Sunday, July 30, 2023

How to self annuitize your income for life

I hardly ever write about personal finance, even though I am very interested and reasonably well read in it, being retired. But a recent article in the Wall Street Journal (free link)about QLACs, or Qualified Lifetime Annuity Contracts, started me thinking. 

Millions of Americans have good reason to worry they will outlive their retirement savings. A little known tax-advantaged annuity can help avoid that, providing a guaranteed income in the final years of life.

Starting this year, Americans can use up to $200,000 of their retirement accounts to purchase qualified longevity annuity contracts, or QLACs. ... 

An annuity is an insurance contract that you can buy to provide a steady income like a pension, making it easier to plan for the uncertainty of life expectancy. QLACs have existed for a decade and offer significantly more income for life than a typical immediate annuity, since the payments don’t start until later in life, at, say, age 80 or 85. They also have a special tax benefit. 

The shift from the security of pensions to relying on 401(k)s turned workers into both investors and actuaries, tasked with building a nest egg big enough to last their lifespan. QLACs are a way to remove some of that guesswork. 

Let me be clear: I have no annuities now and no intention of ever getting one. My father was an agent for one the country's largest life insurance companies. Starting near the end of his career, the company began selling brokerage products, including annuities, in addition to insurance. One day I was home visiting and he took me to a seminar at his office on annuities (we were going to the golf course afterward). Everything I heard there convinced me never to buy one. 

The WSJ's article on QLACs made me wonder whether there is a way for individual investors like me to guarantee lifetime income the way that QLACs do, but without simply handing up to $200,000 over the the annuity company, locking it up:

The drawbacks to a QLAC are the upfront cost and that if an emergency occurs and you need money before the beginning of payouts, you can’t touch it. It is locked in. The size of the payout also depends on how long you live. 

My wife is 65. I have promised our kids that I will provide for her until she turns 100, but then she is their problem. This is a very realistic expectation since she comes from a family of Methuselahs, of whom living to very late 90s and beyond is quite common. 

So I thought, how to take, say, a QLAC's $200,000 and self annuitize it until 2058? The first thing I tried was to withdraw annually an amount of money equal to the balance on hand divided by the number of years left to go. And bingo! It worked. So the first year's withdrawal would be $200,000 / 35 = $5,714. And I let Excel do the rest:

Note that the annual balance increases in this case until 2037, then starts to fall. If the Annual Withdrawal Decimal remains equal to 1.0, as here, the Annual W/D Increase will always equal the Annual ROI, in this case, 5 percent. Continuing to the year 2058, my wife would receive $30,019 that year, leaving a balance of zero. Total withdrawals would be $516,116. 

But wait! There's more! What if the Annual W/D is "decimalized"? On the Excel, the annual withdrawal is calculated thus:

Amount withdrawn = balance / (Years to Go * Ann W/D Decimal), or the first year:
5,714 = 200,000 / (35 * 1.0) 

If the Annual W/D Decimal is greater than 1.0, it simply increases the number of each Yr to Go fractionally. It seems counter-intuitive, but the larger that decimal is, the greater is the total amount withdrawn at 2058; here is that table: 

But how to make sure you get a good ROI? Well, if the point is to guarantee income for life, you can do that simply by dropping that $200K (or other amount) into a savings account. You will get an annual withdrawal increase of, say 0.5%. 

But you will also get killed by inflation. After 35 years, your withdrawal of $6,770 will be worth a mere $1,946 in 2023 buying power, using 3.5 percent average annual inflation. So what to do? 

Option One - Fixed-Return Instruments 
Invest the starting balance in fixed-return instruments, such as government or corporate bonds - which as I write the WSJ says is better now than buying stocks (free link). Those rates are fixed for the life of the bond. For example, as I type this, three- and six-month US Treasury Bills can be bought with a yield to mark (maturity rate)  of 5.483 percent. You can set up a "ladder," in which you buy T-bills that mature in three, six, nine and 12 months, rolling them all into three-month bonds as they mature. That means you have bonds maturing every three months as long as you keep that up. You can do the same with other corporate bonds and CDs. 

