As the interest rate is raising, if you want to bet on interest rates coming down, buying long-term instruments that will appreciate on falling interest rates is the idea.
Which one is better STRIPS vs bonds. Both will be bought in IRA, and can wait for 7 to 10 years. Goal is to invest at least $100K.
I’m sure that you have already done research on this. Here’s a video from a bond specialist.
Given your specific objective, which is to bet on interest rates falling, STRIPS fit the purpose better than bonds. The bond will throw off interest continually which will need to be reinvested - at a lower rate if your bet pays off. The STRIPS compound at the initial yield.
Like all bets, this one could turn in the opposite direction. And STRIPS concentrate the risk.
Wendy
Yes, and while the interest is automatic, a STRIP ties up your money for the term, whether 5, 7 or 10 years. It seems they would be best used if you have a target year you’d need the money for. Also, as mentioned, much better in an IRA since otherwise the interest is taxable in each year it accrues regardless of the year of payout.
Pete
Please correct me if I am wrong but I see 5 yr STRIP yield to be about 4.4%, correct?
If that is valid, you may consider a 5 yr fixed annuity (insured by your state) that are paying well over 5%.
The STRIP can be sold if the investor needs the cash before maturity. But the value will fall if yields rise.
Wendy
That’s a good idea as long as Kingram doesn’t care that the money ($100K+) will vanish from his estate if he dies before the fixed annuity matures.
Wendy
That isn’t factual. A fixed (deferred) annuity does not require distribution. You are thinking of an immediate annuity.*
*Some deferred may require liquidation at age 90 or 95.
My goal is to sell strips when the value raises, that is not an option with annuity. I want the ability to buy and sell at will, annuity doesn’t fit in that.
Exactly. That is one of the reasons I am looking at STRIP, because if my thesis ends up being wrong, I can get out even if it is at a loss. I don’t want to be locked in.
OTOH, the reason I am looking at 7 to 10 years is to give some time for the recession thesis and the duration to work, if the thesis plays out.
@Hawkwin please correct me if I’m wrong. My understanding is that the higher yield is provided because some of the annuitant pool will die during the period. The annuity investment is transferred to the pool on the annuitant’s death, not to the annuitant’s estate.
My mother had such an annuity. When she died I looked for the money but it had vanished into the annuity.
Wendy
Timing a recession and interest rates are tricky. It would be less risky to break up your $100K into rungs on a ladder.
Wendy
A deferred fixed annuity operates much like a CD with tax deferral and more liquidity. At the passing of the owner, the full account value (including any interest and minus any withdrawals), transfers to the benes or the estate, just like a CD would.
Only in the case of a life annuity* (just like most pensions and SS) would any amount not paid out be surrendered to the insurance company.
*Note, a life annuity with period certain would ensure that some remaining payments/amounts would transfer to a bene or an estate.
A good primer on fixed deferred annuities:
What Happens to an Annuity After Death?
Deferred annuities often include a death benefit component. If the owner dies while the annuity is still in its accumulation (savings) phase, their heirs may receive some or all of the account’s value. If the annuity has entered the payout (income) phase, however, the insurer may simply keep the remaining money unless the contract includes a provision to keep paying benefits to the owner’s heirs for a certain number of years.
Note, one DOES NOT need to enter a payout (annuitization) phase to take income. A policyholder can take systematic income of the interest, lump sum distributions up to the free withdrawal amount, or simply cash it in at maturity - all without locking in a payout that would otherwise put the principal at risk of loss due to early death.
The overwhelming majority (90%) of deferred annuities are never annuitized.
@Hawkwin a deferred annuity would not meet @Kingran’s objectives.
While Kingran can buy and hold STRIPS from the Treasury for no charge, deferred annuities have high sales and ongoing management fees.
Deferred annuities are illiquid. Kingran has already stated that he wants the option to sell his STRIPS if he needs the money. Treasurys have a large, liquid marketplace so STRIPS would get a fair price without extra charges layered on top by the insurance company that sells the annuity.
Wendy
sigh Not factual. The vast majority of fixed annuities have NO fees (minus an early termination fee - much like a CD). 100% of fixed deferred annuities have no management fees (by definition, there is no management on a fixed annuity). Again, these are almost identical to a bank CD. It appears you are now conflating a fixed annuity and a variable annuity (the later of which has M&E expenses and sub account fees).
Yes, he posted that after my recommendation so I am well aware. I am not arguing in favor of him considering such. I am now just trying to correct your understanding of this tool.
https://www.fidelity.com/viewpoints/retirement/facts-about-annuities
Deferred fixed annuities include single premium deferred annuities (SPDAs), which are similar to a certificate of deposit (CD). You are guaranteed an interest rate for a specific period of time, typically 3 to 10 years.
Fixed deferred annuities do not have explicit, changing annual management fees because they do not charge direct management fees and their base terms are locked in by contract.
No explicit fees: Traditional fixed deferred contracts lack standard asset-based management fees, mortality and expense charges, or administrative fee line items deducted from your balance.
In summary, if you buy a 5 yr fixed annuity paying 5.5%, you will receive 5.5% compounded over the next 5 yrs. No fees, all interest. Cash it in and walk away at the end of the five years - and if you die prior, your benes can either continue the contract until maturity or cash it in early without any penalty on the principal or interest.
I’ve sold over $20,000,000 of these and that is how they work - and have worked for at least the last 20 years.