Talk Your Book: Longevity Income
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Today's animal space talker book is brought to you by life ex go to life x funds that calm to learn about their whole sweet of longest income etf life x funds that can.

Welcome to animal spirits, a shell about markets, life and investing. Join Michael panic and ben carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and ben are solely their own opinion and do not reflect the opinion of red house wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of red hot wealth management maintain positions in the security disgust in this podcast.

Welcome the animal spirits with Michael and band Michael, I been slowly but surely like building up my thoughts on this over the years, and just about the fact that there are so many baby boers retiring and there are so much money. We've mention .

that one to thirty .

and can be .

ten thousand every day.

You tell me that's an average of course, that's an average of ten thousand gold watches today. You're ten thousand and one you don't get one.

but it's bit ten thousand every day for the last eight years. Our mission that nine thousand and a one thousand still .

probable been more than that because ata people are so rich, the return early and that cohorn is living longer. And we hear all the time from people being like I don't know to do about taking my money out. What's the rate withdraw percentage? Four percent rules.

Should I do this? What about three times? This is a very stressful topic for a advertorials that I wasn't. I have a pile of money now.

What do I do with that? And so I think marrying the portfolio with the financial planning is something a lot of, especially D I Y. Investors didn't think about. But I think a lot of advisors are going to be bumping up against. Two, it's much easier to help someone in the saving phase, in the accumulation phase and of the .

distribution phase. You know, amErica has a lot of first world problems.

Don't yes.

but so do somebody. People that have just a piles of money, they're not sure exactly. But all I decide IT is clearly a very important topic in retirement because it's stressful, life is unpredictable.

And so the the discussion that we have today gets into how to create a stream of predictable income over the course of your lifetime. So on today's show, we have night contrat. Nate is the head of life x at stonewall asset management to talk about longevity income. Yeah, I think it's cool .

that we're starting. We're going to see more of but we're in products, especially base, that are trying to solve some of these problems you mentioned. IT, like certain, is the one thing most people want.

And so here is our talk with neon. Read from my fax and stones reject management. Eight, conrad, welcome to the show. Thanks for having me a explained to us for the people who don't know, what is life facts?

So life facts is our version. What should a bond fund really looked like for somebody wants her in retirement and in that inside of living off of the money, they spend their live savings? You know, a lot of people are in the mode of wealth accumulation.

How do I investing grow? And you know that Normally when you're working, you're getting a paycheck life. X is a bond T, F, meant for when you're spending the money that you saved and when when you own bonds, you, anna, get not just interest, but you want to get principle out to. So we created a sweet of etf designed to help you invest in bonds, but in a way that the friendly to cash out over the course of your financial plan.

it's maybe let's start with what what problem were you trying to solve out in the marketplace? okay. You retired.

You have found all this time your humanity assets. And now your strategy is shifting, your life is shifting. You're spending a shifting. What's wrong with the traditional bond fund?

So the way we think about IT, you imagine the prototypical sixty five world seven year old, you, let's say, know, over the course of, you know, four years in the workforce, you save a million dollars and you retire million dollars of what you're going to live on now. And if you invest that in a diversified portfolio in the fixed income bucket, you're using hybrid bond.

You're probably getting a yield in the market today, you know four percent, four and a half percent on those bond. And when you own a bond fund that distribute to interest and not principle, that makes IT your problem. To figure out how do I get my principle out, i'm going to sell and my selling once a month and my selling once a quarter.

What if the Prices of bonds are down and I putting my financial plan in danger? How much principal can I take out out? What kens without you putting myself in in harm's way for down the line?

This is a huge psychological problem for littoral ies. We hear from a lot of people who say, okay, it's great. I saved enough money and now i'm terrified what to do with that because i'm not working anymore.

I don't know what the I mean, I think the principal thing for you that you're talking about as well is another psychological hurdle of a lot of people don't want to touch the principle, right, or they don't want to come up with the plan. It's like i'm going to live off of the income in the whole point of saving the money, the first places you have to spend some of IT. And so I think that is a huge problem for a lot of retirees in terms of what's the plan here, how what i'm going to take, what's my withdraw strategy, how I going to do to that.