However, if you do that you cannot sell/redeem them early without taking a loss on the ones you redeem. And profits are taxable, so best to do this in tax-excluded accounts such as a Roth IRA. 

US Treasury Direct, run by the Dept. of Treasury, offers I-Bonds, the return of which are related directly to the inflation rate, adjusted every six months. You can buy up to $10,000 per year per person. They cannot be redeemed at all before the end of 12 months, then if you redeem before the end of five years, you will be docked the previous three months interest. But if your goal is to maintain buying power versus inflation, they can be a good choice

Option Two - High Yield Savings and Money Market Accounts
Ordinary savings accounts, as indicated above, pay practically nothing in interest these days. But there are other savings instruments that offer the same liquidity and pay much higher rates. One example is a money market fund, which is a mutual fund that invests in short-term, high-quality securities. However, since they are designed to provide high liquidity and generate current income with low risk, money market funds do not offer capital appreciation and are generally not suitable as long-term investments. 

That means that your invested principal will itself never be worth more than it began, but you will earn much more in interest or dividends than in an ordinary savings account, in which the amount deposited never gains value, either, it also just earns interest. So, these are not equity investments like buying shares of stocks or Exchange Traded Funds (ETFs) are, in which a share bought for, say, $25 may appreciate to more than that while also (hopefully) paying dividends. 

However, current yields for money market accounts range from 5.0 to just more than 5.2 percent per year, adjusted every week. So, if you think of them as another kind of savings account, they are a very good choice. Also, you can buy tax-exempt MM funds; they pay less in interest but may be an excellent choice for taxable accounts, such as an ordinary brokerage account. 

High Yield Savings Accounts are simply savings accounts that pay a much higher rate than ordinary ones. (This begs the question of why there are ordinary savings accounts at all!) CNBC explains (excerpted):

High-yield savings accounts stand out from traditional savings accounts in that they reward you with a higher interest rate, allowing your money to grow even faster as it sits in your account. 

It’s important to note, however, that the APY that savings accounts offer when you sign up can change at any time. These rates are variable and often go up or down in accordance with the Federal Reserve changing its benchmark interest rate.

Not only does your money earn a better return in a high-yield savings account, but you still have access to your cash when you need it as you would in a normal savings account. Your money in a high-yield savings account should be federally insured by the Federal Deposit Insurance Corporation (FDIC), which means that deposits up to $250,000 are protected if the bank were to suddenly collapse.
CNBC's page relates that HYSA interest ranges from 4.18 percent to 4.81 percent, but the article was published last February, so rates will be different today. 

Option Three - Dividend Growth Investments
This means to purchase shares of stocks or ETFs focusing on their dividends, which are payments of earnings returned to shareholders. Dividend Growth means two things:

1. The share price of the equity increases over time, so your invested principal increases in value with no further action by you. 

2. The dividend paid also increases over time, usually per year, so that the amount of dividends paid per share also increases. 

Dividends are measured in yield, which simply means the percentage of a share's value, or price, that is paid in dividends. Dividend payments may be reinvested to buy more shares or simply accepted as cash into your account, your choice. Two well-known and highly invested examples are SCHD and NOBL, named respectively Schwab US Dividend Equity ETF and Proshares S&P 500 Dividend Aristocrat ETF. If you had invested $10,000 in each on Jan. 1, 2014, this would be the result:

These are excellent annual returns, btw. 

Multi-gazillionaire Warren Buffet's advice to ordinary investors is simply to buy ETFs priced directly to the S&P 500 index and that's it. NOBL is one such example, but Forbes says these are the best S&P 500 ETFs this year
  1. SPY, with 10-Year Average Annualized Return, 12.30%
  2. IVV, 12.28%
  3. VOO, 12.35%
  4. SPLG, 12.27%
  5. IVW, 13.79
  6. RSP, 10.71
Together, their averaged annual return is 12.28 percent. So what would the self-annuity look like with that average annual return? This:

With withdrawals increasing an average of 12.28 percent per year, you will beat the tar out of inflation. But (and there is always a "but," right?), "annual average" does not mean "every year." Here is the chart of high earner IVW over the last five years. 

