My Strategy,... will it work??

[rdjrn]

55 years of age, 31 years of service with megacorp. Want to retire now, and need/want $87K per year. Healthcare is taken care of with both megacorp policy, VA, CHAMPVA, and at age 60, TriCare.

I have $43K of my needs covered with COLA'd VA disability pension. I plan to invest $480K profit sharing in a Metlife Variable annuity that will provide $21,600 after the 10% early withdrawal penalty.

In addition, I will also invest my $430K lump sum pension in Mutual Funds/Stocks and will need $23K per year from it (after early withdrawal penalty) to achieve my funding goal for the next 4 years, then I'll escape the 10% early withdrawal penalty, have an an Army Reserve pension kick in at age 60, and SS at age 62.

Question: Give my various sources of current and future income, is it feasible to take $23K per year (6% return) from the $430K mutual fund investment for 4 years prior to other sources of income kicking it?

Thanks in advance for your opinions!

[jclarksnakes]

Yes.

[rdjrn]

Quote:

Originally Posted by Midpack Looks about as close to bulletproof as one could hope for though you could run it through FIRECalc: A different kind of retirement calculator with your Reserve and SS incomes to see just how high your range of residuals will be. Congratulations...

Thanks! I've ran everything through FIRECalc and everything looks good, but for some reason my financial advisor seems to think taking a 6% return for the next 4 years is stretching a bit due to market volatility? I just wish there was a way to escape that 10% early withdrawal penalty!!!!!

[Dimsumkid]

Quote:

Originally Posted by rdjrn I plan to invest $480K profit sharing in a Metlife Variable annuity that will provide $21,600 after the 10% early withdrawal penalty.

Check into annuitizing or exercising Rule 72(t) or 72(q), you'd avoid the 10% penalty. You only need to do this for 5 yrs.

[Independent]

I see nothing inherently wrong with taking extra in the first few years to provide "bridge income" until the army reserve and SS start. We are doing that.

Maybe your FA is concerned that the market may tank in the next few years and force you to sell low to fund the $23k. I was concerned about that, so we moved the money (maybe 4 x $23k = $92k in your case) into CDs to insure against the downside risk. Some people like that approach, others think it's too conservative.

Re the 10% penalty, is that something the fund family applies or are you talking about IRA early withdrawal taxes? If it's the fund, your FA should have other options. If it's the gov't, you can look into 72t withdrawals. Both your FA and the fund company should know about them.

[rdjrn]

Quote:

Originally Posted by Independent I see nothing inherently wrong with taking extra in the first few years to provide "bridge income" until the army reserve and SS start. We are doing that. Maybe your FA is concerned that the market may tank in the next few years and force you to sell low to fund the $23k. I was concerned about that, so we moved the money (maybe 4 x $23k = $92k in your case) into CDs to insure against the downside risk. Some people like that approach, others think it's too conservative. Re the 10% penalty, is that something the fund family applies or are you talking about IRA early withdrawal taxes? If it's the fund, your FA should have other options. If it's the gov't, you can look into 72t withdrawals. Both your FA and the fund company should know about them.

It's the government. When I run the 72T calculations I don't generate enough income due to the extremely low interest rates today.

[pb4uski]

Do you own a home or other assets? If so, you could borrow against them and use the proceeds to fund the gap between ages 55 - 59.5 and then use withdrawals after age 59.5 to paydown or payoff the borrowings and effectively avoid the 10% penalty. Or perhaps some borrowings combined with 72ts.

I would agree with your FA that a 6% WR is too high, but in your case the 6% withdrawals is just for 4-5 years and then your WR will drop as your pension kicks in and SS comes on line.

Just curious, why the variable annuity? MetLife is a fine company, but I'm not keen on VAs generally and if it were me I'd prefer to just have a $910k investment portfolio.

Also, if your WR is acceptable after your pension comes on line you may want to consider deferring SS beyond age 62 as a form of longevity insurance.

[Independent]

Quote:

Originally Posted by rdjrn It's the government. When I run the 72T calculations I don't generate enough income due to the extremely low interest rates today.

Okay.

[rdjrn]

Quote:

Originally Posted by pb4uski Do you own a home or other assets? If so, you could borrow against them and use the proceeds to fund the gap between ages 55 - 59.5 and then use withdrawals after age 59.5 to paydown or payoff the borrowings and effectively avoid the 10% penalty. Or perhaps some borrowings combined with 72ts. I would agree with your FA that a 6% WR is too high, but in your case the 6% withdrawals is just for 4-5 years and then your WR will drop as your pension kicks in and SS comes on line. Just curious, why the variable annuity? MetLife is a fine company, but I'm not keen on VAs generally and if it were me I'd prefer to just have a $910k investment portfolio. Also, if your WR is acceptable after your pension comes on line you may want to consider deferring SS beyond age 62 as a form of longevity insurance.

What are some of the drawbacks with variable annuities? My FA is high on the Metlife annuity, and I do like the garanteed lifetime income aspect.

[travelover]

Quote:

Originally Posted by rdjrn What are some of the drawbacks with variable annuities? My FA is high on the Metlife annuity, and I do like the garanteed lifetime income aspect.

