EE bonds as annuity - limits

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mrmicro
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EE bonds as annuity - limits

Post by mrmicro »

How much can a married couple invest in EE bonds in a year? I am looking towards building an annuity. From all posts here, folks mention investing 20k every year to get a 40k annuity after 20 years. Is that the max or can we invest 10k in the trust account as well for a total of 30k/year leading to an annuity of 60k?

If it is allowed, any reason why folks don’t consider maximizing this to 60k? Thanks
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

mrmicro wrote: Fri Oct 15, 2021 12:16 am How much can a married couple invest in EE bonds in a year? I am looking towards building an annuity. From all posts here, folks mention investing 20k every year to get a 40k annuity after 20 years. Is that the max or can we invest 10k in the trust account as well for a total of 30k/year leading to an annuity of 60k?

If it is allowed, any reason why folks don’t consider maximizing this to 60k? Thanks
Each of you can open a living trust and invest $10k/year/trust.

So the total with a reasonable trouble is $40k/year leading to an annuity of $80k.

Considering that most people in the accumulation phase should invest around 70/30-80/20 stocks/bonds, and because EE-bonds are very illiquid, they should probably be at maximum only half of your bond portfolio. Most people are not probably saving at high enough rate for this to be relevant...
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Re: EE bonds as annuity - limits

Post by mrmicro »

Thanks for the quick reply. Answers my question clearly. :happy
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Re: EE bonds as annuity - limits

Post by calwatch »

I Bonds have a lower rate but are much more flexible, and have the same features such as tax deferral of interest and being exempt from state income tax. I think many savings bond users would prioritize I Bonds first and then EE's since I's could be used for college educations, moving expenses, rebalancing portfolios/opportunistic buying, etc.

Assuming an inflation rate of 2%, the amount of $40,000 20 years from now is really $27,000 in today's money. But most people will also receive Social Security and/or have other assets. I would look at Social Security and EE's to fund at least minimum expenses - that one could live a lifestyle that covers the needs but not necessarily wants. This allows me to be more aggressive at the stock end to cover the wants. Others construct their portfolio differently, but regardless EE's are hard to manage because of that feature.

There are certain specific situations like college financial aid and other asset tests the fact that 99% of the interest comes on the 20th year is a feature not a bug but those are pretty niche.
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Re: EE bonds as annuity - limits

Post by 000 »

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.

Do you have a need for an illiquid nominal bond ladder? Really think about...... Do you have nominal expenses to match 20 years out?
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Re: EE bonds as annuity - limits

Post by CletusCaddy »

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.

Do you have a need for an illiquid nominal bond ladder? Really think about...... Do you have nominal expenses to match 20 years out?
Most people do - their mortgage
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

000 wrote: Fri Oct 15, 2021 12:57 am Do you have a need for an illiquid nominal bond ladder? Really think about...... Do you have nominal expenses to match 20 years out?
It's not only about nominal expense matching. EE-bonds are for long-term stability.

While it's true that stocks have always beaten bonds in 20-year period during the last 100 years, there is no guarantee that this continues to be the case going forward.

Presuming that the FED succeeds reaching its 2% inflation target (or getting even close to it), they also offer pretty good long term inflation protection.

All this being said, I would recommend first maxing out retirement accounts, then maxing out I-bonds, and in the end if there is extra, then considering EE-bonds.
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Re: EE bonds as annuity - limits

Post by SnowBog »

If interested, see viewtopic.php?t=358793
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Re: EE bonds as annuity - limits

Post by 000 »

CletusCaddy wrote: Fri Oct 15, 2021 1:06 am
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.

Do you have a need for an illiquid nominal bond ladder? Really think about...... Do you have nominal expenses to match 20 years out?
Most people do - their mortgage
That is a fair point depending on the interest rate spread.
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Re: EE bonds as annuity - limits

Post by 000 »

ivgrivchuck wrote: Fri Oct 15, 2021 1:52 am It's not only about nominal expense matching. EE-bonds are for long-term stability.

While it's true that stocks have always beaten bonds in 20-year period during the last 100 years, there is no guarantee that this continues to be the case going forward.

Presuming that the FED succeeds reaching its 2% inflation target (or getting even close to it), they also offer pretty good long term inflation protection.