And you got to exactly right. I want to highlight one thing you pointed out in there, which is there is this tendency of people, when they're scared of touching the principle, own bonds, keeps the principle intact and only spend the coupon, and that this you instinct of reaction to the risk people sense of selling principle, and that sub optimal two big ways. The first is you work really hard to build that dust.

You should get to enjoy IT. And second of all, when you think about the taxi ends, the best deal is spending your own principle because if you get that principle of that tax free, and so when you look at, you know what what advisers to do to confront this, one of the common solutions is a bond latter instead of a bond fund. You know, let's go out and build maybe, and you of wrongs going out three, five, ten years and get you interest in principle of tax efficiently.

But the thing is, a bond latter approach like that doesn't scale very easily to the full client base. So often a bond ladder strategies available with maybe a two hundred fifty thousand minimum or five hundred thousand minimum, there's a lot of work there. And when you think about what a retire he really wants to have, you know, twenty year horizon or thirty year horizon, and they want to spend money every month.

So if you build a bond ladder going out thirty years with mentally rungs, talking about three hundred and fifty different bond cuse ops in the account, and if you want to make a change, if you want to rebounds because the market down, you know. So bond and biek ties are trading three hundred sixty cuse model, not scalable. So a simple mental model for what we built in life after we took that thirty year bond, latter three ticket to me, package that in the one etf ticker. So you get that interest in printable accumulation over time in a reliable monthly cats. And you know, because we say this is the twenty fifty four etf, the twenty fifty five etf how to easily program by picking the right ticker, what kind of bond later you're buying and what cash flow cases you get out of that.

So explained to us what the what the numbers mean is that when you retired as well to be the or when this like the end of you you retirement.

how what is the year imply that, right? So that is the india. So we have a twenty fifty four etf out in the market today. That's thirty years from today. If you buy the twenty fifty four etf, you're buying a product that's designed to give you a reliable monthly distribution between now and twenty fifty four every months along the way. And we're distributing interest and principle. And the idea is, is that instead of getting coupons only and then all of your principle at the end, we're distributing all the principle along the way, and there's kind of nothing left at the end in twenty fifty four.

So what happened after to twenty, you die.

the the fun shuts down. We give whatever left back to whoever is there. But if you put in a hundred dollars in day one, you're not getting one hundred dollars at the end to be, you know, not literally zero. Hopefully you know, I could be, but you know, small, small, positive, all right.

So how how do you do this? What's what's actually inside of the etf? So we're investing .

in government bonds, U S. Government bonds, treasury money market, fn. We're not investing in other asfa classes like corporate bonds or equities.

Is not about reaching for yelled and taking different forms of risk. It's about trying to build a reliable monthly cash low stream using U S. Government bonds into that process where you're starting with this really unknown future of your financial plan. You don't know what stuff we can do. You don't about inflation, but how about you have a little bit of kind of treasury based monthly .

cash for coming in for people that are in retirement that need to figure out a solution to spending? You say, OK, I put one hundred thousand dollars into this product. And every month until twenty fifty four, for this particular series, I have a reliable stream of income. Is IT the same amount of income evenly distributed over the however many month that is? How does that work?

So when you look at the way people spend, people typically spend a little bit more in their sixties and seventies. And the eighties and nineties cording to the research we ve. And so what we did was retailer these to front load some of that accumulation.

So we give principal back a little that faster of a way in the early years of the etf on the little bit flower in the last twenty years, just solving for the shape of how quickly we give you the money back instead of a completely level pace over time, is a little bit front loaded. And so let's use the twenty fifty four. One is an example.

There is one distribution per share number that to design to happen. Can I now through twenty thirty four in the first decade of I F in in in twenty thirty four ital change and it'll be a little bit different in the last twenty years. Let's say you bought one hundred thousand shares of that etf. The goal is one dollar per share in the first decade, so one hundred thousand dollars in distributions year. And then you the perspective would probably say something on the order of about maybe seventy five thousand a year in the back twenty years to reflect the shape of how people like to spend.

But investors up front, they know exactly what they're getting when they enter the etf? Or is IT not exactly clear?

Does does the changing yields on government bond yells change how much is distributed from this fund?

So the goal is that, that does not change them, that they know what they're getting in terms of distributions for share. Now you know this is this is an investment products. It's not a guarantee product.

