• Portfolio Strategies
  • A Pseudo-Life Annuity: Is There a Downside?

    by Robert Muksian

    Last year, I wrote an article that shared ideas on how not to outlive, with virtual certainty, one’s money (“A Pseudo-Life Annuity: Guaranteed Annual Income for 35 Years,” AAII Journal, June 2012).

    Specifically, I demonstrated how an individual investor with a $1 million portfolio on March 19, 2012, could have invested the money to have virtually a 100% probability of both not outliving his or her money and leaving a legacy for heirs at death.

    Though the data showed that income for the investor would be assured throughout retirement, a question that was left unanswered is, “Is there a downside to the beneficiaries when the individual dies and the remaining bonds must be sold prior to maturity?” That is, will there be a loss of original principal? In this article, I will answer that question.

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    Robert Muksian is a professor of mathematics at Bryant University in Smithfield, Rhode Island.


    Discussion

    Sebastian Lasher from VA posted over 3 years ago:

    Why is essential to get the STRIPS in an IRA account? Won't it work in any account?


    Sebastian Lasher from VA posted over 3 years ago:

    Why is essential to get the STRIPS in an IRA account? Won't it work in any account?


    Joseph Schunk from CA posted over 3 years ago:

    Because the IRS will impute interest yearly, even thought it's not paid until the end.


    Donald Brown from Virginia posted over 3 years ago:

    I disagree-if strips are bought assuming a 2% interest rate and they are sold when interest rates rise substantially, selling them before maturity will shrink their value substantially.


    Monk Monk from Texas posted over 3 years ago:

    The article is interesting but it is not clear to me why this protects against currency devaluation. Dollars have been losing value steadily and with government deficits as far as the eye can see, one cannot but expect a continuation of the devaluation trend.


    Steven Spainhower from MT posted over 3 years ago:

    I would use this strategy to protect against a major market meltdown. My concern would be lost purchasing power due to expected inflation. Would it not be best to buy the strips in ever increasing amounts for each subsequent year to account for this?


    Charles Rotblut from IL posted over 3 years ago:

    Steven,

    The argument for buying the strips in equal dollar amounts is that no one knows what future interest rates will actually be. If you are concerned about purchasing power, you want to consider combining bonds with stocks. This way, you get both preservation of wealth (bonds) and return on capital (stocks).

    I hope this helps,
    Charles


    Hildy Richelson from PA posted over 2 years ago:

    Another alternative is to purchase some strips and some high coupon interest paying bonds that will hold value much better in a rising interest rate scenario due to their current income payments.

    It is also possible to purchase zero coupon or non-income producing bonds issued by municipalities that may be free of federal, state and local taxes.

    The strategy to chose is based on your individual needs and the current market environment. This is an interesting idea that should be given consideration when planning investments for retirement years.


    Robert Wainer from MA posted 4 months ago:

    Can Tips be bought as strips?


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