All this being said, I would recommend first maxing out retirement accounts, then maxing out I-bonds, and in the end if there is extra, then considering EE-bonds.
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?
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Re: EE bonds as annuity - limits

Post by SnowBog »

000 wrote: Fri Oct 15, 2021 4:27 pm
ivgrivchuck wrote: Fri Oct 15, 2021 1:52 am It's not only about nominal expense matching. EE-bonds are for long-term stability.

While it's true that stocks have always beaten bonds in 20-year period during the last 100 years, there is no guarantee that this continues to be the case going forward.

Presuming that the FED succeeds reaching its 2% inflation target (or getting even close to it), they also offer pretty good long term inflation protection.

All this being said, I would recommend first maxing out retirement accounts, then maxing out I-bonds, and in the end if there is extra, then considering EE-bonds.
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?
Don't let perfection be the enemy of the good.
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Re: EE bonds as annuity - limits

Post by 000 »

SnowBog wrote: Fri Oct 15, 2021 4:37 pm Don't let perfection be the enemy of the good.
This thread is about constructing an 'annuity', right? So an annuity should match one's expenses, right.......?

Now if we're talking about EE bonds as deflation protection then sure I could see them being 'good'.
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Re: EE bonds as annuity - limits

Post by SnowBog »

000 wrote: Fri Oct 15, 2021 4:51 pm
SnowBog wrote: Fri Oct 15, 2021 4:37 pm Don't let perfection be the enemy of the good.
This thread is about constructing an 'annuity', right? So an annuity should match one's expenses, right.......?
Why?

I doubt anyone (or very few) has perfectly matched expenses to annuities.

Targets like 25X reference residual expenses, meaning expenses - income. So adding an annuity amount - any amount - lessens the residual gap for the portfolio to cover.

Sure, in a "perfect" world that would be an inflation adjusted amount. But that's like saying someone with a non-inflation adjusted pension shouldn't bother collecting their pension. It just doesn't make sense... The non-inflation adjusted amount will still cover the first $x in expenses regardless.

Now the fact its not inflation adjusted means I need to have a bigger buffer, but it doesn't invalidate the benefit of an annuity.
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Re: EE bonds as annuity - limits

Post by 000 »

SnowBog wrote: Fri Oct 15, 2021 5:06 pm Why?

I doubt anyone (or very few) has perfectly matched expenses to annuities.

Targets like 25X reference residual expenses, meaning expenses - income. So adding an annuity amount - any amount - lessens the residual gap for the portfolio to cover.

Sure, in a "perfect" world that would be an inflation adjusted amount. But that's like saying someone with a non-inflation adjusted pension shouldn't bother collecting their pension. It just doesn't make sense... The non-inflation adjusted amount will still cover the first $x in expenses regardless.

Now the fact its not inflation adjusted means I need to have a bigger buffer, but it doesn't invalidate the benefit of an annuity.
Bond ladders aren't annuities at all so no point quibbling over technicalities when we can't even get the basics right.

Color me surprised if 20 years from now no investable asset class beats 2x nominal.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

000 wrote: Fri Oct 15, 2021 5:11 pm
SnowBog wrote: Fri Oct 15, 2021 5:06 pm Why?

I doubt anyone (or very few) has perfectly matched expenses to annuities.

Targets like 25X reference residual expenses, meaning expenses - income. So adding an annuity amount - any amount - lessens the residual gap for the portfolio to cover.

Sure, in a "perfect" world that would be an inflation adjusted amount. But that's like saying someone with a non-inflation adjusted pension shouldn't bother collecting their pension. It just doesn't make sense... The non-inflation adjusted amount will still cover the first $x in expenses regardless.

Now the fact its not inflation adjusted means I need to have a bigger buffer, but it doesn't invalidate the benefit of an annuity.
Bond ladders aren't annuities at all so no point quibbling over technicalities when we can't even get the basics right.

Color me surprised if 20 years from now no investable asset class beats 2x nominal.
Many people consider a steady, predictable stream of income for a period certain to be an annuity, regardless of the fact that the income doesn't come from an insurance company. Personally, I'd rather have those annuity payments coming from risk-free EE Bonds, backed by the full faith of the US, rather than from an insurance company that could declare bankruptcy.
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Re: EE bonds as annuity - limits

Post by SnowBog »

000 wrote: Fri Oct 15, 2021 5:11 pm
SnowBog wrote: Fri Oct 15, 2021 5:06 pm Why?

