clifp
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Oct 27, 2006
- Messages
- 7,733
No somebody hasn't hacked my account, I am serious. The major caveat is the really applies only to those who qualify for an ACA subsidy and probably doesn't make sense for those over 62.
Here is the summary
Buying a variable annuity (VA), decreases your income for dividends and interest today. Each $1,000 in income you decrease increases your subsidy by $100-$200 a fantastic rate of return
Professor Moshe Milevsky says VA should be part of your retirement portfolio in the new edition Are you a stock or a bond
With the market at new highs you lock in profits without having to pay tax.
If the market goes up you get some of the upside.
VAs from good firms Vanguard, Schwab, Fidelity (and I bet USAA) have lower expenses, than those sold by brokers..
Background
On my recent trip/vacation. I read Are you a stock or a Bond. I found it to be good book but since I am already retired much I know or didn't apply. The one area that was a great surprise was his section on VA. Early in his career the Professor was harsh critic of VA. But lately he says that embedded put contract associated with Guaranteed Minimum Withdrawal Benefits (GMWB) is considerably cheaper than buying a longer put on the open market. This makes them good retirement products for three reasons, the provide a guaranteed income stream, protection from a bad sequence of returns, and they also provide inflation protection, especially if you invest heavily in equities.
Still the expenses are high even Schwab and Vanguard charge between 2.2-2.5% for their VAs.
I have also been scheming on how to reduce my income to qualify for an ACA. Tax loss harvest, paying property taxes early, and making a donation of appreciated stock, is not something I can do every year. What I needed is way of deferring my income until I am 65 and I get on Medicare.
Now it is also possible to do this with a fixed deferred annuity but the interest rates are still very unattractive ~2% for a 10 year. So I actually think a VA maybe a better product.
The addition of ACA subsidy and i think overcomes most of the arguments against VA.
Here is example. 55 year California couple no kids
$25,000 COLA pension
500K taxable
300K 401K
200K Roth
At 66 they get $35,000 in SS
They can live on $60K, but they really want to spend 80-85K while they are under 70. Note at 66 they make 60K from pension +SS. So the only question is how much more than can spend.
Their 500k portfolio throws off 2% in dividends and interest or $10k making their income $35,000
A BCBS enhanced Silver plan cost $889 but after a $679 subsidy is down $210/month. If they buy a VA for $250K, that cuts their income down to $30K and their can buy an insurance for $150/month and it comes with much lower deductibles $500 vs $1,500, lower copays etc. But just the $720 higher subsidy is equivalent to a 14.2% return.
They drawn down on their portfolio to meet their needs until they turn 65, secure in their knowledge that they have an adequate income once they hit SS age.
Now if the market is flat or down when they turn 65, they will still be able to withdraw ~$11,000 a year for life. If their portfolio goes up 6% a year (which would translate to a 8% market return because of the extra 2% in expenses). The couple would get an extra 20K per year. Now it is likely that couple will be in the 25% instead of the 15% bracket so that has to be figured in also.
Obviously annuities aren't good product in many situations and I know insurance salesman sell some horrible ones. But my philosophy has always been its ok to buy an annuity,just not have one sold to you. The additions of ACA subsidies I think really demands people take a second look at them with market at record levels and fixed income paying so little. On the other hand with so much of ACA in the flux, waiting for a year probably makes sense.
Here is the summary
Buying a variable annuity (VA), decreases your income for dividends and interest today. Each $1,000 in income you decrease increases your subsidy by $100-$200 a fantastic rate of return
Professor Moshe Milevsky says VA should be part of your retirement portfolio in the new edition Are you a stock or a bond
With the market at new highs you lock in profits without having to pay tax.
If the market goes up you get some of the upside.
VAs from good firms Vanguard, Schwab, Fidelity (and I bet USAA) have lower expenses, than those sold by brokers..
Background
On my recent trip/vacation. I read Are you a stock or a Bond. I found it to be good book but since I am already retired much I know or didn't apply. The one area that was a great surprise was his section on VA. Early in his career the Professor was harsh critic of VA. But lately he says that embedded put contract associated with Guaranteed Minimum Withdrawal Benefits (GMWB) is considerably cheaper than buying a longer put on the open market. This makes them good retirement products for three reasons, the provide a guaranteed income stream, protection from a bad sequence of returns, and they also provide inflation protection, especially if you invest heavily in equities.
Still the expenses are high even Schwab and Vanguard charge between 2.2-2.5% for their VAs.
I have also been scheming on how to reduce my income to qualify for an ACA. Tax loss harvest, paying property taxes early, and making a donation of appreciated stock, is not something I can do every year. What I needed is way of deferring my income until I am 65 and I get on Medicare.
Now it is also possible to do this with a fixed deferred annuity but the interest rates are still very unattractive ~2% for a 10 year. So I actually think a VA maybe a better product.
The addition of ACA subsidy and i think overcomes most of the arguments against VA.
Here is example. 55 year California couple no kids
$25,000 COLA pension
500K taxable
300K 401K
200K Roth
At 66 they get $35,000 in SS
They can live on $60K, but they really want to spend 80-85K while they are under 70. Note at 66 they make 60K from pension +SS. So the only question is how much more than can spend.
Their 500k portfolio throws off 2% in dividends and interest or $10k making their income $35,000
A BCBS enhanced Silver plan cost $889 but after a $679 subsidy is down $210/month. If they buy a VA for $250K, that cuts their income down to $30K and their can buy an insurance for $150/month and it comes with much lower deductibles $500 vs $1,500, lower copays etc. But just the $720 higher subsidy is equivalent to a 14.2% return.
They drawn down on their portfolio to meet their needs until they turn 65, secure in their knowledge that they have an adequate income once they hit SS age.
Now if the market is flat or down when they turn 65, they will still be able to withdraw ~$11,000 a year for life. If their portfolio goes up 6% a year (which would translate to a 8% market return because of the extra 2% in expenses). The couple would get an extra 20K per year. Now it is likely that couple will be in the 25% instead of the 15% bracket so that has to be figured in also.
Obviously annuities aren't good product in many situations and I know insurance salesman sell some horrible ones. But my philosophy has always been its ok to buy an annuity,just not have one sold to you. The additions of ACA subsidies I think really demands people take a second look at them with market at record levels and fixed income paying so little. On the other hand with so much of ACA in the flux, waiting for a year probably makes sense.
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