Asset: Life annuity through immediateannuities.com
Price: Variable, the current payout is 6.22% for a 45y/o male in my state.
Rationale:
I think sequence of returns risk (SORR, or the risk of being forced to sell assets at low market prices during retirement) can be mitigated if one has a base of relatively safe fixed income in excess of one's withdraw rate. E.g. people with a 4% WR could probably improve the longevity of their portfolios if they could generate a decent chunk of their spending from fixed income assets with yields in the 6% range.
Returns this high cover the 4% WR. They offer inflation protection to the extent the return exceeds the WR. So in our 6% example, the 2% excess return covers that much inflation per year. If inflation exceeds this excess (e.g. if inflation is 4%) then this part of the asset allocation loses the difference in real purchasing power (e.g. 4%-2%= 2% reduction in purchasing power per year).
That scenario may sound bad, but it's nowhere near as bad as a 30-40% loss in stocks followed by a few years of withdraws from a stock-heavy portfolio. A portfolio with more fixed income is more likely to sustain itself for decades after such an event, all while spinning off cash that insulates the investor from SORR. So if one allocated, say, 25% of their assets to a 6% fixed return, one would be reducing their SORR risk in exchange for some additional inflation risk. That tradeoff is reasonable because with stocks one takes the exact opposite trade, reducing inflation risk in exchange for SORR risk.
Safe fixed income assets returning over 6% are available to purchase now, in the form of bonds from A-rated corporations or annuities.
I pulled an annuity quote for a stream of income starting in 1 year, with a $100k investment. The payment for my age, gender, and location was $518 per month, or 6.22% of my investment per year.
People who want to leave an inheritance might prefer similar-yielding corporate bonds such as those issued by Celgene (151020AL8), Aflac (001055AD4), Alibaba (01609WAY8), Simon Property Group (828807CL9), Pacificorp (695114CL0), or Washington Gas & Light Co (93884PDT4). However some of these are callable, which means you might have to reinvest at lower interest rates in the future and don't really have a 100% secured income. Plus, there is arguably more credit risk involved. Another way to get 6% is through preferred stock, but these arguably come with even more risks.
A lower interest rate future that might lead to bonds, CDs, and preferreds being called away would likely be the same future in which stocks have just taken a severe beating - connected to the reason why rates were cut. So there's a case to be made that to fully exploit the offsetting of interest rate and SOR risks, you need to have the fixed income portion of your AA be REALLY fixed income. That means non-callable, lifetime-term, and with relatively low credit risk.
So a 6.22% annuity is intriguing for its potential to float a 4%WR portfolio through a SORR event OR to endure as a not-callable safe source of income if low rates return.