I doubt anyone (or very few) has perfectly matched expenses to annuities.

Targets like 25X reference residual expenses, meaning expenses - income. So adding an annuity amount - any amount - lessens the residual gap for the portfolio to cover.

Sure, in a "perfect" world that would be an inflation adjusted amount. But that's like saying someone with a non-inflation adjusted pension shouldn't bother collecting their pension. It just doesn't make sense... The non-inflation adjusted amount will still cover the first $x in expenses regardless.

Now the fact its not inflation adjusted means I need to have a bigger buffer, but it doesn't invalidate the benefit of an annuity.
Bond ladders aren't annuities at all so no point quibbling over technicalities when we can't even get the basics right.

Color me surprised if 20 years from now no investable asset class beats 2x nominal.
You continue to miss the point... Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.

At its most basic, an annuity is an exchange of a defined amount of money for a defined return of money. That's exactly what EE Bonds do, $10k purchased today is worth $20k (nominal) in 20 years. I can buy more, and buy for longer as I see fit.

To give a simple example, my social security will be roughly $40k @ 70. I'm buying EE (and I bonds to backfill for missed years) to build a similar income from the year I retire until social security kicks in. So I can "plan" on approximately $40k/year of income from the year I retire until I die. My "cost" for this is about 10% of my portfolio (or 25% of my bonds if you want to think about it that way).

Our expenses are more than $40k/year. That's what the other 90% of our portfolio is for. It covers the residual expenses, including impacts of inflation.

Will EE Bonds be the best asset I have in 20 years? No... Will EE Bonds be my best fixed income asset? No idea... But do EE Bonds give me a predictable and guaranteed - albeit nominal - return? They sure do!
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Re: EE bonds as annuity - limits

Post by mrmicro »

I should clarify my intent. I want to have a risk free steady source of income during retirement. I am willing to not touch these bonds for 20 years and am definitely maximizing 401k, backdoor Roth and I bonds before putting the 30k in EE. Thanks
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Re: EE bonds as annuity - limits

Post by Thesaints »

SnowBog wrote: Fri Oct 15, 2021 5:48 pm Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.
Yes, but they are disregarding inflation/rates risk. At present a 3.5% rate on a 20-year maturity may look appealing, but who can tell 10 years from now ?
20 years ago that rate was 6%, for instance, and they could be in the unenviable situation of having to decide whether to cash in 10 years of 0% interest, or accept 10 more years of subpar interest.
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Re: EE bonds as annuity - limits

Post by CletusCaddy »

Thesaints wrote: Fri Oct 15, 2021 11:25 pm
SnowBog wrote: Fri Oct 15, 2021 5:48 pm Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.
Yes, but they are disregarding inflation/rates risk. At present a 3.5% rate on a 20-year maturity may look appealing, but who can tell 10 years from now ?
20 years ago that rate was 6%, for instance, and they could be in the unenviable situation of having to decide whether to cash in 10 years of 0% interest, or accept 10 more years of subpar interest.
Anyone can at any time figure out what the rational thing to do with EE bonds is by looking at the yield of newly issued Treasuries with maturities matching the remaining maturity of the EE bond
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

Thesaints wrote: Fri Oct 15, 2021 11:25 pm
SnowBog wrote: Fri Oct 15, 2021 5:48 pm Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.
Yes, but they are disregarding inflation/rates risk. At present a 3.5% rate on a 20-year maturity may look appealing, but who can tell 10 years from now ?
20 years ago that rate was 6%, for instance, and they could be in the unenviable situation of having to decide whether to cash in 10 years of 0% interest, or accept 10 more years of subpar interest.
But all bonds carry similar kind of risks.

If you buy BND and interest rates rise rapidly to 6%, you'll lose around 30% of your investment.
If you buy VGLT and interest rates rise rapidly to 6%, you'll lose around 50% of your investment.

With EE-bonds at least, if interest rates rise rapidly to 6%, you don't lose anything. You can choose to cash them out at zero (nominal) loss and invest into something else, or hold them to maturity.

