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No. of Recommendations: 7
QTS-B looks attractive. I love convertible preferreds, because they are not callable and some have a realistic chance to appreciate with the commmon. This one looks like it fits in that category-- fast growing issuer, conversion value only about 15% below market price. Am I looking at this right?

Lots of folks on this board have had a good ride on ARE-D. But it's now eligible for forced conversion (eligible for, but not yet subject to), I believe, so this might be a good substitute.

On the Google Sheet many of us use to track preferreds, QTS-B is listed as callable. But it's not. Anyone know how to get that corrected?

Prospectus: https://www.sec.gov/Archives/edgar/data/1577368/000104746918...

Apologies if this is old news to active board participants. I've been away. If so, please refer me to the relevant posts.
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No. of Recommendations: 6
QTS-B looks attractive. I love convertible preferreds, because they are not callable and some have a realistic chance to appreciate with the commmon. This one looks like it fits in that category-- fast growing issuer, conversion value only about 15% below market price. Am I looking at this right?

What bothers me is that at $110.21 (today's closing price) QTS-B is trading at a premium both to the liquidation value of $100 and to the conversion value of $97.03 (2.1264 shares of QTS common, which closed at $45.63 today). At $110.21, with a coupon of 6.5%, the effective yield is 5.90%, while their Preferred A, which has a coupon of 7.125%, closed at $25.65, which provides an effective yield of 6.94% Since QTS-B has parity with the QTS A stock, that means that you are paying a premium of over 1% in yield for the conversion feature. Seems overpriced to me.

Lots of folks on this board have had a good ride on ARE-D. But it's now eligible for forced conversion (eligible for, but not yet subject to)

How so? The conversion price for a forced conversion of ARE-D is that the common closes at 150% of $100.93, or $151.40, for 20 out of 30 trading days. The 52 week range for ARE common tops out a $144.46, or $6.94 short of the price to force a conversion. And that was a peak on a single day, not the closing price, much less the closing price for multiple days. Holders of ARE-D should be watching to see when it may become eligible to be converted, but at this point, it's not.

AJ
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No. of Recommendations: 4
What bothers me is that at $110.21 (today's closing price) QTS-B is trading at a premium

The preferred's are protected from conversion till 2023. So, the preferred's are trading today at $52 conversion price (if you are stickler to the decimals then $51.83).

Now, think of the protection till 2023 as a call option on the stock or in much simpler terms the current preferred price assumes the stock will gain at 3.25% per year, not a big hurdle right?


2019 45.63
2020 47.112975
2021 48.64414669
2022 50.22508145
2023 51.8573966


Suppose if the stock gains 5% CAGR then you are seeing the stock price at $55 and that would value the preferred's at $116.95, 8% CAGR would value the stock price at $62, and the preferred at $131.

The worst case, you will continue to receive 5.9% or you get 5.9% and some cap gains.

What am I missing ? what is your concern?

PS: Thanks Jim for bringing this to the board.
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No. of Recommendations: 3
I was just going off an old mental note that said ARE-D has about had its run, price-wise, because it's about up against its forced-conversion price, so be looking around for a substitute. Thanks, AJ, for stating the situation with more precision than I did.

As to the premium to conversion price, that's typical for a convertible, when the common is below the conversion price, but not far below. When the common is way below the conversion price ("busted convertible") they trade like straight preferreds with no call risk. When the common is above the call price, they trade at very close to their conversion value. In between those two extremes, they trade with a modest premium to their conversion value, and with lower yields than a comparable straight preferred or busted convertible. The premium gradually declines as the common appreciates, giving the holder some, but not all, of the appreciation of the common. It's a sweet spot if you are a conservative investor who still wants to be in the game for potential equity-like returns in the long run -- if the common tanks, your holding does not have far to fall before it is supported by its value as a busted convertible/straight preferred, but if the common takes off, you get a high percentage of the gain that you would have gotten by buying the common. Since it is a safer security than the common, you can take a larger position than you would have in a more risky security. And the income is higher.