So there is investment risk around these things, but we're trying to do our best to create reliability in the numbers through how we manage the treasure report folio so that you're getting you know a dollar per share per year in those early years, whether integrates go up or down. That's what we're trying to do. And in the kind of back twenty years, it's meant to be more on the about seventy five since to share again, you know, trying to do our best to make that stable .

regardless of our interest change. Ask a question on to my question. So my question that .

was the same question .

now IT was a is a IT was a fair following question. But my question was, before somebody presses by, can they see what their distinctions are going to be going out? I don't know. Twelve months, one hundred months, I do. They know what .

they are getting the short answers? Yes, they know exactly what the goal of that fund is posed to, produced for them in cash, and they know what a that's gonna cost them. So you know, if you go to our website life as funds, that com is a easy way to go find IT for any of the kind of horizons you might pick, whether that be twenty, fifty four, sixty, you can see what's the distribution per share and what is the cost per share? obvious.

Ly, you're onna buy a whatever Price you buy in the mark a bit. You plugged in that current market Price, the distribution per share, and that's gona tell you what's my distribution? yellow.

Does the money get go back to their state? How does that work?

Is this is really just in etf. You know it's not new IT. It's not insurance product, not a guarantee product.

It's an etf that invest in treasuries and it's yours. IT trades like an etf. IT passes to your state like an etf.

You know the simplest way to think about IT, you know going back to the begin, you will call think about a treasury bond fund and you just kind of rack IT up in A E T to change the experience around IT. But you know that's the investment underneath. That's the source of liability. It's just a really scale. The way of putting treasury bond is in your client portfolios without minimums and lots of cushions and you filling a Better account statement.

But the nave is you have the nave is designed to try to zero over time.

right corner. We capital those kind of capital distributions come out of the nf pressure.

But if someone decided i'm gona live longer, i'm going there is a there should be liquidity in these where you can say, like, well, gee, i'm going to go out to the one that's five years longer. Now I don't need this one that's shorter. You could change that if you have theodore wanted to fires online.

exactly. That's really what we love about IT. There's a theme in the market right now of you know advisers wanting to personalize the way they deliver these financial plans. And your financial plan journey's dynamic, you know what you believe about yourself at sixty five, it's all going to a change. You know you get different information about how's the market done, how's my portfolio, what's my spending, how's my health and exactly.

You said you're gna change your horizon at some point and if you have a bond ladder with, you know three, six excepted, a lot of work to change what that looks like if you want to twenty four term etf and you wanna change that to a twenty fifty nine to extend five years because your head is Better than you thought, that's pretty easy. And so we want that simplicity of how can people online the way they spend from their bond portfolio? Can we make IT really easy to a line bond based spending with the financial plane as IT changes and help people understand what the spending rate should be based on their new horizon?

So advisors, and certainly their investors love predictability, right? We live in an unpredictable world. You have no idea what the market is going to do, stocks or bonds. So with this, I get the story. My question is there's a lot happening underneath the hood and there's a lot of different lumpy cash flows, distributions.

How would an investor go about saying compare, say, the cash the cash distribution on this versus an equivalent bomb latter that they might otherwise put together? Like how much are they paying for this? How how do they really get to the bottom of IT?

A simple way to think about IT is that a life x etf is really just a different way to invest in U. S. Government bond.

So if you're investing in U. S. Government bonds today and you're talking about life x.

You know the first order impact on your returns is really what are the yields of U. S. Government bonds, right? We're giving you the income from the borne and then principle too.

What we're not saying, you know we're trying to generate alpha were buying corporate ond the same underlying government bond mechanism with a different cash flow profile because we're distributing that principle. The rate you'll find on our website or all published native expense to make you really easy for people to think about IT. So if you go our website, you look at etf and IT says, you know, six percent distribution yield. That means if you can invest a million, that's gonna spit out, we think, sixty thousand dollars of cash flow in the next 12 months。 So trying to make that comparison really easy, the expenses we deduct and calculating that it's a fifty basis point expense ratio initially and that expense ratio gets cut in half to twenty five basis point for the last twenty years of the term.

So the management of these funds within the etf is a decent amount of turn over to create the the distribution this month? Or is the effect that like you're effectively building a latter.

there is some rebalancing happening inside of the T F. Know the beauty in the etf, you know through the create redeem mechanism with kind activity, there are a lot of efficient you can pursue about doing that in a way that good for both transaction costs and tax and would be trying to be really thoughts about how we manage that over time.