So, it's return is neither a uniform nor guaranteed. That needs to be considered for self annuitizing for life, too. This chart, however, reflects only share price. Here is the chart with dividends included:

It is very important to assess your comfort level relative to risk of loss compared to likelihood of gains. 


I think I have demonstrated that it is possible to self annuitize for life. To start with an expected longevity age, the IRS publishes Publication 590-B because that is what they use to determine Required Minimum Distributions (RMDs) from IRAs and other taxable retirement accounts. The IRS updates the pub intermittently, the latest table is here.

Be aware also that the figures of my worksheet may be overridden by RMDs if you include taxable accounts. If the calculated withdrawal is less than the RMD for that year, then you must withdraw more money to equal the RMD (or more, if you want). 

But being required to withdraw at least the RMD does not mean you have to spend it. You can transfer all or part of it to ordinary investment or banking accounts and continue to use them for self annuity balances, or anything else. 

My wife and I are both retired now. We do not intend to self annuitize as I have described, however, because we do not need to. We withdraw what we need to and leave the rest in various equities and accounts as described above. But we also know the day may come when self annuitizing those accounts will be the best solution once we reach our truly elderly years. 

And that is one of the major beauties of self annuitizing - you never tie your money up handing it off to some corporation. It is always yours and you can begin self annuitizing it when you want or need to. No matter when you start, the calcs always guarantee a lifetime income. 

Good luck!

End notes:
WSJ, free link: You May Need Less Money Than You Think for Retirement

For the record, I am not a financial advisor. Nothing I write here is intended to be actual advice, just some things to think about. I sell no products of any kind related to finance. In fact, I sell no products of any kind period. Did I mention that I am retired

Here are a few more dividend leaders for 2023 so far:

  1. GSL, Global Ship Lease, Inc., Year To Date Return, 34.92% 
  2. OBDC, Blue Owl Capital Corporation, 26.76% 
  3. JEPQ, JPMorgan Nasdaq Equity Premium Income ETF, 25.79% 
  4. EOI, Eaton Vance Enhanced Equity Income Fund, 16.81% 
  5. AMLP, Alerian MLP ETF, 15.56% (MLP means Master Limited Partnership)
  6. MLPA, Global X MLP ETF, 13.32% 
  7. AOD, Aberdeen Total Dynamic Dividend Fund, 11.59% 
  8. JEPI, JPMorgan Equity Premium Income ETF, 6.46% 
  9. ARLP, Alliance Resource Partners, L.P., 7.41%

Friday, July 14, 2023

Ukraine: Zelensky is a true hero, but does he have a clue?

I posted a couple of days ago on why NATO's decision not to invite Ukraine into NATO membership was a very sound decision. But also I related why NATO's assurances to Ukraine that an invitation to join will come someday are not realistic. Reuters: 

The leaders said in a declaration: "Ukraine's future is in NATO". But they offered no timeline for the process.

"We will be in a position to extend an invitation to Ukraine to join the alliance when allies agree and conditions are met," the declaration said, without specifying the conditions Ukraine needs to meet.

NATO was deliberately vague because its members have no sort of agreement on such conditions. Other reports say that no invitation will be made until after the end of the war. In fact, the NYT reported:

In a communiqué agreed to by all 31 NATO nations, the alliance said that “Ukraine’s future is in NATO,” and it will be allowed to join when the member countries agree that conditions are ripe — but it did not offer specifics or a timetable. ... 

The wording means that Mr. Biden, who declared last week that “Ukraine isn’t ready for NATO membership,” and like-minded allies had prevailed over Poland and Baltic nations that wanted a formal invitation for Ukraine to join the alliance as soon as the war ends.

Affirming an applicant nation into NATO requires unanimous vote by all member nations. Of course, that is not merely possible, it was done this week by admitting Sweden into NATO. But the tagline of the NYT quote, an "invitation for Ukraine to join the alliance as soon as the war ends," simply tells Russian President Putin to keep fighting as long as he can. And despite the fact that Russian troops have by no means covered themselves in glory in the war, Putin has a vastly larger reservoir of Russians to draw from than Zelensky has Ukrainians. 

