I retired a few months ago with liquid assets that will bridge me until my annuity income and social security kick in three years from now. The rest of my money is in an IRA, that I had in 65% VT/12% BND/10% VTIP/8% TIPS ETF ladder/5% SGOV. I won't be tapping the IRA portfolio at all until 2029, and even then it will be a relatively small amount.
I was good with that allocation until this week, when I figured out that I was assuming the 12% BND allocation was worthwhile as a volatility smoother, but I don't really need to smooth volatility during the next three years since I'm not going to be risking equity withdrawals during that period anyway.
So I moved that 12% sleeve out to a 3 year MYGA that will give me 5.9% guaranteed return. That return, when it pays out in 2029, will match my discretionary spending needs perfectly that year, and the annuity and social security income will match my fixed spending needs. This decision is already a done deal and I'm good with that.
But my question now is, why not look at that 10% VTIP allocation the same way as I did the BND allocation and just move that money to a MYGA as well, where I'll also lock in the 5.9% return?
The tradeoff analysis is different with VTIP than BND. BND wasn't going to give me 5.9% return, and it ran the risk of tanking if the market misbehaves. That was an easy choice to make. But VTIP does hedge against an inflation spike (it's inflation adjusted), so moving it to a MYGA would only make sense if the 5.9% return will beat the unpredictable return of VTIP.
Basically, inflation would need to average 3.7% or more over the next three years in order to generate enough return in VTIP to beat the guaranteed 5.9% that I would have with the MYGA. That's the decision point. Hold on to an inflation spike hedge in VTIP, or lock in a very decent rate in the MYGA that wouldn't completely protect me from a severe inflation spike, but it definitely would help retain some buying power.
The other trade-off of course is that I would no longer have dry powder to purchase depressed VT shares if the market tanks sometime in the next three years. The answer to that concern is the idea that it won't matter too much, because the cash generated by the MYGA would buy me an extra year of stable reserve that would allow me to stay away from the VT money until 2030, resulting in a better chance of recovery from the hypothetical crash.
Thoughts?