Being comfortable with taking a larger position is key for me.
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No. of Recommendations: 2
The preferred's are protected from conversion till 2023.
.
.
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What am I missing ? what is your concern?


They aren't protected from liquidation if there is a merger or 'other corporate action', so paying >10% over the liquidation value is a concern to me. The fact that the coupon rates for the A vs. the B indicate that the premium for the conversion feature should be closer to 0.625%, paying >1% for that feature is a concern to me.

Now, think of the protection till 2023 as a call option on the stock or in much simpler terms the current preferred price assumes the stock will gain at 3.25% per year, not a big hurdle right?

Maybe, maybe not. Given the bull run that we've pretty much been in for years, assuming that any REIT is going to hit a hurdle rate, even 3.25%, for the next 4 1/2 years seems a bit optimistic, especially given the slow down in the real estate markets (increasing inventories and falling prices, even with lower rates) that I've been seeing recently.

YMMV

AJ
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No. of Recommendations: 1
They aren't protected from liquidation if there is a merger or 'other corporate action', so paying >10% over the liquidation value is a concern to me.

There is a "Special Rights Upon a Fundamental Change" read the prospectus. I read it in some cases it is good and some it is not so good.

You have a right to convert into common stock at any time. So, if the company is taken out you can immediately convert and sell the common, assuming the take out is at higher price.

Now, if the share price is lower, merging with a publicly listed company, the preferred's would continue to be listed and you can live with that.

On the other hand if it is taken private, you are in a very bad situation whether it is A or B, because you can be waldon-ed, for those who require their memory to be refreshed see "Am Trust". In that case 10% premium is hardly the worry.

Maybe, maybe not. Given the bull run that we've pretty much been in for years, assuming that any REIT is going to hit a hurdle rate, even 3.25%, for the next 4 1/2 years seems a bit optimistic

Lot many smart people were predicting market downturn for over 5-7 years, and similar predictions were on interest rates, so, I am not going to make any assumptions. However, any downturn may not last for 4 or 5 years and so far the prices have re-bounded with vengeance (see recent one in Dec). So don't make assumptions on market crashing is my take.

Winter may be coming in Game of Thrones and preparing for it may be the best thing for the "seven kingdoms" but for investors that's a bad thing.
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No. of Recommendations: 5
Regarding the comparison to QTS-A, with the A series you have a guaranteed capital loss. If rates and credit quality stay constant, some day it will be called at $25 and you lose a little on the price. If rates rise or company deteriorates, the A (and the B) will go down and you lose that way. With the B, while you have a lower current yield, you have unlimited capital gain potential and only a little more downside risk than the A. QTS common is up 11 points year to date. It's a fast-growing data-center REIT. Wells Fargo estimates 3 - 5 year growth rate of 12%



I have an allocation to REIT preferreds that I promise myself to keep filled. I've gotten bounced out of Well-I by forced conversion (with an 18% capital gain and years of dividends). I have very nice capital gains in my ARE-D, EPR-C and EPR-E convertible preferreds and I won't be able to keep them forever either, if all goes well. So, I'm very glad to have a new convertible to add to my portfolio. They don't come along all that often. I buy very large positions in them when they do, because I can do so within my risk-tolerance limits, and they have treated me well. My favorite, from long ago, was CNT-B. CNT was a gazelle REIT I would not have bought in quantity through the common. But I was able to take a large position within my risk-tolerance zone through the convertible preferred (which I learned about through this board) and it gave me a very nice ride.

I gladly give up a point of yield and have the potential for double-digit capital gain. My capital gain in ARE-D is 33%, in EPR-C it's 31%, in EPR-E it's 24%. I forget the magnitude of my gain on CNT-B, but it was big. So, I like convertible preferreds. I like even busted convertibles, because of their lack of a call option for the issuer, and will accept a lower yield to get them.
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No. of Recommendations: 8
All preferreds are in danger of being Waldenized. So let's put aside that concern when comparing one to another.