Therefore, I have to think that by now Ukraine's President Volodymyr Zelensky is at least beginning to understand that Ukraine's admission to NATO is this:

So I surmise that Zelensky does have at least a clue about that. I wonder, though, about this: Last Sunday (July 9) he appeared on ABC News’ This Week. (Naturally, the lead in the linked story is about Trump, not Ukraine's situation or the NATO summit beginning two days later.) 
Ukrainian President Volodymyr Zelensky called out Donald Trump on Sunday for his outlandish and repeated claims that he could end the country’s drawn-out conflict with Russia in just a day if re-elected. 
He [Zelensky] made the statements ... noting tensions between the two former Soviet countries were already ratcheting up during Trump’s years as president—and that he did little to lower the temperature.

“It looks as if Donald Trump already had these 24 hours once in his time,” Zelensky said through a translator. “We were at war, not a full-scale war, but we were at war, and as I assume, he had that time at his disposal but he must have had some other priorities.”

Zelensky also rejected Trump’s past suggestion that Ukraine cede some of its contested territory to Russia as a peace offering—saying that he rejected such propositions wholeheartedly.

“If we are talking about ending the war at the cost of Ukraine—in other words, to make us give up our territories—I think, in this way, [President Joe] Biden could have brought it to an end in five minutes,” Zelensky said. 
“But we would not agree,” Zelensky added.

 Well, what Zelensky said about Trump (and Biden) is not very arguable. Here is what Trump said last March:

The ex-president said that if the war is not over by the end of the 2024 presidential election, and he were to be reelected to the White House, he would “within one day” have a peace deal in place.

Trump argued that negotiations between himself, Ukrainian President Volodymyr Zelensky and Russian President Vladimir Putin would be “easy.” 

“If it’s not solved, I will have it solved in 24 hours with Zelensky and with Putin, and there’s a very easy negotiation to take place, but I don’t want to tell you what it is because then I can’t use that negotiation,” Trump vowed, not so much as hinting at what his negotiation strategy would be. 

Now, that is a remarkably stupid thing for Trump to say, even for, well, Trump. That Zelensky took issue with it, somewhat gently I would add, is unsurprising. But here is where Zelensky either does understand the probable end to the war and is trying hard to call it off, or he does not understand and hence does not have a clue about what is really going on. 

Does Zelensky understand that his national goals for the conflict are not automatically the same as US or NATO's national strategic interests? Presently, they coincide closely, but much of our support for Ukraine stems from our disgust for the inhumane, unprovoked aggression it has suffered. However, that motivation will only last so long. 

As said in my prior post, I have supported the US and NATO efforts to date in assisting Ukraine diplomatically and materially, with military supplies and weapons. I continue to support such measures. 

But I also say that if Zelensky thinks that we will always support him, financially and materially, to fight a Forever War, he will be and should be very, very wrong.

Source: The Hoover Institution

He might also consider one simple question: Would he rather have the terms ending the war dictated to him by Moscow or by Washington and NATO?

Wednesday, July 12, 2023

NATO's empty promise to Ukraine

Why Ukraine has no future and never will

Please read added endnote also

The just-adjourned NATO summit in Lithuania pledged to admit Ukraine (UKR) into NATO - but sorry, Ukraine, just not yet. As the photo shows, Ukraine's President Volodymyr Zelensky attended the summit. 

President Volodymyr Zelensky of Ukraine being applauded by NATO members,
 including Prime Minister Rishi Sunak of Britain, center, and President Biden
during a meeting of the NATO-Ukraine Council in Vilnius, Lithuania, on Wednesday.
Credit Doug Mills/The New York Times

The New York Times reported,

President Volodymyr Zelensky of Ukraine praised NATO on Wednesday for offering his nation a path to membership after the war with Russia is over, seeking to move past differences over the lack of a clear timeline as leaders of the alliance concluded a major two-day summit.

A day after NATO’s 31 members confirmed that Ukraine would eventually join the alliance, but with no firm time frame, some Western officials called on Kyiv to express more thanks for the mammoth military and financial aid that allies have provided since the invasion began.

