This is a contribution from Bud Hebeler who runs Analyzenow.com

Dear Mr. Hebeler:

Thank you for your books and spreadsheet in assisting with retirement fund disbursement planning.  Your conservative thoughts are a rudder in the sea of misinformation. 

Here’s my hypothetical question for you:  Inflation and annual expense ratios are onerous costs for wealth accumulation. I can and have populated my asset allocation with low cost admiral shares of Vanguard’s mutual funds so those are minimized.( I like the ability to adjust your investment fees in the “what if” section of the spreadsheet. I’m going to use that feature to show people the real cost of a fund charging 1.5% vs. 0.2% annual fees.) 

Inflation is a whole horse of another color. As you point there is no reason inflation will be constant or that it will remain moderate.  If I go to the Vanguard Retirement Center planner, I can use their Annuity for Life calculator to give me a quote for an immediate annuity.  This says that for each $1,000 I place in the immediate annuity they will provide $4 per month, adjusted for inflation, for the rest of my life, starting at age 50.  That’s $48 annually per $1,000 or 4.8%. And that amount is indexed to inflation. 60% taxable. 

Being a frugal fellow I’ve also saved additional money, half in an IRA and half in post tax investments, that I’d like to not place in an annuity, but maintain in my current portfolio of about 60% stocks and 40 % bonds. This seems to be an intelligent move. It’s a hedge against inflation for my basic living needs and I maintain control of a larger amount of my assets.

Thanks, 

Gary S.

Thank you for asking.  I believe that Vanguard’s inflation-adjusted immediate annuity is a good investment for part of a retiree’s savings.  I think it’s better than getting into the commodities or collectibles markets to offset inflation.  I think that things are so wild now that there is some possibility that we could either go into something like the Great Depression or have hyper inflation–or even a combination of the two.

There are two things to be cautious about:  (1) That you have enough other investments to handle surprises that might require a large amount of immediate cash without borrowing, and (2) the solvency of AIG, Vanguard’s underlying insurer.  AIG is one of the world’s largest insurers, has a good rating, and I believe that Vanguard could step in if AIG got into trouble, but who knows?  (AIG has had a problem recently, but I understand it’s not serious as a % of its total assets.) 

You might also consider using I bonds to accomplish the same thing without the worry about solvency.  Until this January, you could buy $30,000 worth each year per Social Security number, but now the US, fearing another burden from inflation, cut the maximum to $5,000 a year.  However, you can buy $5,000 from a bank and $5,000 from Treasury Direct.  That’s a total of $20,000 for a couple each year.

If you were over 55, I would suggest that you consider using a direct transfer of money from your IRA to buy the immediate annuity.  Then use your taxable account to hold your equity investments.  That will give you a more favorable tax break.

Of course, my own sense of what way the economy will go and what are good investments is just my own opinion–and I could be very wrong.  That’s why I never put all of my eggs in one basket no matter how strongly I feel about such things. 

Bud