The question is whether to buy the common, the straight preferred, or the convertible. Let's look at 3 possible states of the world -- "A" being disaster, "B" being bad economy but company limps along, and "C" being happy days:

A) If the company goes belly up, they're all in trouble, though the two preferreds might fare better than the common, with the straight preferred having a slight edge because it is not above par and the convertible is. So rank them straight first, convertible a close second, common third in the belly-up scenario.

B) If the economy tanks but the company scrapes along (a likely scenario sooner or later), the common plummets (maybe with a reduced dividend), interest rates fall so the straight preferred gets called, and the convertible becomes a busted convertible and is one of the best performing holdings in your whole portfolio of long positions, paying you 5.9% on cost in a world where 5.9% yields cannot be bought at reasonable risk. Rank them Convertible preferred first, straight preferred second, common a distant third in this scenario.

C) It the economy continues okay or great and the company continues its fast growth (another likely scenario given how hot data centers are), then the common soars, the convertible rises by 20 - 50% and you get 5.9% on cost along the way. Then there is a forced conversion and you cry all the way to the bank. The straight preferred just keeps doing what it has been doing -- paying its fixed dividend and gyrating inversely with interest rates. It responds to the company's good fortunes only a little, reflecting improved credit quality. Rank them common first, convertible second, straight preferred a distant third in this scenario.

I look at these 3 and I say buy the convertible, given my goals (reasonably safe income and a shot at a jackpot). I've done this multiple times over the last 20 years and have liked the results. I've lived through B & C and been very happy to have made the best choice when B prevailed and didn't waste much effort on regret when C prevailed, because I had a jackpot, just not as big of a one as if I had bought the common. Never wished I'd bought the straight preferred when a convertible was available.
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No. of Recommendations: 0
Thank you all for the enlightening discussion.
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I second jaroman's thanks for the intelligent and illuminating discussion and especially would like to thank Jim very much for bringing this convertible to my attention. I typically do not do gazelles either, but this does fit my goals.
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No. of Recommendations: 2
>>>>>>>>>>I have an allocation to REIT preferreds that I promise myself to keep filled. I've gotten bounced out of Well-I by forced conversion (with an 18% capital gain and years of dividends). I have very nice capital gains in my ARE-D, EPR-C and EPR-E convertible preferreds and I won't be able to keep them forever either, if all goes well. So, I'm very glad to have a new convertible to add to my portfolio. They don't come along all that often....>>>>>>>>>>>>>

Thanks for bringing these up. I'm wondering if there is a reason you don't mention RPT-D, a convert that used to be discussed here? Currently trading around par. Thanks
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No. of Recommendations: 1
Interestingly both rpt and rpt-d are yielding same. What is the advantage of owning this convert instead of the common?
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No. of Recommendations: 0
The preferred has a higher rank in the capital structure and the dividend is cumulative, presumably this reduces some of the downside exposure making it a lower risk play than the common. Whether it is over valued at this point compared the common, good question.
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No. of Recommendations: 0
My understanding is that if the REIT goes bankrupt, landlords* come first and bonds come next so the "protection" given by dividends have to be paid on the common is not much protection, in my opinion.

* This was the case with O when Buffets went bankrupt. Actually, O did very well in recovering their money owed.

brucedoe
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No. of Recommendations: 2
While acknowledging that preferreds are higher in the capital structure than the common shares, what has the actually history been?

I think that there could be agency issues, managements want to keep paying themselves for as long as possible and might just run the company into the ground while continuing to pay themselves for as long as possible. Managements often also own common shares, but in my experience rarely much preferreds.

Anyone know of any REITs that went through bankruptcy and/or liquidation and just how did the preferreds actually do?

If CBL goes down, a real possibility, it will be a good case study. Three family members in senior management, they own (or at least used to) own a fair amount of common, and after the tenant electricity reimbursement issue their ethics have to be questioned.