The option to cash out the bond without taking a loss is actually a great plus for EE-bonds that bonds with secondary markets don't have. I don't think that people fully realize the value of it...
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Re: EE bonds as annuity - limits

Post by 000 »

mrmicro wrote: Fri Oct 15, 2021 8:14 pm I should clarify my intent. I want to have a risk free steady source of income during retirement. I am willing to not touch these bonds for 20 years and am definitely maximizing 401k, backdoor Roth and I bonds before putting the 30k in EE. Thanks
It is probably best to decide what overall asset allocation you desire first. Your comment that I bolded above suggests to me that you may be structuring your investments around contribution limits. But if you want more stocks than you can fit in 401k and (Roth) IRAs it's perfectly acceptable to open a taxable brokerage account to invest in stocks; OTOH, if you want more bonds than you fit in retirement plans it's perfectly acceptable to do taxable bond investing, which includes EE bonds as a potential choice.

You say "I want to have a risk free steady source of income during retirement" but EE bonds alone cannot provide that unless you are fairly sure you will have retirement expenses that will not grow faster than the EE bond rate. There is no particular reason to think that food, electricity, rent, etc. will be bound to the EE rate so it's not risk free in inflation terms. Also, as I'm sure you're aware, but just to be clear, the income from EE bonds does not function like a perpetual annuity.

So why might I hold EE bonds? Well, I don't find the 'annuity' angle particularly compelling. Where I do think EE bonds shine, however, is as deflation protection as part of a diversified portfolio. 3.54% nominal for 20 years will look pretty good during a deflationary environment. And if asset prices drop bigly (think a 1929 style crash) I could still take my EE bonds out early (with an implicit penalty) to scoop up assets on the cheap.
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Re: EE bonds as annuity - limits

Post by Thesaints »

ivgrivchuck wrote: Fri Oct 15, 2021 11:35 pm But all bonds carry similar kind of risks.
Yeah, but they don't pay 0% interest.
If you buy BND and interest rates rise rapidly to 6%, you'll lose around 30% of your investment.
If you buy VGLT and interest rates rise rapidly to 6%, you'll lose around 50% of your investment.
But these are not bonds, they are bond funds.
With EE-bonds at least, if interest rates rise rapidly to 6%, you don't lose anything. You can choose to cash them out at zero (nominal) loss and invest into something else, or hold them to maturity.
Also with a real bond you can carry it to maturity and not lose a dime.
The option to cash out the bond without taking a loss is actually a great plus for EE-bonds that bonds with secondary markets don't have. I don't think that people fully realize the value of it...
It doesn't come for free. A 20-year treasury today pays 2%.
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

Thesaints wrote: Sat Oct 16, 2021 12:27 am
ivgrivchuck wrote: Fri Oct 15, 2021 11:35 pm But all bonds carry similar kind of risks.
Yeah, but they don't pay 0% interest.
True.
If you buy BND and interest rates rise rapidly to 6%, you'll lose around 30% of your investment.
If you buy VGLT and interest rates rise rapidly to 6%, you'll lose around 50% of your investment.
But these are not bonds, they are bond funds.
If you buy a 10-year treasury bond, interest rates rise rapidly to 6%, you sell it, you take a 30% loss. With a 20-year bond you take a 50% loss.
With EE-bonds at least, if interest rates rise rapidly to 6%, you don't lose anything. You can choose to cash them out at zero (nominal) loss and invest into something else, or hold them to maturity.
Also with a real bond you can carry it to maturity and not lose a dime.
True, but you don't have the option to cash it out at anytime without a loss of principal.
The option to cash out the bond without taking a loss is actually a great plus for EE-bonds that bonds with secondary markets don't have. I don't think that people fully realize the value of it...
It doesn't come for free. A 20-year treasury today pays 2%.
On that we agree.
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Re: EE bonds as annuity - limits

Post by 000 »

I may be coming around to EE bonds a bit more. During rising rates scenario one could just take one's principal back and return to the casino but with a marketable bond one will have to take a haircut to get out of it. It probably depends on exactly when in the lifetime of the bond the rising rates begin.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

Thesaints wrote: Sat Oct 16, 2021 12:27 am
ivgrivchuck wrote: Fri Oct 15, 2021 11:35 pm But all bonds carry similar kind of risks.
Yeah, but they don't pay 0% interest.
What is the 0% interest you're referring to? If it's the fixed rate on the I Bond, that's only one part of the composite rate which is over 7% at the current time. You can't compare apples and oranges. Comparable rates on Treasuries and CDs are pathetic when compared to that.

