The 1% fee is disqualifying for me, but it’s an interesting concept.
intercst
The 1% fee is disqualifying for me, but it’s an interesting concept.
intercst
I don’t see how it is sustainable if it invests only in government bonds. What if those bonds don’t keep up with inflation well enough? Where does the money then come from to pay people between ages 80 and 100 in the future? Or worse, what if only people who expect longevity invest? Then you have a larger than expected portion of the investors collecting for too many years and you literally “run out of money”.
I agree. The same concept with most of the funds invested in low-fee index funds would deliver more over the long term.
intercst
Bernie Madoff
or
A fool and his money
It could be that when they use the word “sustainable”, they mean that it can sustain the people running it for long enough until they move on to their next financial product (after screwing the current set of customers).
The life contingent feature likely allows them to use mortality tables to structure the pool such that it become sustainable like other forms of life insurance.
Their FAQ specifically says “The LifeX funds are not an annuity or other type of insurance contract”.
Besides, the generally accepted definition of “sustainable” means that it can sustain its payments through the term specified. What you are describing is you get $1000/month at age 80, but after a few years of not keeping up with inflation, or excessive longevity among the cohort, you only get $900/month. That is what generally call “NOT sustainable”.
Correct, but that doesn’t say anything about how they price the product.
No. Payments would not go down. Inflation might eat away at purchasing power but that doesn’t mean you get less income.
It basically says that right in the very first sentence:
LifeX funds are designed to provide high, reliable[1](https://www.lifexfunds.com/#endnotes) monthly distributions for life up to age 100[2] (https://www.lifexfunds.com/#endnotes)
“Reliable” is defined as:
It goes on to state:
Aside from fluctuations based on changes in interest rates, the NAV of the LifeX funds will decline over time unless the rate of investor mortality is higher than expected, and the funds expect to distribute substantially all their assets by the time investors reach age 100.
So ya, mortality.
This sounds similar to taking an RMD from an IRA using a mortality table.It doesn’t provide the insurance guarantee of an annuity, but it’s likely to be reliable.
If Vanguard put something like this together for a 10 basis point annual fee, it might be attractive. Pooling the longevity risk without the high cost of involving an insurance company in the transaction would be a winner to me.
intercst
Do they say what happens if the rate of investor mortality is LOWER than expected? (maybe due to adverse selection)
Maybe I’m not understanding it correctly. Do they allow investors to come in at any time? Or is there a cohort that comes in, and only those people remain in the group until all payments are made and the remainder distributed somehow? I didn’t read every section of it!
You buy a fund based on your age and gender, you’re allowed to withdraw your principal before age 80. After age 80, your funds are locked up and distributed according to a mortality table with the goal of running the fund dry when the cohort hits age 100.
They would need to use a mortality table that reflects “adverse selection” (i.e., annuity purchasers tend to live 2 years longer than life insurance buyers.) Of course, that doesn’t mean that buying an annuity will add 2 years to your life expectancy. {{ LOL }}
Click on the “Fund Mechanics” tab at this link.
intercst
Wouldn’t this almost ensure an adverse selection? Everyone who comes down with any sort of major illness before age 80, or even just sees themselves deteriorating more quickly than expected, would take their money out. Meanwhile all those in full health, expecting to live well into their 90s, will stay in and draw money for a substantial period beginning at age 80.
In that case, you would be drawing a lesser amount than perhaps even a traditional annuity. Furthermore, there almost surely will be money leftover after the year in which the cohort turns 100. How will that money be distributed? To the heirs?
I think it would be instructive to see the price at age 79 (instead of at age 61) to avoid the 18+ years of 1% fee. Then figure out how much it would distribute starting at 80 and compare it to a comparable immediate annuity at that point (age 80). Seems like the annuity MUST do better because this instrument is using 100 as the fixed end number, while the annuity is using the annuitized expected age (90-something) as the end number. It would be interesting to see the numbers!
You can’t buy into the fund once you age out of the cohort in the initial year. It would be instructive to see to see the price at age 79, but it wouldn’t be information you could act on.
You can only withdraw your principal up to age 80, not any of the gains (if the fund has any.)
But I agree, it could be that the adverse selection premium you’d need to add would make the product unattractive to a lot of people who could do the math. It might be that you’d have to live to age 95 to get an adequate return.
intercst
Then I have no idea what they mean by the different prices for different ages. They also state explicitly -
“offers daily purchases and sales of shares until December of the year in which the cohort turns age 80”
For example, they say the current fund price for a male, age 76 (born 1948) is $14.46/share, but for a male aged 61 (born 1963) the price is $27.44/share. Since they distribute $1/share (in the first year for the inflation-adjusted option), the distribution rate for age 76 is 6.9%, and for age 63 is 3.6%. Looks like they only go up to age 76, not age 79.
What do you mean by “initial year”?