I have nothing tangible to anchor my doubts just a gut feeling.
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No. of Recommendations: 1
I own RPT-D. I think I own every equity REIT convertible preferred except LXP-C, which Fidelity bans without justification.
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No. of Recommendations: 0
The advantage of owning the RPT convert instead of the common is that convertible has less risk. The board cannot cut the preferred dividend unless it eliminates the common dividend.
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No. of Recommendations: 10
In the 2008-09 meltdown and immediate aftermath years, many, many REIT common dividends were cut. Some have yet to regain their former levels. No well-known equity REITs missed a dividend on its preferred that I can recall. PLD dividend just regained its 2008 level, for example. WRE cut its dividend in 2012 and has yet to bring it back up. KIM cut its common dividend and it has not regained its pre-meltdown level.

Please also recall that REITs are required to pay out 90% of their tax-basis net income in dividends to continue the benefits of REIT status. So, the board has less freedom to go divvy-free for an extended period than it would with a C corp.

Yes, it's no protection in bankruptcy. But how many major REITs have we seen go bankrupt? We've seen many cut their common dividends. Can't think of one that has cut or skipped a preferred dividend.

This article looks at what would have happened to you if you were dependent on REIT common dividends in the 2008 recession and its aftermath. https://seekingalpha.com/article/4181540-reits-surviving-rec... I only skimmed it, but for his list of REITs (and I don't know how he chose the list but it was pretty 24 well-known names, diversified across sectors) half of the REITs cut their common dividends. His portfolio income fell 26% and did not fully recover until 2013.

Some of the companies cutting dividends were considered "bluest of the blue chip REITs" by this board.

So, that's the reason to have an allocation to preferred stocks -- safety.

I only get one retirement. Even a 10% chance of running out of money is unacceptable to me. If I had 10 retirements, and could say while living in poverty "Yeah, this sucks, but in my other 9 retirements I am comfortable," I might be cool with "probably" everything will work out. But I only get 1, and if the one I get is the one where I run out of money, that will be 100% of my retirements.

For this reason, I have an allocation to GNMAs, an allocation to preferreds, an allocation to long bonds, an allocation to insured mutual funds,* and an allocation to common stocks. Plus an annuity that kicks in when and if I reach 85.

I give up a lot of return for the sake of safety. But what this return foregone buys me is priceless: Financial peace of mind.

*Mutual funds with an insurance wrapper that says even if the fund goes to zero due to market reverses and my steady withdrawals, the insurance company will keep paying me and my wife a lifetime income equal to a certain percentage of the accounts peak value. My allocation to this bucket is 33%, spread across 5 insurance companies, none of which is the same as the one who issued my deferred annuity nor the same as the one carrying our long-term-care insurance.
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No. of Recommendations: 1
Speaking of LXP -- there's another that cut its common dividend but not its preferred. It just happened.
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No. of Recommendations: 3
Jim,

Would any of your ten retirements include one with significant inflation?

If so would be interested in hearing about how you would protect yourself from a 1970's type inflation.

If I did a pie chart on the risks I prepare for, the risk piece of that pie would be 40% of the whole pie.

VM - Who believes the best defense combines a good offense and living below my means.
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make my last post the inflation risk piece would be 40% of the whole risk pie.
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No. of Recommendations: 2
Jim,

According to quantumonline, S&P has recently assigned QTS-B a credit rating of B- . This is quite deep into junk territory. Is this not a concern?

Operationally, QTS has not been able to grow its FFO much the past few years despite being in a red hot real estate sector. 2016 FFO/share = 2.61, 2019 FFO/share (estimate) = 2.66 . Real estate being a cyclical business, I would be worried about how they would fare in a sector down turn.

I do not follow QTS. Perhaps you have satisfied yourself on these points already.

It is good to see you posting again.