And if you're referring to something else, please explain what your 0% interest comment is referring to for those of us who don't understand what you mean.
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Re: EE bonds as annuity - limits

Post by exodusNH »

CletusCaddy wrote: Fri Oct 15, 2021 1:06 am
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.

Do you have a need for an illiquid nominal bond ladder? Really think about...... Do you have nominal expenses to match 20 years out?
Most people do - their mortgage
Also, property taxes, insurance, and a house maintenance bucket
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

Mel Lindauer wrote: Sat Oct 16, 2021 1:20 am
Thesaints wrote: Sat Oct 16, 2021 12:27 am Yeah, but they don't pay 0% interest.
What is the 0% interest you're referring to?
Currently EE-bonds pay 0.1% interest per year. That's close enough to 0%.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

ivgrivchuck wrote: Sat Oct 16, 2021 1:58 am
Mel Lindauer wrote: Sat Oct 16, 2021 1:20 am
Thesaints wrote: Sat Oct 16, 2021 12:27 am Yeah, but they don't pay 0% interest.
What is the 0% interest you're referring to?
Currently EE-bonds pay 0.1% interest per year. That's close enough to 0%.
That's not much worse than a lot of bank accounts at the present time. And the bank accounts aren't tax-deferred and free from state and local taxation.
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Re: EE bonds as annuity - limits

Post by SnowBog »

Mel Lindauer wrote: Sat Oct 16, 2021 2:10 am
ivgrivchuck wrote: Sat Oct 16, 2021 1:58 am
Mel Lindauer wrote: Sat Oct 16, 2021 1:20 am
Thesaints wrote: Sat Oct 16, 2021 12:27 am Yeah, but they don't pay 0% interest.
What is the 0% interest you're referring to?
Currently EE-bonds pay 0.1% interest per year. That's close enough to 0%.
That's not much worse than a lot of bank accounts at the present time. And the bank accounts aren't tax-deferred and free from state and local taxation.
And the bank accounts won't do a one-time adjustment of your account after 20 years to ensure its worth at least 2x what you originally purchased (in nominal terms).
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Re: EE bonds as annuity - limits

Post by Thesaints »

Mel Lindauer wrote: Sat Oct 16, 2021 2:10 am That's not much worse than a lot of bank accounts at the present time. And the bank accounts aren't tax-deferred and free from state and local taxation.
Don't put it in a bank account (which is actually yielding 0.50%), but in a Series I bond, which pays >0%.
You are banking on a 3.5% payout 20 years from now and that is risky: 20 years is a very long time and 3.5% ain't that great.
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

Thesaints wrote: Sat Oct 16, 2021 2:27 pm
Mel Lindauer wrote: Sat Oct 16, 2021 2:10 am That's not much worse than a lot of bank accounts at the present time. And the bank accounts aren't tax-deferred and free from state and local taxation.
Don't put it in a bank account (which is actually yielding 0.50%), but in a Series I bond, which pays >0%.
You are banking on a 3.5% payout 20 years from now and that is risky: 20 years is a very long time and 3.5% ain't that great.
Those who know me know that it's not my recommendation to choose one over the other. Both can have a valid place in one's planning. I've been a proponent of I Bonds since they first came out and lots of folks who followed my early I Bond recommendations have done very well.

Here's a Forbes column I did a number of years ago about building one's own annuity using EE Bonds rather than using an insurance company.

https://www.forbes.com/sites/theboglehe ... 865d077ba3

There's no one right answer for everyone, so do whatever's best for you. But first, be informed.
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Re: EE bonds as annuity - limits

Post by Angst »

Thesaints wrote: Fri Oct 15, 2021 11:25 pm
SnowBog wrote: Fri Oct 15, 2021 5:48 pm Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.
Yes, but they are disregarding inflation/rates risk. At present a 3.5% rate on a 20-year maturity may look appealing, but who can tell 10 years from now ?
20 years ago that rate was 6%, for instance, and they could be in the unenviable situation of having to decide whether to cash in 10 years of 0% interest, or accept 10 more years of subpar interest.
Of course, inflation is always a risk, an unknown quantity, but do you have a better value option out there for guaranteed safe nominal dollars 20 years out? If that, specifically, is what you want (or the OP wants, really), you don't. The 20-year Treasury you mention only pays 2% presently. If you bought a zero coupon strip today you wouldn't have earned much more than 2% when you sold it in 20 years.