Do a search here on variable annuities.

[73ss454]

Quote:

Originally Posted by rdjrn What are some of the drawbacks with variable annuities? My FA is high on the Metlife annuity, and I do like the garanteed lifetime income aspect.

I'll bet he/she is very high on it and will be higher if you buy it. I don't know but I can't get past all the mystery on annuities. Too many pages of disclosures and I'm not that smart.

[militaryman]

If it were me I would definitely draw on my HELOC for the four years and avoid the 10% penalty -- My 430k would be growing at whatever rate while I only paid 2.4% Heloc interest.

[Independent]

Quote:

Originally Posted by rdjrn What are some of the drawbacks with variable annuities? My FA is high on the Metlife annuity, and I do like the garanteed lifetime income aspect.

Fees.

VAs are generally mutual funds with an "annuity" wrapper. That may be handy for taxes in certain situations, but not if the money is already in a tax deferred account (like an IRA). So you should compare the total fees (the fees on the underlying funds, plus the fees on the annuity) to low cost funds like Vanguard's index funds. The VA will typically be more expensive, sometimes a lot more expensive. You have to see if the difference in cost is buying you something you really want.

There are various forms of "guaranteed lifetime income" benefits on VAs. So it's hard to make general statements. Here are some examples: Variable Annuity - Bogleheads

I would do the math. What is the monthly income I'll get from the VA? What would that same monthly income cost on a stand alone SPIA? Then, what if I split may VA premium, use part of it to buy the SPIA and put the rest into a Vanguard index fund?

To do that kind of analysis, I'd really have to study the VA benefit, but I should do that anyway before I buy the product.

[rgarling]

I'm with pb4uski. Avoid the variable annuity and draw down on your 900k portfolio. You can buy a SPIA at some time in the future if necessary. (As you age, the 'return' offered by an SPIA will improve and the interest rates will likely improve too.) The bogleheads are experts on this kind of analysis. Run it by them.

[pb4uski]

I don't get the attraction of the VA. They generally have very high fees.

The reason your FA is so high on it is because s/he gets a very nice commission from your $480k deposit (5%/$24k perhaps?). If you want to take out money after you are 59.5 then the VA would likely be subject to surrender penalties to reimburse MetLife for the unearned portion of the high upfront commission paid to the FA.

While I wouldn't do this, a $480k SPIA would actually pay you a bit more; $24,500 after the 10% penalty based on a 55 year old male living in Arkansas according to immediateannuities.com but the VA would have the benefit of access to your money.

If it were me since the money is already tax deferred I would just have a bigger nestegg and buy a SPIA later if I wanted/needed one. But it seems that between your pensions and SS that you have significant life contingent cash inflows (as a percentage of your total need) so I'm not sure a SPIA makes sense, but some people like the peace of mind.

[Katsmeow]

Is the $480k profit sharing currently in a 401K? If so, there are times when someone who retires on or after 55 can withdraw money from a 401k without having to pay a penalty. (Still have to pay taxes on money withdrawn but not a penalty). I don't know the details of when you can do this so you should look into that.

I would never consider the variable annuity in your situation.

[allen76]

If the profit share is in 401k account, the rule is that if you retire in the year you turn 55, withdrawals can be made from your 401k account with no early withdrawal penalty. Taxes will be due on any pre-tax contributions plus earnings.

[rdjrn]

Quote:

Originally Posted by allen76 If the profit share is in 401k account, the rule is that if you retire in the year you turn 55, withdrawals can be made from your 401k account with no early withdrawal penalty. Taxes will be due on any pre-tax contributions plus earnings.

It's a company sponsored Vanguard 401K, and Vanguard tells me I can't take withdrawals from it, even after I retire at 55. They tell me I must roll it over into an IRA (and be subject to the early withdrawal penalty)!

[Dimsumkid]

Quote:

Originally Posted by rdjrn It's a company sponsored Vanguard 401K, and Vanguard tells me I can't take withdrawals from it, even after I retire at 55. They tell me I must roll it over into an IRA (and be subject to the early withdrawal penalty)!

Once you have it in the IRA, this is when you can apply IRS rule 72(t) to avoid the 10% early withdrawal penalty. You just need to make equal withdrawals for 5 yrs.

[pb4uski]

Quote:

Originally Posted by rdjrn It's a company sponsored Vanguard 401K, and Vanguard tells me I can't take withdrawals from it, even after I retire at 55. They tell me I must roll it over into an IRA (and be subject to the early withdrawal penalty)!

I would call Vanguard back and discuss it with them further. Reference IRS Publication 575 (Publication 575 (2011), Pension and Annuity Income)


"Additional exceptions for qualified retirement plans. The tax (on early distributions) does not apply to distributions that are:

From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees) (see Separation from service , later).........

Separation from service. In order to meet the requirements for the first exception in the list above, you must have separated from service in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). You cannot separate from service before that year, wait until you are age 55 (or age 50 for qualified public safety employees), and take a distribution."

I seem to have a faint recollection that Vanguard may have an unduly conservative view on these. Or it could be that the person who you talked to at Vanguard was misinformed. Also, you may want to check with megacorp and/or look at the megacorp plan documents.