Consider someone who have $300,000 in savings. S/he wants to invest it now so as to generate a stedy stream of monthly income for long term (say, 10 years or more). His/her preference is to preserve the principal amount, and s/he is not too much worried about infletion. The question is, what are the available investment options for him/her?

I did some research and found the following instruments:

=> 1. Capital One bank's 10 year jumbo CD: It has a 5.50% APY effective April 23.

Link

Capital One ACH the monthly interest to the checking account. According to bankrate.com's CD calculator, a $300,000 deposite grows to $512,419.01 in 10 years. So I guess the montly interest payment will be approximately $1,770.16 (am I right?). The capital is preserved if Capital One doesn't go down within the next 10 years (they are currently rated as 4-star in bankrate's website).

=> 2. Vanguard Managed Payout Distribution Focused Fund: Newly introduced on April 23 and taking investment until May 4.

Link

This fund has the exact same goal as the investor. It preserves the initial investment and makes monthly payouts. This is a perpetual investment with no preset maturity, and the investor may make new deposit or withdraw capital (in part or full) at anytime. The fund plans to pay 7% per year interest, and it currenly pays $1,751 per month for the year 2008.

This fund looks like an excellent choice.

=> 3. Fidelity Income Replacement Funds: These funds are introduced around October 2007. They have target horizon for holding the investments. These funds use part of the invested capital for making the monthly payouts. As a result, the capital is not preserved and it goes to zero at maturity.

Link

According to the website, a $300,000 investment for 20 years is paying $1,693 per month in the year 2008. For 10 years, it pays $2,739 in year 2008. These payouts are so atractive because of the depreciation of the initial capital.

Wall Street Journal and other websites reported these funds last year.

WSJ Link

Google Search - Payout Fund

MSN reports that Schwab also started a group of "Monthly Income Fund" for retirees.

MSN Link

But the link to Schwab's website takes me to "Page Not Found" error. It could be that these funds are not taking any new investment.

That is all I can find by myself. What instrument would you chose for a similar investment plan? It seems to me that the Vangurd fund is an excellent choice. Am I misshing something? Is it a good idea to invest there? Any alternative investment/idea?

Thanks,
Tintin

Fixed link

Vanguard Managed Payout Funds

where do you get 7% from?

Is that guarenteed?

Distribution of assets is often one of the more difficult topics in retirements planning. Anytime you use one product from one company you are putting all of your eggs in one basket - just like in wealth accumulation it's not a good idea to have all of your money in one place.
Consider this:
$300,000 invested in a balanced portfolio of fixed assets and equities - the type of bonds depend on the $300,000; is it retail money of qualified?
A balanced portfolio could be expected to return about 8% over time; 11% equities and 5% fixed.
If you leave 3% back for inflation (maybe a little high but good for this illustration)
You'll probably have to pay for this management so figure 1%
Then you can comfortable take out 5% a year or in this case $15,000 in the first year and each year following would be a little hight because you are leaving in the 3% for inflation.
don't concern yourself with years when you earn less than the 8% in this example as long as you are taking the same percentage a year (5%) then you can weather market fluctuations. 10 years is long enough to use these market assumptions.

bandyopa said:Consider someone who have $300,000 in savings. S/he wants to invest it now so as to generate a stedy stream of monthly income for long term (say, 10 years or more). His/her preference is to preserve the principal amount, and s/he is not too much worried about infletion. The question is, what are the available investment options for him/her?

I did some research and found the following instruments:


=> 1. Capital One bank's 10 year jumbo CD: It has a 5.50% APY effective April 23.

Link

Capital One ACH the monthly interest to the checking account. According to bankrate.com's CD calculator, a $300,000 deposite grows to $512,419.01 in 10 years. So I guess the montly interest payment will be approximately $1,770.16 (am I right?). The capital is preserved if Capital One doesn't go down within the next 10 years (they are currently rated as 4-star in bankrate's website).

Am I misshing something? Is it a good idea to invest there? Any alternative investment/idea?

Thanks,
TintinIf you are going to have the interest deposited to a checking account (or ACH it out yourself) then you must use APR (Annual Percentage Rate) rather than APY (Annual Percentage Yield) in your calculations. APY depends on your leaving the interest in the CD to compound.

The calculation will tell you how much interest will be transferred to the bank account each month, but it will be a level amount because your principal will remain $300,000.

I think the more important questions are:

1) What will happen after 10 years? Will there no longer be a need for money?
2) Why is this person not worried about inflation?

If you're talking about a person who's, say, 65, and just starting retirement, they've still got a long horizon to plan for, and inflation is important, so you need to take all of those into account, not just a "monthly" income figure.

Here's a link to a pretty good vanguard paper on the topic:

https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf

Also, as mentioned, the calculation on the Capone CD is a bit off. You see, any bank's "APY" advertisement is going to assume that dividends are compounded back into the product when paid. If you're taking monthly (or quarterly, or whatever) income from it, then you're not compounding. You need to look at the simple interest rate instead. In the case of that Capone CD, it's 5.25%. So, in a 30 day month, the payment would be ~$1295.