10 years out from now, if your 6% nominal scenario did come to pass, it would still be a mistake to dump one's 10-year old "0% interest" EE bonds. At 10 years out, they'd still have a yield to maturity of over 7%. At eleven years, they'd be over 8%, barely.

Code: Select all

Year  YTM     Years left
1     3.53%   20    
2     3.72%   19    
3     3.93%   18    
4     4.16%   17    
5     4.43%   16    
6     4.73%   15    
7     5.08%   14   
8     5.48%   13  
9     5.95%   12  
10    6.50%   11    
11    7.18%   10    
12    8.01%    9    
13    9.05%    8    
14   10.41%    7   
15   12.25%    6   
16   14.87%    5    
17   18.92%    4
18   25.99%    3
19   42.42%    2
20  100.00%    1
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Re: EE bonds as annuity - limits

Post by Thesaints »

In which scenario does one have a nominal dollar liability 20 years from now ?
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Re: EE bonds as annuity - limits

Post by SnowBog »

Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
The question makes no sense to me...

I will have expenses 20 years from now. They will exceed the amount I get returned from EE Bonds.

If inflation is higher than 3.5% over those 20 years they will exceed the amount by even more (meaning I'll be getting back less than $1 real for $1 invested). If inflation is less than 3.5%, EE Bonds will cover more of my expenses (getting > $1 real for every $1 invested).

But either way, EE Bonds will cover part of my expenses in 20 years. The rest will be covered by things like withdrawals from the rest of my portfolio, pensions, social security.

This is exactly the same as what I'll deal with having a [small] non-COLA pension. It too will cover some fixed [nominal] amount of expenses. Would I rather it be inflation adjusted - sure. But I'm happy to have EE Bonds and the non-COLA pensions all the same, 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.
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Re: EE bonds as annuity - limits

Post by exodusNH »

Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Property taxes? Rent? Home owners' / renters' / auto / umbrella insurance? Medicare payments?

I've begin buying I bonds so that I have an inflation-protected, essentially 0-risk floor for expenses that I know I will have, e.g. property tax. Even now, property taxes are about 50% of my mortgage payment. Assuming property taxes roughly increase with inflation, the $10K of I Bonds will cover that, insurance with a $2-$3k left over. $3k is roughly 1% maintenance on the house.

If I had the extra cash, I'd max out EE bonds to cash in 20 years from now.
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Re: EE bonds as annuity - limits

Post by surfstar »

Angst wrote: Sun Oct 17, 2021 7:29 pm
Thesaints wrote: Fri Oct 15, 2021 11:25 pm
SnowBog wrote: Fri Oct 15, 2021 5:48 pm Those considering EE Bonds have already chosen to hold bonds, so comparing them against equity options is pointless.
Yes, but they are disregarding inflation/rates risk. At present a 3.5% rate on a 20-year maturity may look appealing, but who can tell 10 years from now ?
20 years ago that rate was 6%, for instance, and they could be in the unenviable situation of having to decide whether to cash in 10 years of 0% interest, or accept 10 more years of subpar interest.
Of course, inflation is always a risk, an unknown quantity, but do you have a better value option out there for guaranteed safe nominal dollars 20 years out? If that, specifically, is what you want (or the OP wants, really), you don't. The 20-year Treasury you mention only pays 2% presently. If you bought a zero coupon strip today you wouldn't have earned much more than 2% when you sold it in 20 years.

10 years out from now, if your 6% nominal scenario did come to pass, it would still be a mistake to dump one's 10-year old "0% interest" EE bonds. At 10 years out, they'd still have a yield to maturity of over 7%. At eleven years, they'd be over 8%, barely.

