Originally Posted by nun
Here's my reasoning. If I get 6% return, my $35k will grow to $66k in 11 years time (age 65). If I continue to get 6% return I can take out $5600 a year and the money will run out at age 86. That's how I did the comparison with the annuity and came up with needing a 6% annual return.
I actually think the annuity is probably going to work out as the better deal.....where can you get 6% today? The only gamble is whether I live long enough to collect. But I took the lump sum out of academic interest and because I already expect to get $70k annual income from pensions and SS at age 65.
If you leave your initial $35,000.00 investment from your lump sum distribution in VG's Balanced Index fund - it would theoretically grow to $93,334.00 in 12-13 years (66-67) and provide the 6% withdrawal rate you stated you wanted to to match your $5600.00 annuity payments @ 65 (11 years). Balanced Index fund has averaged 8.11% annually since inception in '92. It's 1 yr is 9.37%, 3 yr 8.71%, 5yr 9.84% and 10 yr 6.81%.
Since it's in a rollover IRA, it would continue to grow in the Balanced Index fund tax-free for over 30 years during your lifetime of withdrawals @ 6% ($5,600.00 annually with no adjustment for inflation as would be an SPIA annuity). Given the calculator I used - you "would" theoretically be leaving behind an inheritance - unlike an annuity where your heirs get nothing when you die, only the insurance company does.
Taking the annuity payments @ 65 - you'd need to live to be 82-83 "just to break even" with the Balanced Index fund's investment growth.
That is, to match the growth of the Balanced index fund to $93,334.00 and to use it up over 16+ years (assuming no further growth of those funds at 66-67, putting it under your mattress). In theory - you won't ever break even if you leave it in the Balanced Index fund for over 30 years
- assuming that you'd have an inheritance to leave, where you'd have nothing to leave with the annuity.
If you're married and you pass before your spouse - the investment in the Balanced Index fund would continue to grow tax deferred and pay the $5,600 annually well past 30 years from your 66th-67th birthday. This wouldn't happen with an SPIA annuity - it's gone when you are.....
IIRC -when you and your spouse have passed - what's left of the tax-deferred initial investment from your lump sum distribution may be rolled over to a beneficiary (inherited IRA), who could continue to draw off the tax deferred Balanced Index fund at an immediate specified required withdrawal rate based on their age (Ed Slott can tell you more about this).
You state that you will live off a pension and SS to the tune of $70K annually. That's a nice income stream, and congratulations. I consider those to be income streams that are in effect annuities - that go away when you do. I also believe that no one should put all of their retirement investments into annuities. Most people have more than enough in annuities just with SS....
You may see an annuity as a better gamble and favor them, but I've never seen it that way and don't care for them. Understanding investing is far simpler to me, than understanding the complexities of annuity documentation. I believe the numbers above (simple as they are) based on your criteria, favor the investment long term.
I reran the numbers $35K for 11years @ 8.11% - then $5600 annually, would still run past 30 years of withdrawals.