No. of Recommendations: 35
Ignore the people teasing you, we're mostly nice around here.
I would love to do a well thought out post, but I have a horrible case of Covid and I'm running on about 60 IQ points.
(it only takes 40 to bark, I've heard).
You and your spouse are older than most people discussing this situation here, which changes the standard advice.
The key thing is not long run annualized real return, the usual prime concern. The risks you need to stop on are longevity risk (outliving your money) and inflation.
For longevity risk, there aren't any good products other than annuities, which are financially terrible but they do really serve a purpose. The problem with annuities is that there basically aren't any that are fully inflation protected. (last I heard in the US there was precisely one, and it was about to be discontinued...with no competition you can rest assured the pricing was not aggressive).
So, two general approaches, which I am not smart enough today to say things about their relative merits.
If you go with equities because they offer a positive long run real total return, then yes, some of the alternatives mentioned are relatively richly priced at the moment, especially RSP. I believe QQQE and Berkshire are only modestly more richly valued than usual. If you wanted to go with equities, then I'd suggest buying in three chunks over the next year. One will be at a bad price, one at a good price, one in the middle. You will feel like a genius for at least getting a good price on 1/3 of it! If you are living from equities and handling longevity risk yourself, you have to have a low withdrawal rate. e.g., each year cash out and spend 4% of the current portfolio value. The income will be variable, but should keep up with inflation indefinitely.
But, going with the first note above, your concern is primarily inflation protection and longevity risk. You don't really need the extra return that equities would offer over the very long run, and they do come with the downside of variability.
So I might suggest something like this:
For a random back of the envelope, and immediate joint annuity for a couple aged 83 will pay around 10.6%/year of the purchase amount. (remember it's a purchase, not an investment: the premium is gone once you hand it over)
That would probably work fine, except for the fact that the real income will slide with inflation. Your joint life expectancy is around 12.5 years (i.e., at least one of you is likely to live at least that long). It is not inconceivable that you could lose 1/3 or 1/2 of your purchasing power in that amount of time, which is too much, especially when you consider that expenses tend to rise as you get older.
That leads to some ideas of a two part solution.
Put some of your money into 5-year TIPS. They are paying inflation + 1.77%/year, which is is a lot better than full exposure to inflation losses, then on maturity buy an immediate joint annuity with the money from the redemption. At the moment a joint annuity for two people age 88 would give about 13.4%/year cash income for life, again with no inflation protection.
Spend the rest of your money in a straight line over the next five years. Just as that pot of cash runs out, you buy the annuity and live on that from then on.
Pick the ratio so you are getting a big bump in spending power at the five year mark, since you will get no inflation protection after that date. For example, if you put 35% of your money in cash (all T-bills or a five year ladder) to spend cash in a straight line over five years, that will give you 7%/year spending money measured as a fraction of your total nest egg. Putting the other 65% into five-year TIPS and buying an immediate joint annuity at age 88 will probably get you around 9.5%/year as a fraction of your total starting nest egg today (because the TIPS have a positive real yield). It would take around 10 years of 3% inflation for that to erode back down to the income level you had for the first five years.
For bonus points:
It is possible that bond yields will be very low on the precise fifth anniversary, so the annuity you buy won't have the same income as today's quote suggests. However, you can keep an eye on quotes and buy the annuity sooner (with more money) to mitigate that. Or, do two annuities: buy 4-year TIPS to go into annuity at age 87, and also 8-year TIPS to go into annuity at age 91. It's less likely that the bond rates (and therefore annuity rate) will be unusually low at both of those future dates. You're a bit better protected from an inflation point of view, too.
I'm not sure any of that is GOOD advice, but it gives you things to consider that you might not otherwise have done.
Jim