Code: Select all

Year  YTM     Years left
1     3.53%   20    
2     3.72%   19    
3     3.93%   18    
4     4.16%   17    
5     4.43%   16    
6     4.73%   15    
7     5.08%   14   
8     5.48%   13  
9     5.95%   12  
10    6.50%   11    
11    7.18%   10    
12    8.01%    9    
13    9.05%    8    
14   10.41%    7   
15   12.25%    6   
16   14.87%    5    
17   18.92%    4
18   25.99%    3
19   42.42%    2
20  100.00%    1
This is the correct way to view EE bonds, IMO.

I had started us on a path of purchasing EE and I last year, but due to wanting funds available during early retirement, we nixed the EE and went full I. For the richer BH's they seem to easily max both options and complain about the "low" limits - lol. Not a problem here, and we'll be retired before you most likely :-P (lower expenses for the win)
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Re: EE bonds as annuity - limits

Post by Mel Lindauer »

Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Anyone with 20 or more years left on a fixed rate mortgage.
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Re: EE bonds as annuity - limits

Post by ApeAttack »

exodusNH wrote: Fri Oct 22, 2021 12:40 pm
Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Property taxes? Rent? Home owners' / renters' / auto / umbrella insurance? Medicare payments?

I've begin buying I bonds so that I have an inflation-protected, essentially 0-risk floor for expenses that I know I will have, e.g. property tax. Even now, property taxes are about 50% of my mortgage payment. Assuming property taxes roughly increase with inflation, the $10K of I Bonds will cover that, insurance with a $2-$3k left over. $3k is roughly 1% maintenance on the house.

If I had the extra cash, I'd max out EE bonds to cash in 20 years from now.
In CA, Prop 13 limits property tax increases to well below 3.54% (assuming one doesn't sell their home). So one definitely could use EE bonds for future increases in property taxes.
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Re: EE bonds as annuity - limits

Post by Grt2bOutdoors »

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.
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Re: EE bonds as annuity - limits

Post by Thesaints »

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.
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Re: EE bonds as annuity - limits

Post by SnowBog »

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.
That's like saying a normal pension is risky... :shock:
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Re: EE bonds as annuity - limits

Post by Thesaints »

SnowBog wrote: Fri Oct 22, 2021 2:33 pm That's like saying a normal pension is risky... :shock:
Ok, but a normal pension comes with the job; one cannot ask to change its terms.
Whereas here people are actively engaging in buying EE bonds, with the idea of holding the 20 years.
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Re: EE bonds as annuity - limits

Post by SnowBog »

Thesaints wrote: Fri Oct 22, 2021 3:30 pm
SnowBog wrote: Fri Oct 22, 2021 2:33 pm That's like saying a normal pension is risky... :shock:
Ok, but a normal pension comes with the job; one cannot ask to change its terms.
Whereas here people are actively engaging in buying EE bonds, with the idea of holding the 20 years.
But the person had a say in choosing that job, which likely came with less pay versus a different job with likely higher pay and no pension.

They valued the predictable income stream that the pension provided.

It's the same with people buying EE Bonds. When I buy them, I'm knowingly picking a safe and predictable income stream. They are part of my fixed income assets, which are also "safe" but not as predictable. And my non-fixed income assets are more "risky" (relatively speaking).

If you want to simplify it down, I'm giving up some upside for some downside protection.
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Re: EE bonds as annuity - limits

Post by sureshoe »

I'm not familiar with EE bonds, so maybe this should be its own thread or I should google harder...

But gist here is that you are locking up for 20 years at current, terrible rates, but there is a guarantee it doubles? So you're getting 3.5%-ish interest rates. That rate sounds good if you eat the lock-in... And it's guaranteed, whereas most bond funds aren't performing that high.

Hmmm.
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Re: EE bonds as annuity - limits

Post by exodusNH »

sureshoe wrote: Fri Oct 22, 2021 4:15 pm I'm not familiar with EE bonds, so maybe this should be its own thread or I should google harder...

But gist here is that you are locking up for 20 years at current, terrible rates, but there is a guarantee it doubles? So you're getting 3.5%-ish interest rates. That rate sounds good if you eat the lock-in... And it's guaranteed, whereas most bond funds aren't performing that high.

Hmmm.
Yes. They pay next to nothing right now, maybe 0.10%? But the US Treasury makes a one-time adjustment at 20 years to double face value if the guaranteed rate didn't already do that. (E.g. if you had a 5% EE Bond, they wouldn't double that since the natural interest rate will have more than doubled the value after 20 years.)