Lee
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No. of Recommendations: 5
Good points VM. I think I'm covered:


The dividend stream from the common stocks is my biggest income source. That could be expected to increase in step with inflation. Not guaranteed, of course, but one would expect company revenues, expenses and profits to all accelerate in nominal terms. There would be winners and losers, and good years and bad, but across a diversified portfolio of common stocks, I would expect the income to keep pace with inflation over a span of years. Usually beating it, but some decades lagging it just a bit. This article takes a deep dive on that question: https://seekingalpha.com/article/439171-has-dividend-growth-... Over the 40 years ending the year 2000 inflation was over 500% but dividend growth was over 800%. Dividend growth lagged inflation in the 1970s, but not disastrously so and it caught up later.

The stock prices too should rise with inflation, but that might take a decade or 3, if the 1970s are any guide. Not important - selling stocks to support consumption is not part of my plan (except within the insured funds where the withdrawal rate is fixed by contract and only total return matters for whether the withdrawals come out of my holdings or out of the insurance company's hide). If the total return inside the insured funds beats my withdrawal rates (4 - 5% of the peak value on most of them), then my insured withdrawal amounts increase. If not, it stays the same. Cannot decline as long as I do not exceed the contractual withdrawal schedule. (Simplification, but approximately true).

The GNMA income stream would also rise to beat inflation. The long bond fund's income too, but to a lesser extent. Remember -- selling securities is not part of my plan, so I am only talking about the income stream, not the share prices. The income stream from a bond fund will rise with inflation as maturing bonds are replaced with ones bought at higher rates.

Then there's my deferred annuity, which though not inflation protected, is a big after-burner that kicks in in the far future (15 years out), replacing what inflation has done to the buying power of my preferred stocks. (Maybe more than, maybe less than, but it can only help).

Actually some of my insured mutual funds also have a delayed start to the guaranteed withdrawals, at a much higher (10%) withdrawal rate -- they start in 2022. Again, not inflation adjusted in themselves, but having income streams with delayed starts gives the aggregate family income an upward sloped over time in nominal terms, which is what you need to offset inflation.

We don't spend all the income, so the excess income reinvested is always increasing the income stream and that would accelerate in a high-inflation environment as dividend yields and bond yields of the securities bought with the excess income increased.

Then last, but foremost because of its safety and direct linkage to a price index, we will delay social security for both of us until age 70, to maximize that income stream that has a built-in inflation adjuster. Mine starts this year. Hers in 7 years. So hers is another delayed-start future income stream, on top of being inflation-adjusting.

Oh yeah, SailboatsToGo.com is still going strong. No plan for when or if I drop that. I sold half in 2012, taking in a partner to do half the work, but the remaining half is significant. The profits of that business could be expected to keep pace with inflation -- as long as I can (and want to) keep pace with the work!
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No. of Recommendations: 1
Jim -
Your prudence is amazing and your heirs are fortunate.

You are sort of the opposite of Mr. Carey Concerned
https://boards.fool.com/sustainable-withdrawal-rate-14799039...
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No. of Recommendations: 5
Jim, you might want to reconsider your GNMA fund as any protection from inflation.

Theoretically, fixed income is a poor performer in inflationary and/or rising rate environments, but do better in deflationary and/or decreasing rate environments.

Looking back at the prices you listed in your original Oct 2009 post, the fund was at $10.75 and adjusted for distributions was at Apr 87 was $2.27, this equates to a 7.15% nominal and a 4.2% real after inflation return.

Not bad at all. However, it is important to remember that was a declining interest rate environment.

What has it done since? Well in your original Oct 2009 post you mentioned that is had a 3.43% SEC yield and a $10.75 price, so that would equate to an annual distribution of 37 cents. As of Friday it had a price of $10.37 and yield of 2.98% so its annual distribution would be 31 cents.

So both its price and distribution has declined over the last 9 plus years, hardly an inflation hedge in my book. Schwab gives two total returns for the fund – SEC Pre-Liquidation and SEC Post Liquidation. For 1, 3, 5, & 10 year periods, the Pre/Post total returns are respectively 2.78%/2.48%; 0.33%/0.59%; 1.27%/1.35%; & 1.88%/1.94%. The decline in many interest rates over the last few months, really kicked up that 1 year total return. Schwab lists the average Pre/Post annual returns going back to its inception in Jun 1980 at 4.13%/4.12%.