Here is their chart -
Share Prices as of 03/14/2024
LifeX Income Funds ("LifeX Fixed") LifeX Inflation-Protected Income Funds ("LifeX Inflation-Protected")
Birth Year Gender Ticker Price/Share ($) Distribution Rate (%) Ticker Price/Share ($) Distribution Rate (%)
1948 Female LFADX 12.96 7.7 LIADX 16.03 6.2
1948 Male LFAAX 11.89 8.4 LIAAX 14.46 6.9
1949 Female LFAFX 13.53 7.4 LIAFX 16.90 5.9
1949 Male LFAEX 12.52 8.0 LIAEX 15.36 6.5
1950 Female LFAIX 14.09 7.1 LIAIX 17.76 5.6
1950 Male LFAHX 13.12 7.6 LIAHX 16.25 6.2
1951 Female LFAKX 14.63 6.8 LIAKX 18.61 5.4
1951 Male LFAJX 13.69 7.3 LIAJX 17.12 5.8
1952 Female LFAMX 15.15 6.6 LIAMX 19.45 5.1
1952 Male LFALX 14.25 7.0 LIALX 17.98 5.6
1953 Female LFFFX 15.65 6.4 LIFWX 20.29 4.9
1953 Male LFFMX 14.79 6.8 LIFMX 18.84 5.3
1954 Female LFAOX 16.13 6.2 LIAOX 21.12 4.7
1954 Male LFANX 15.31 6.5 LIANX 19.69 5.1
1955 Female LFAQX 16.60 6.0 LIAQX 21.95 4.6
1955 Male LFAPX 15.81 6.3 LIAPX 20.53 4.9
1956 Female LFAUX 17.06 5.9 LIAUX 22.78 4.4
1956 Male LFASX 16.30 6.1 LIASX 21.37 4.7
1957 Female LFAWX 17.51 5.7 LIAWX 23.61 4.2
1957 Male LFAVX 16.77 6.0 LIAVX 22.20 4.5
1958 Female LFFWX 17.95 5.6 LIIFX 24.46 4.1
1958 Male LFFEX 17.24 5.8 LIFYX 23.05 4.3
1959 Female LFAZX 18.40 5.4 LIAZX 25.32 3.9
1959 Male LFAYX 17.69 5.7 LIAYX 23.90 4.2
1960 Female LFBEX 18.85 5.3 LIBEX 26.20 3.8
1960 Male LFBDX 18.14 5.5 LIBDX 24.76 4.0
1961 Female LFBGX 19.30 5.2 LIBGX 27.10 3.7
1961 Male LFBFX 18.59 5.4 LIBFX 25.63 3.9
1962 Female LFBJX 19.75 5.1 LIBJX 28.03 3.6
1962 Male LFBHX 19.04 5.3 LIBHX 26.52 3.8
1963 Female LFEWX 20.21 4.9 LIIWX 28.99 3.4
1963 Male LFEMX 19.48 5.1 LIIMX 27.44 3.6
They have 68 different funds with various age cohorts, male/female, and inflation adjusted or not. They won’t let someone born in 1955 buy into the 1948 model.
From the “Fund Mechanics” tab
{{ each fund is offered exclusively to investors of a particular birth year and gender. }}
and Footnote #4
{{ Shares of each LifeX fund can be purchased or redeemed any day at the closing net asset value (NAV) through the end of the year birth year + 80. Aside from fluctuations based on changes in interest rates, the NAV of the LifeX funds will decline over time unless the rate of investor mortality is higher than expected, and the funds expect to distribute substantially all their assets by the time investors reach age 100. As a result, if an investor chooses to sell his or her shares, the NAV will be lower than when the investor initially purchased shares, unless interest rates have fallen, based on the amount of return of capital already received by the investor through monthly distributions. }}
intercst
This part I understand. The part I didn’t understand was that the shares can be bought and sold at will until the year you turn 80. So if you were born in 1955, you can buy and sell shares in that particular fund until the year you turn 80.
What I still don’t understand is the later part. If you can only sell through age 80, and you only get distributions from 80 through 100, how is it possible for the NAV to have declined when the investor is still permitted to sell. Here’s the quote -
As a result, if an investor chooses to sell his or her shares, the NAV will be lower than when the investor initially purchased shares, unless interest rates have fallen, based on the amount of return of capital already received by the investor through monthly distributions.
No. I’m pretty sure you get distributions from the start. The table you posted shows a 6.3% distribution for male born in 1955 and 8.4% for a 1948 birth. At age 80 you get a tontine like product with continuing annual distributions, and then they split the pot at age 100 among the surviving members of the cohort.
intercst
So there’s no difference between the distributions between age 61 and 80 and after age 80??? $1/share each year? That’s essentially an immediate annuity, even if not sponsored by an insurance company. A 5.1% distribution for a male age 61 seems a bit low in that case, no?
I think anyone who seriously considers this thing really needs to compare closely to annuities. Seems that even with the insurance company skim, they have better rates.
Absolutely! Anything an insurance company touches is going to come with a 15% to 20% skim rate as a percent of the initial investment. That’s why delaying SS to age 70 allows you to “buy” an inflation adjusted life annuity at a big discount to what an insurer would charge.
But if Vanguard was able to adopt this model at say a 10 basis point annual fee, and use an investment in a low-fee index fund rather than lower yielding Treasurys, it might be attractive.
intercst