If you have $300,000 saved for retirement, it is unlike you will need the entire thing all at once. Thus, investing the entire sum through CDs would be too conservative especially in periods of high inflation. It may be prudent to invest some in CDs and the rest in bond funds.

dolmar said:bandyopa I am confused and maybe I am missing something here you said:

bandyopa said:Consider someone who have $300,000 in savings. S/he wants to invest it now so as to generate a stedy stream of monthly income for long term (say, 10 years or more). His/her preference is to preserve the principal amount, and s/he is not too much worried about infletion. The question is, what are the available investment options for him/her?

How can you compare a CD to this garbage vanguard is offering. With a CD your principle is guaranteed 100% and will not go up or down based on market conditions at all. A CD has a final maturity which at that point you are guaranteed to get back all your principle. While this fund makes no guarantee about your principle or there performance at all and at times may distribute a portion of your principle back to you if the fund has a loosing streak. While this fund maybe more conservative than other vanguard funds it is investing in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market investments so by definition your capital is at risk with most of the investments they are making. With this garbage your "dividend" is at risk based on the previous 3 year performance so the income is not even guaranteed like a CD or Bond. If when you go to sell this garbage the Nav price could be well below the initial $20 per share price, as a matter of fact the fund could open at a Nav price of $20 per share and drop from there and never make it back to $20 again in your life time.

If all you care about is income and preserving capital then your only choices are CD's or high grade bonds period and even those have a risk to principle if you need the money prior to maturity but your principle is guaranteed to be returned to you in full at maturity. The only true risk-free investment are CD's under FDIC limits or US Treasuries as any CD above FDIC limits is at risk that because the bank might go under and you could loose some of your capital and even high grade bonds can blow up so then you really need to limit your choices of bonds to US Government Bonds ie Treasuries, Fannie, Freddie, FHLB, TVA, FFCB or GO Muni Debt as everything else in theory is subject to default which in turns put your capital at risk.

These funds while they might be run more conservatively than other comparable funds and not invest very much of the funds assets in the riskier type of investments they are allow to invest in they are really no different than the targeted mutual funds market to a particular segment of the population except these fund are targeted at the growing baby boomer population who controls a big portion of the nations wealth.

>>
The capital is preserved if Capital One doesn't go down within the next 10 years (they are currently rated as 4-star in bankrate's website).

>>
These are FDIC insured, correct? Doent matter if Capital one goes down, FDIC should cover it.

Also have you considered AARPSAVINGS.com , high-yield jumbo mm funds @4.75?

Dolmar,

Good summary. I have been mostly keeping my money in CD's and high-yield savings A/C as I was not familiar with preferred and bonds. I have brokerage accounts at Fidelity and Ameritrade - will they have the info. Also can you let me the best place to find the info on preferred stocks from BOA, Citi etc? Is any brokerage better than other?

godzillaborland No idea what to tell you. The only time I have bought Preferred have been when they IPO from either BOA or Citi as I have accounts at both places. I have very small position of preferred compared to my bond positions. Also I only buy new issue bonds in general at underwriting discount from Citi and once in a blue moon from BOA. I know Fidelity offers new issue bonds but not at underwriting price but with a much smaller up market then on the 2nd market.

ferengi31337 Most of the preferred issued are non cumulative . Also if you read Enhanced TruPS Trust Prospectus they are not direct obligations of Citigroup but of Citigroup Capital who is a company who owns debt Citigroup sold it. That debt includes credit card debit, HELOC, Mortgages, Business Loans etc. vs Non-Cumulative Preferred Stock is direct obligations of Citigroup. So Trust divided is 100% based on performance of the loans inside of the trust and is cumulative just like a bond which is why it does not count for the 15% qualified dividend as income is coming from bonds which is fully taxable vs Preferred Stock dividend is but issued by the company just like normal company stock dividend which is why is qualifies as qualified dividend and is only taxed at 15%. There are a couple of cumulative issues but most of them are older issues and have been called.

In general you do not want to buy Preferred at a premium because the company normally calls them at Par so if you pay a premium you need to be careful that it can not be called in the near term otherwise you could end up with a negative return to call.

And as far as the dividend all preferred holders get paid their dividend in full before 1 penny can be paid to convertible holders and common stock holders. The only people paid first are bond holders. Then inside of preferred holders there is an order of which preferred gets paid first too.

A company like Citigroup pays much more out in common stock dividend than in preferred dividends and I personally do not see any time in the future Citi completely suspending there dividend as that could be the end of Citigroup as that would cause there stock to go down from $23 to $5 a shares. Banks stock historically pay dividends and that is the reason people buy bank stocks just like people buy tech stocks for growth. Also remember Citigroup currently has 2 preferred only. BAC, Chase and Wells Fargo have more preferred but those companies have written down much smaller losses compared to Citigroup. Also Citigroup has a lot more outstanding bonds than BOA, Chase or Wells Fargo. As Bonds in general pay less interest but are more costly to underwrite unless you are underwriter like Citigroup or Chase as then it costs you nothing to underwrite the bonds. BOA and Wells Fargo are retails banks and really do not underwrite securities or very many bonds issues. Also remember 1 more thing all those losses written down are not real losses but paper losses and it is very possible that in 2-3 years we see Citigroup write back up those assets too.

yurgreat said:Fixed link

Vanguard Managed Payout Funds

where do you get 7% from?

Is that guarenteed?

The percentage is guaranteed for the year, but if the fund does poorly that year, it looks like that 7% might just come out of your initial investment:

"The funds are not guaranteed to achieve their investment objectives, and some of their distributions may be treated, in part, as a return of capitol"