More than a few NATO members were for admitting Ukraine very quickly. But President Joe Biden (of all people) talked them out of it, according to Foreign Policy.

Despite public condemnation [by Ukrainians] of NATO’s decision, the biggest winner of the summit appeared to be the United States for Biden’s ability to sway the rest of the alliance into postponing Ukrainian membership. “It turned a minority position into a majority position in NATO,” said Jamie Shea, a former NATO deputy assistant secretary-general for emerging security challenges. “I think the allies will sort of feel that they’ve managed to preserve the unity on Ukraine, give Ukraine a significant upgrade in the relationship, and move the cursor forward.”

To my point: I oppose admitting Ukraine into NATO - not now, not later. Some reports from the summit, including summit delegates speaking on camera, say that NATO decided not admit UKR now because they knew that UKR President Zelensky would immediately invoke Article 5 of the NATO Charter, thus requiring NATO nations to take substantive action against Russia, "including the use of armed force," according to the text of the Article. And guess how many NATO nations want to do that? 

Hence, the summit's assurances to UKR that yes, NATO will admit UKR into NATO are (let us strongly hope!) empty.

But Russian President Vlad Putin does not think so, and he has said for a very long time that he was deeply suspicious of NATO already having decided long ago that it would admit Ukraine. Last February, for example, Putin said

The information we have gives us good reason to believe that Ukraine’s accession to NATO and the subsequent deployment of NATO facilities has already been decided and is only a matter of time. We clearly understand that given this scenario, the level of military threats to Russia will increase dramatically, several times over. And I would like to emphasize at this point that the risk of a sudden strike at our country will multiply. 

Update for clarity: For the record, I have supported the US and NATO efforts to date in assisting Ukraine diplomatically and materially, with military supplies and weapons (but Biden's admission that, "America Is Running Out of Ammo," because of we have sent so much to UKR does give me pause). I continue to support such measures. 

Without question this war must be brought to an end, preferably with Russia's ejection from UKR, for the sake of the people suffering from it now. 

But let us not lose sight of the inalterable fact that even if Vlad Putin completely gives up the invasion tomorrow, Ukraine has no inherent, possible future worth the risks to NATO nations that will come from UKR's NATO membership. Even before the present war, UKR was literally dying from increasing death rates and decreasing birth rates (I explain below). That "military age" men and women also are "child-bearing age" men and women makes UKR's future even worse, especially since combat-killed men and women simply cannot be replaced.

Demographically, Ukraine has been in much worse shape than Russia for many years. And because of that, Ukraine has already lost this war no matter who wins on the battlefields. 

Six million Ukrainians have refugeed out of the country, and eight million others have been displaced from their homes within the country. They are mostly women of childbearing age and their children. The next generation of adult Ukrainians is largely not living in the country any more. Most of them will not be back.

Families evacuating from Irpin during Russia's invasion of Ukraine.
Women, children, and the elderly evacuated from Irpin were relocated to Kyiv
by the Kyiv territorial defense battalion.

The Ukrainians birth rate in pre-war 2020 was 1.22 births per woman, the lowest in Europe and one of the lowest in the world, much less than the 2.1 needed just to keep the population level. And the rate plummeted afterward. According to The Wilson Center

The total fertility rate (TFR) in 2021 was 1.2, and for 2022 it is expected to be 0.9. Since the births planned before the war were still delivered in 2022, a much more dramatic drop in fertility rate is expected in 2023: it will most probably achieve 0.7, and this level will remain at least until the end of the war.

Half of the country is more than 41 years old, meaning that the birth rate will never go up by any significant amount, if at all. So much for a post-war baby boom - sorry, it will not happen, as The Wilson Center understands: 

I see no reason to expect any compensatory effect in that regard, and the demographic dynamics will follow the models of what was seen after World Wars I and II. This means that after Ukraine’s victory, the TFR may return to the level of 1.3–1.4 only in the 2030s.