You know the the kind of idealistic imagination of what our profile would be would be you buy a bond that matters every month for the next thirty years. We do a little bit differently and we tell towards the most liquid benchmark security because that's what really helps the market makers you provide to on exchange liquidity. And we want to create really good liquidity for people to kind of buy the shares, sell the shares, treat them in a broader portfolio for rebalancing. You know, customization over time.

Are these just straight up plain vanilla omino treasury bonds?

We offered IT in two flavors. So one is straight up plain velna inal treasury bonds. You know, we're not doing agencies or anything else.

The other flavor is inflation protected, and we're buying tips instead of nominal and instead of saying, you know, our goal is to give you, you know a dollar per share per year, saying our goals to give you a dollar per share adJusting each year based on changes in CPI kind of passing through that underlying benefit of the protection that U. S. Government offers on tich.

Why would somebody not choose that as that? Because they've a view of like break evens or something of that embedded inflation expectations are above where inflation is actually good to bay. Why would somebody na choose tips the the inflight .

protected version is a really interesting conversation. You know, I have some conversations with financial advisors who say, why would anybody ever buy that fixed right version? The tips one is the only one for me, and I have some people to feel the opposite way.

The key considerations for people, some people really focus on, on you over the course of thirty years, even a two or three percent inflation rate, you know, accumulative ly, a kind of cut your nominal spending power in half. And so you know that the argument for the tips version is kind of protecting the long term spending power. The argument for the fixed rate version is it's more money now, stead of more money later, which people tend to like. And the allocations in people's portfolio today typically tips or you know ten percent allocation giver take, you know not thirty, forty, fifty percent were most of the bonds people on in their portfolio are typically more nominal. And so it's a little bit easier of the swap, you know in kind of what people on today to go into the fixed right version where going in the tips, you know other than replacing your existing tips allocation is a bit of a change in what you on.

Do you see this is more of the advisor tool? Or do you have some tools are experts on staff that kind of work with investors to fill out which product, which year, which type is, is best for them.

So we make a lot of tools available on our website to try and to help people think about what's right for them. Ultimately, our business at stone ridge from day one has really been about empower ing financial advisors with tool. You know, we think people benefit from having people to help them on the journey.

So uh, we we kind of market through and educate through financial advisers and really want to help them do IT. And the most common approach that we've been hearing about from financial advisors is when they look at their client base, they're gonna pick one ticker that they think is representative of their kind of baseline financial plan length. And maybe you know Normally, they start a retirement plan around age sixty five and they plan for our horizon through ninety five is a thirty year length and they're gna pick an etf that goes for thirty years, which today would be through twenty fifty four.

They will plug that ticker into the model. And that's the way that they can deploy the scalability of their whole community of clients and retirement. But then they still retain all the flexibility to personalize IT over time so that when that cant comes in with a comment done, you know how they feel about their horizons? And is that too long as that too short, are they worried about inflation? And seeing that in the grocery bill, there's always things client that the client and the adviser can do together to personalize that allocation over time.

And these are monthly distortions monthly, right? So the story is I understand that is the investor is paying fifty basis points to have something done that let's be real, they're not car to do themselves, right? It's just it's too much work.

And to me, that's the trade of any question. And there is like an argument online where people say our dividends of tax and efficient and understand IT. And you could just create your own dividend, right? Just just sell some of your principal.

But if we've learned anything or if we've learned nothing, I don't know what the rephrase here is that people don't do that to paint on the boat. Like why don't they? Just because they don't because it's annoyed, because they have they've have other things to do with their life. And so people would rather do something and pay a fee for service, they're not going to do themselves.

I think that's right. You know, I read an article the other day about you, the financial journalist, talking about, you know, building a tip slater in retirement. And I I think he said he took him something like ten hours to do IT somebody know, write about finance for a living and that was to build, you know, and you were wrong tips ladder.

And there's six years where there no maturity. So there's big gap. And you know boys are going to be complicated to adjust that later down the line. If he wants to change the horizon, I think when you create that kind of friction for people in the system to pretty tough.

