33 pm ...I'm happy to have EE Bonds ...because they give me a fixed predictable income stream. And while I don't know the ultimate "purchase power" of that steam in 20+ years, I know that it's going to help my overall retirement plan just the same.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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