Note the 10 year returns pretty much equal the inflation rate. Since the average return was 7.13% for the 22.5 years from Apr 1987 to Oct 2009, it is obvious that VFIIX performs much better during a declining rate environment than a rising one.

For a inflation hedge, VFIIX wouldn’t make my list, but it might do for a cash reserve fund. My cash reserve fund is my Kasasa checking and Kasasa saving accounts, I didn’t make the names myself. The checking pays 2.5% for balances up to $10,000 and 0.5% for balances over $10,000 and the savings account pays 1.5% on up to $10,000.

Since it is a constant value account, it would beat VGIIF during rising rates especially on small amounts. Needless to say, I don’t hold that much rainy day cash anymore.

VGIIF may not have tanked as some predicted, but neither has it done as well as it did prior to Oct 2009.
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No. of Recommendations: 0
Jim-

Would you mind sharing the names of the insured mutual funds you mentioned?

Thanks in advance.

David
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No. of Recommendations: 1
Robfinkii,

Thanks a million for that link. 18 years ago! It's timely for me because I've asked to speak on sustainable withdrawal to a group next week. I was reading the first post in the thread and thinking, "Damn, who is this guy?" then looked up at the name and saw it was me. Funny. (Anyone here who would use correct grammar in that sentence -- "it was I?")
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No. of Recommendations: 2
ValueMonger,

Your are applying total return analysis to an income-only question. Total return means nothing if you are only spending the income and the asset is debt with zero default risk. Income will always increase in a GNMA fund when interest rates increase, which almost always happens when inflation increases. Moreover, your rate of reinvestment of distributions should always match the rate of inflation so that your income stream stays at least constant in real terms.

Consider what one has to do as a GNMA investor when inflation increases. You should always be viewing the inflation-premium part of the interest you are getting as return of capital and should be reinvested in more shares. So, if the fund yield increases 2 points, and inflation also increased 2 points, you need to be putting all that increase in income back into more shares, and increasing your withdrawals from the fund only in line with your build-up in share count.

The decline in share price as inflation increases actually helps you to increase your nominal income in line with inflation because your reinvestment purchases are made at the new lower share price.

Yes, we're talking very small real returns. That comes with the territory when that asset is liquid, short-duration debt, with zero default risk. But the question is, are they inflation-protected. I continue to believe they are, provided you only spend the real-return part of the nominal return and reinvest the inflation-premium part of the return.

Here are the annual total return numbers. But they are useless to the current question, because they are a mix of share-value change and income.

Annual Total Return (%) History
Year (first % is the fund total return. Second is the GNMA category)
VFIIXCategory
2019
N/AN/A
2018
0.87%0.51%
2017
1.87%1.58%
2016
1.85%0.89%
2015
1.33%0.49%
2014
6.65%4.73%
2013
-2.23%-2.72%
2012
2.35%2.80%
2011
7.68%6.70%
2010
6.94%5.66%
2009
5.29%4.74%
2008
7.22%4.76%
2007
7.01%6.09%
2006
4.33%3.47%
2005
3.33%1.91%
2004
4.13%3.01%
2003
2.49%1.90%
2002
9.68%9.23%
2001
7.94%6.81%
2000
11.22%10.86%
1999
0.78%-1.35%
1998
7.14%7.49%
1997
9.47%8.68%
1996
5.24%2.91%
1995
17.04%16.45%
1994
-0.95%-3.79%
1993
5.90%8.16%
1992
6.85%6.34%
1991
16.77%14.57%
1990
10.32%8.68%
1989
14.77%12.18%
1988
8.81%6.92%
1987
2.15%1.32%
1986
11.69%11.88%
1985
20.68%18.33%
1984
14.03%12.59%
1983
9.65%8.09%
1982
31.56%28.21%
1981
4.78%4.52%
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No. of Recommendations: 5
Dave,

I hold 5.