And you know, I mentioned earlier, you know the fee here starts at fifteen unit, declined to twenty five for the last twenty years, and you pay the fee on the current baLance. And you you asked a question earlier, you know, how's that network? The nave declined. If you put in a hundred dollars today, the now in year twenty isn't going to be a hundred dollars, going to be a lot less in your paying fees on .

that lower amount.

I after years, the i'm not getting right.

IT differs by etf. The rule is um the last twenty years of the etf are when the twenty five basis points of just reflecting its simply to manage you know the last twenty years and the first twenty years, if you have a forty year etf when we got to a manage as the government is issuing new bonds.

So curious the risks here involved for people who in this are the risks kind of backloaded, then since you have the ability to pay on principle and kind of cover yourself from the distribution, is is that the problem that maybe the the interest from the bonds of the yet the bonds is not covering the distribution, is that the biggest risk for people?

So I think you're no effect vely asking about, could the fun kind of run out .

of money if things that's correct.

this isn't a guarantee product. We're trying to build a treasury investment portal that we believe is gonna run all the way through the india. There are no guarantees around that.

And if the U. S. Government defense or know whatever is that caused a loss in that bound portfolio, that would manifest as the fund running out of money ahead of time. We're not going to cut the distributions along the way. As long as there is money in the fund, we want to keep meeting those planned distributions of you know if something goes wrong, it's that instead of twenty fifty four, you know and sometime before that, not that you know next month, we're going to your payment to keep IT going. So that kind of a nice way to align things because a lot of people, you don't live all the way to the financial planning horizon.

Have you guys i'm sure you've got a lot of brains. Tell me about this. Is there a category name that you've come up with to define what we're trying to do here, what you guys trying to do here? And if not Better on your idea, guys, a lot of cook. But to you .

first with drawl etf distribution etf.

I keep going. No, he does. I feel like a new category you know of a new way to build bond funds that you a decus late bond fund. We've we've come up with call IT two category names, no kind of related. So the etf we have that alive in the market are called longevity and come from OK.

And you know we use that to to reflect the fact that where you know it's an income fund that focused on investing in income producing bonds, but it's built for a longevity planning. And you know how do we give you that principal back and the shape of kind of giving you more principle back up front to fit the way retirement spending, a longevity income was what we thought was a good category name. there.

We have a new fund, a type coming out uh in january that we're calling term income where is you know totally level the whole time as the goal. So we have a twenty thirty five term income product where the goal is run for a decade and trying and pay the exact same distribution every single month for the whole decade level term. And you know, you can think of that as you know, maybe a more kind of standard bone later, but you know monthly wrong not and or wrong. And a nice way to think about how do I I own my bonds for high cash flow as a you know kind of a spinning bucket or rainy day fund for the next decade to me, that a use case, not just for a longevity, but just in case you change jobs in paychecks, not there going to buy a house.

What have you so speaking of longevity, Peter tea, who people friends podcast in his book, he's one one of those guys that has jumped into like even my norm friends, you don't consume out of content like this or like if you read Peter T A book outlive uh really into IT. So he's on the board with with you guys that correct that's correct.

He's on the board of advice for life action.

okay. And so just to what is his role? Is he trying to help with fear out ways to help people who are gona live a long time and h manage their .

money basically. So this wonderful board, Peter uh law carston fan ted math rost events, the the role of the board is really in helping us think about how to educate and position the product in the market. You know, we live in this a wonderful time period of increasing langevin.

You have got a big part of what Peters mission is about helping people live longer and helping people enjoy longer lives in terms of that quality with their health and their health span over the course of that. Or carston really about helping people enjoy those lives, you know, kind of planning their life and you to be able to enjoy your life. You know, health is a component, financial security of component, and this kind of all big together.

You know, this is a wonderful purpose for financial advisors in helping their retirees live Better lives. So we really wanted kind of think broadly about how we can make a real impact in amErica with this product when we have, you know, such an aging population. And so Peter and Laura and ted kind of all together help us think about that and positioning the product around IT.

Very good, nate. If people want to learn more about the life fex weed of etf.

where do we send them so you can send them to life fex funds dot com L F E X funds the outcome, contact us there. There is information about all the different tf factors pricing y happy to help people get up to be appreciative coming on.

Thank you.

Thanks for having. Okay, thank you to mate member, check out live lix funds that com, thanks to just management email us animal spirits at the compound news dot com.