This assumes, of course, that Ukraine will win (extremely doubtful), and it must be noted that a TFR of between 1.3 - 1.4 still means that far more Ukrainians will die every year than will be born. The population was steadily aging even before the war, so the mismatch between the high number of Ukraine's deaths and the low number of its births will grow greater each year. 

In fact, even in the former peacetime hundreds of thousands more Ukrainians died annually than were born. In 2021, according to, "the death rate was 18.5 per 1,000 people (~ 816,000 deaths) and the birth rate was 7.3 per 1,000 people (~ 322,000 births)." That is 494,000 more deaths than births. And as I said, this war only accelerates that.

Ukraine's end, one way or the other, is certain. Hopefully, it will not be violent, but either way, it will be the grave. Ukraine has no national future either in war or peace. 

As I wrote above, this war must be brought to an end for the sake of the people suffering from it now. But not for the sake of Ukraine's future generations, because Ukrainians already decided not to produce them. Ukraine is putting up a heroic defense. But the country was already literally dying. Now it will not recover, ever.

So what do these figures have to do with Ukraine's NATO membership? I say this: 

If Ukrainians abandoned having children to grow up and fight for their country, on what possible basis can we morally require American parents to send their children to fight for their country? 

Our young men and women would not be fighting for Ukrainians. They would be fighting instead of Ukrainians. 


I received some responses on a site where this essay was linked, mainly objections that I am "negating and condemning" Ukraine and that I think we should "bail" on Ukraine. My text never says any such thing, although the feedback did move me to add the "for clarity" update above. I responded there as such to commenters who made those claims:

So my questions to you:

1. Do you support Ukraine's admission into NATO membership? If so, why and when? If not, why not?

2. If Ukraine is admitted into NATO while still fighting the Russians, do you believe that the other NATO countries will send their own combat forces to fight there if (well, when) Ukraine demands them? (Not should they send them, but will they send them.)

3. If Ukraine is admitted in NATO, do you specifically think the United States should send our own military forces to Ukraine when Ukraine demands them?

If no, then why admit Ukraine to NATO? What would we be doing differently than we are now? 

If yes to sending US forces, do you accept that Russian forces will attack US forces inside Ukraine? If such an attack comes from Russian forces (i.e., aircraft) based inside Russia, do you think we should destroy those bases (inside Russia), and if so, what risks of escalation by Putin are you willing to accept? 

4. If you support sending US troops to Ukraine if demanded by Zelensky, how many Americans are you willing to see killed in order to help Ukraine? In fact, in order to help Ukraine do exactly what? Don't just say "win the war" unless you can also describe what that means on the ground, and how the combatants will know it has been won (or lost, for Russia). 

5. Once you have decided answers, then define what are the conditions of success for NATO and/or the United States. In every operations plan I helped write in the Army, from HQ, XVIII Airborne Corps up to the Army staff at the Pentagon, we were always required to answer this question when presenting them to the commander for approval: "How will we know when we have won?" What is your answer to that regarding NATO, Ukraine, Russia, and the United States?

That Ukraine's status quo is dreadful and unacceptable hardly needs be said.  As I wrote in the essay, "Without question this war must be brought to an end for the sake of the people suffering from it now." 

But let us not delude ourselves that we are working to that goal for the sake of Ukraine's future generations. Ukrainians decided long ago not to produce them. Ukraine is putting up a heroic defense. But the country was already literally dying. Now it will not recover, ever. So, NATO membership to what end and why? 

See also my follow-up post, "Ukraine: Zelensky is a true hero, but does he have a clue?"

BTW, I strongly recommend David Goldman's article, "What Is America’s Strategic Interest In Ukraine?"

Also, this, written one month before Russia invaded: "Fateful Collision: NATO’s Drive to the East Versus Russia’s Sphere of Influence"

Update, March 2024: "NATO Should Not Accept Ukraine - for Ukraine’s Sake. The top five reasons that expanding the Western alliance would make Kyiv even worse off," in Foreign Policy by Harvard Prof. Stephen M. Walt. 

Jesus is served

John 6.5-14 When he looked up and saw a large crowd coming toward him, Jesus said to Philip, “Where are we to buy bread for these people t...