Jackson National -- remarkable in that it allows 100% allocation to equity. I have mine in a NASDAQ 100 index fund. Woohoo! Hold onto your hat! I figure, with them guaranteeing 4% of the high water mark annually for joint life, shoot for the stars if they'll let you. Note: New investor probably are held to a lower withdrawal rate. The industry as a whole has pulled back a half point or so.

Nationwide
Ohio National

These two are similar so I'll treat them as one. But performance is a little better with Nationwide.

High fees, conservative investment mix required, but higher guaranteed withdrawal rate. I am deferring start of withdrawals to year 10 (2022 for me) and the rate will be 10.5% of the initial investment, per annum, for joint life (or some lower percentage of the fund highpoint -- forget what it is).

Vanguard

Lower fees, no early withdrawal penalty (the others have a penalty if you withdraw more than the permitted amount in the first 7 years), lower-fee funds, decent performance, conservative mix required, lower guaranteed withdrawal percent -- in my case 4% of high-water mark.

Pacific Life

Higher withdrawal rate than Vanguard and Jackson. In my case 5% of peak value. Moderate fees. Slightly more aggressive asset mix allowed.

Notes:
= Peak value is measured once per year on the investment anniversary.
= Mine are held as IRAs or similar (funded by direct transfer from my Fidelity IRA).
= All are sold through sales people, except Vanguard, where you deal direct.
= All the above descriptions pertain to terms of the particular product I invested in and the particular options within each one that I chose. The companies are always fiddling with their terms, so what is offered today will differ from my deals. Also, terms vary by age of you and spouse.
= You can quit at any time and get your money back (whatever the fund shares are worth at market), less any applicable early withdrawal penalty). When you and your spouse die, the remaining money in your fund goes to your heirs.
= If the fund balance goes to zero due to the combined effects of fees, permitted withdrawals and market performance, the insurance company has to continue to pay you for the rest of your joint life at the permitted withdrawal rate x the peak value.
= If the insurance company goes bellyup and you are due payments under the guarantee, you have a claim against your state's insurance guarantee fund, subject to applicable caps. You also have a claim in bankruptcy along with other claimants, ahead of lenders.

Here's a 6th one that seems reasonable if you can deal with the complexity. I wrote the description below several years ago for a person I know who had invested in it but did not understand it. I read his contract and prospectus and digested it for him as follows. He is 76 today and his wife is older.

"You have $130k in a Transamerica variable annuity with guaranteed lifetime withdrawal benefit. The money is invested in a balanced (domestic stocks, foreign stock, bonds, moneymarket) ETF, and therefore its value varies with changes in market values of the securities.



You can take the money out at any time. However, in the first 5 years, if you take more than the permitted withdrawal there would be a penalty. Penalty is 5% in first year then 4, 3, 2, 1, 0 in succeeding years. A further caveat is you are paying an annual fee in exchange for Transamerica guaranteeing a lifetime income stream from this investmtent and that guarantee is conditioned on your withdrawals being under a certain amount, determined by a complicated formula described below.



The guarantee part of the investment is that Transamerica promises that if you abide by certain rules governing the size of your annual withdrawals it will keep sending you money for the rest of your lives even if the account value goes to zero due to a combination of poor market performance and/or withdrawals that comply with the rules of the guarantee and/or their fees taken out of the account.



I will use the term "permitted withdrawal amount" to mean the maximum that can be taken out without reducing the guaranteed lifetime income stream. But, always bear in mind you can withdraw any amount up to the full value (minus the early withdrawal penalty in the first 5 years I already mentioned) if you are willing to reduce or eliminate the guarantee.



The details of the guarantee are:



The permitted withdrawal amount (for keeping the guarantee intact) is a permitted withdrawal percentage (5%) times a number called "the withdrawal balance." If you wait until Dan's age 80 to start withdrawals, then the percentage will be 6% not 5%.



The Withdrawal Balance is just a computed number resulting from a formula. It is not the value of the account and you cannot withdraw that whole amount.