That sets a floor of ~3.5% if you cash it in at exactly 20 years. After 20 years, it continues at whatever rate it was issued at, up to 30 years, when it matures and no longer collects interest.

Unlike TIPS, there is no deflation adjustment.
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Re: EE bonds as annuity - limits

Post by SnowBog »

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...
Last edited by SnowBog on Fri Oct 22, 2021 7:05 pm, edited 1 time in total.
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Re: EE bonds as annuity - limits

Post by emlowe »

ivgrivchuck wrote: Fri Oct 15, 2021 12:25 am
mrmicro wrote: Fri Oct 15, 2021 12:16 am How much can a married couple invest in EE bonds in a year? I am looking towards building an annuity. From all posts here, folks mention investing 20k every year to get a 40k annuity after 20 years. Is that the max or can we invest 10k in the trust account as well for a total of 30k/year leading to an annuity of 60k?

If it is allowed, any reason why folks don’t consider maximizing this to 60k? Thanks
Each of you can open a living trust and invest $10k/year/trust.

So the total with a reasonable trouble is $40k/year leading to an annuity of $80k.

Considering that most people in the accumulation phase should invest around 70/30-80/20 stocks/bonds, and because EE-bonds are very illiquid, they should probably be at maximum only half of your bond portfolio. Most people are not probably saving at high enough rate for this to be relevant...
A couple can also reasonably create a joint trust which then gives another 10k/yr - so it's not that hard to reasonably get up to 50k (your joint trust may need some specific language). All those bonds however are contained within completely separate TD accounts, and some people prefer simplicity than managing 5 more accounts (eg, that's five separate bank transfers, five separate purchases, etc.). Also, the trust accounts cannot be set up with transact rights from a second account or name a secondary owner or a beneficiary, so you will need to make sure your spouse can log into those accounts directly. (I think it's fairly safe to say it will be more complicated if you die to handle your trust TreasuryDirect account "properly" - I think they need to be reissued)
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Re: EE bonds as annuity - limits

Post by SnowBog »

emlowe wrote: Fri Oct 22, 2021 7:05 pm (I think it's fairly safe to say it will be more complicated if you die to handle your trust TreasuryDirect account "properly" - I think they need to be reissued)
Assuming you have a successor trustee, I believe they can gain access. I forget what TD calls it, but it's something like "entity" or "account" manager. My understanding is a trustee could manage the account this way. But there can only be one at a time.

So I agree with the general sentiment that they add more complexity. As such, my expectation is we'll cash in our I Bonds from our trust(s) first. That theory will be tested if we have any high fixed rates in the next 7 years (my time line for buying).
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Re: EE bonds as annuity - limits

Post by ivgrivchuck »

emlowe wrote: Fri Oct 22, 2021 7:05 pm A couple can also reasonably create a joint trust which then gives another 10k/yr - so it's not that hard to reasonably get up to 50k (your joint trust may need some specific language). All those bonds however are contained within completely separate TD accounts, and some people prefer simplicity than managing 5 more accounts (eg, that's five separate bank transfers, five separate purchases, etc.). Also, the trust accounts cannot be set up with transact rights from a second account or name a secondary owner or a beneficiary, so you will need to make sure your spouse can log into those accounts directly. (I think it's fairly safe to say it will be more complicated if you die to handle your trust TreasuryDirect account "properly" - I think they need to be reissued)
There is no reason why a person couldn't have two living trusts. So now you are already up to $60k.

But then you have two trust accounts with the same SSN (your proposal has the same problem). The system may start flagging these. I'm not sure, maybe you can get away with it? But we are starting to move more and more into grey area...
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Re: EE bonds as annuity - limits

Post by Joe Public »

Mel Lindauer wrote: Fri Oct 22, 2021 12:55 pm
Thesaints wrote: Fri Oct 22, 2021 12:20 pm In which scenario does one have a nominal dollar liability 20 years from now ?
Anyone with 20 or more years left on a fixed rate mortgage.
You beat me to it. Also, many people have entered into such mortgages with interest rates well below 3.53% within the last year or so to where, depending on an individual's future tax rates, a person could come out a bit ahead by diverting extra principal payments to Series EE bonds.
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