The Withdrawal Balance started out being equal to the value of the account in year one.



In each subsequent year, the Withdrawal Balance has the potential to go higher, according to a formula explained below. It will never go down, unless you withdraw more than the permitted amount. (If you did withdraw more, then it would go down by the amount of the excess withdrawal).



The formula:



The withdrawal balance is re-computed annually on the anniversary of the investment. The new withdrawal balance for the future is computed tentatively 4 different ways and the method that gives the highest number is the one that the final computation method for that year. The 4 ways are:



1) No change. So, if the other 3 ways would result in a reduction, then this method governs. The new Withdrawal Balance is equal to last year's.



2) The highest value that the account reached on any "monthiversary" during the preceding year. So, the value of your investments is fluctuating all the time due to market fluctuations, fees and withdrawals (or even deposits). They look at this value on one day of each month -- the same day of the month as when you bought the investment to begin with -- and select the high water mark as the potential new withdrawal balance under this method.



3) The old withdrawal balance increased by 5.5%. This method is only available during the first ten years of the investment It is also only available in years you did not take a withdrawal (zero withdrawal -- not permitted withdrawal, but actually zilch). Both things have to be true to use this method -- first 10 years and no withdrawal in last year.



4) Account value at this anniversary date (could be folded into 2 if you just define "monthiversary to include the anniversary)



Your strategy, which seems reasonable given the rules of the game, has been to make no withdrawals in order to take advantage of method #3, with the goal of having a higher guaranteed annual income stream when you do start withdrawals. Market performance has not been good enough for #2 or #4 to give you a better boost, so #3 has governed, with the result that the withdrawal base is now a few thousand dollars above the actual account value. Your withdrawal base is $144k, so your lifetime guaranteed income would be 5% of that per year (a bit over $7k).

I doubt you would want to continue to defer withdrawals beyond the tenth year because you would not be getting rewarded by an automatic boost in the withdrawal base."
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Thanks, Jim.

David
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<<Thanks a million for that link. 18 years ago! It's timely for me because I've asked to speak on sustainable withdrawal to a group next week. I was reading the first post in the thread and thinking, "Damn, who is this guy?" then looked up at the name and saw it was me. Funny. (Anyone here who would use correct grammar in that sentence -- "it was I?")<<

Yes, 18 years ago! Then it was an academic exercise, now I am newly retired and it is an actual issue. As it worked out, Mr. Concerned could probably have exercised his plan to put all his money in reits and take 10% a year. He would have had to pull the extra profits and put them into something safe, like treasuries (or your GNMA fund). Early on there were some very good years.

Below are the returns for the next 18 years. By my calculations had he taken $200K each year, plus 2% inflation, and invested any extra earnings in treasuries at the end of each year (at 3.5%) he would have gone below $2 million only once, in 2002, by over $100K. By the end of 2006 he would have had his $2MM in reits and $1.45MM in the treasuries. His annual draw by 2018 is up to $280K.

Had he just left all of his money invested in reits, with the same $200K plus inflation withdrawals, he would now have $1,6MM, almost $700K less. Still not bad since he only has 12 years of his 30 years left and is in his 80s now and probably slowing down.



REIT % REIT invested T bills invested
return start of year end of year
2001 13.93 2,000 79
2002 3.82 2,000 0
2003 37.13 1,954 471
2004 31.58 2,000 891
2005 12.16 2,000 934
2006 35.06 2,000 1,445
2007 -15.69 2,000 939
2008 -37.73 2,000 5
2009 27.99 2,000 364
2010 27.95 2,000 684
2011 8.28 2,000 618
2012 19.70 2,000 788
2013 2.86 2,000 613
2014 28.03 2,000 942
2015 2.83 2,000 756
2016 8.63 2,000 693
2017 8.67 2,000 618
2018 -4.04 2,000 281
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Up about 9% plus dividends since I started this thread.
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Another 2% today. So make that 11.4%
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Now the gain is 14.5%, after another 0.9% was tacked on today.
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Now up 16.2%.
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