10 Year Period Certain

[aksteelhead]

We are finally able to FIRE at 50yo. Net worth 2m and would like to spend 500k over the next 10yrs. Should I buy an annuity or try to invest and withdraw on my own.? We have pension income of 110k but would like to supplement 50k or so till reaching 59 1/2. The supplemental would be used for travel and other extra stuff. We can easily live on the pension. FYI no kids or anyone expecting an inheritance.

 

[Fedup]

What's wrong with just withdraw $50k per year to pay for travel. That's what I did. No annnuity was necessary. And when I'm bored with travelling I still have almost close to $2M.

 

[aksteelhead]

If the market tanks for a few years our travel plans get derailed. I was thinking the annuity could protect us. We have made good decisions so far but a mistake leaves us without any extra till 59 1/2.

 

[GravitySucks]

Would a CD / Bond ladder pay better? That way you would retain more control over the assets.

 

[bingybear]

so if you go with 10 year certain annuity @ a cost of 500k, how much would you get each year?

 

[OldShooter]

Buying an annuity is simply paying someone a fee plus profit to take a risk for you. You just have to look at the numbers. How does the discounted cash flow of the annuity compare to what you could do on your own with high confidence? Is that a good tradeoff for you?

Most annuities are highly profitable ripoffs, which is why you constantly see insurance companies settling with the Justice Department for selling them to unsuitable customers. I have read that TIAA/CREF and Vanguard have annuity products that are fairly priced but I have never investigated this area.

You might benefit from spending a few hundred bucks to have a CPA help you work out the calculations.

 

[pb4uski]

A period certain annuity is simply an interest bearing investment and the return can easily be calculated using the RATE function in Excel.

According to immediateannuities.com, a $100,000 10 year period certain pays $899/month.... the IRR is ~1.5% interest on your money and your money is tied up.

IMO you can do just well with a CD ladder and a high-interest online savings account and retain control over those funds.

 

[Ready]

I don't think an annuity would be a fit for you, as others have stated. There are 5 year CDs out there paying 2.25%, maybe slightly higher. They only require a six month penalty for early withdrawal, so you could buy a series of CDs, putting $50K into each of them, and then withdraw as necessary. I would not turn over your money to an insurance company when annuity rates are so low.

 

[pb4uski]

I would put $50k in an online savings account and $50k in 1,2,3,4,5,6,7 8,9 and 10 year CDs. You'll want to use more than one bank to make sure the entire $500k is covered by the FDIC... or just buy a ladder of brokered CDs and hold them to maturity.

That will give you much better return.

 

[Independent]

I vote for a CD ladder for the earlier 5 years of withdrawals and I-bonds for the later 5 years.

Since this is discretionary money, almost any investment would be ok, this one is very conservative.

 

[evilanne]

Is Substantially Equal Periodic Payments or life expectancy payments an option if $2M is in your 401(K)? With $2M the amount withdrawn based on end of year balance & age factor, it would be over $50K/year and you are locked into same method until 59.5. Actual about will vary each year based on your rate of return each year & age factor for life expectancy method. For IRAs, IRS 72(t) covers this exception without 10% penalty see Rule 72(t)

 

[mrfeh]

An annuity for a discretionary expense? No, that doesn't make sense.

 

[hesperus]

Keep control of your assets. Annuities in this low rate environment are not the way to go.

 

[Sunset]

Is Substantially Equal Periodic Payments or life expectancy payments an option if $2M is in your 401(K)? With $2M the amount withdrawn based on end of year balance & age factor, it would be over $50K/year and you are locked into same method until 59.5. Actual about will vary each year based on your rate of return each year & age factor for life expectancy method. For IRAs, IRS 72(t) covers this exception without 10% penalty see Rule 72(t)

This would be a terrible thing to do, as the penalties are severe if OP deviated from it for any reason.
Better would be to put 250K into a separate IRA, and do the 72(t) on it , with the intention of a 5 year lifespan on the action. Then repeat.

This leaves the other 1.5M available in case of emergency or sudden change in life.

 

[Fedup]

If this is a really 2M pot then just in a CD that gives you 3%. You get $60k a year for travelling. I didn't get that it's actually a pot of $2M, rather it's $2M net worth. I think there is a diiference.

 

[nun]

$50k from a $2M portfolio is 2.5%. That's a pretty conservative draw from a diversified portfolio. So we are once again confusing SWR, AA and buckets. There's no need for an annuity and even with a downturn equal to the worst in history the OP's withdrawal rate will be just fine if they have 60/40 portfolio. The 40% of fixed income could be CDs, I-bonds or short term bonds, but I would not think of them in isolation from the rest of the portfolio. Also the $50k is not required for basic expenses so why fund it with an annuity?

 

[zinger1457]

Better would be to put 250K into a separate IRA, and do the 72(t) on it , with the intention of a 5 year lifespan on the action. Then repeat.

Could never get $50K/year using that method, a 72t has to be calculated using life expectancy and current interest rates so if starting out with $250K the most you'll get is ~$11K/year. Also, you wouldn't be able to stop it at 5 years unless you've reached 59.5.

 

[joylesshusband]

$50k from a $2M portfolio is 2.5%.

The portfolio size is unknown.
The $2M was mentioned as net worth.

 

[evilanne]

Looking at OP's other posts in the forum, most of their "nest-egg" is in retirement accounts...if these are Federal Government/Military accounts, you can use TSP retirement income calculator to look at different options based on your assumptions. https://www.tsp.gov/PlanningTools/Calculators/retirementCalculator.html

Calculator uses IRS life expectancy tables through age 70 and it changes to IRS tables for RMDs at age 70.5 and beyond. Using TSP life expectancy withdrawals until age 59.5 would avoid any errors that would result in early withdrawal penalty. You can also look at different annuity options under separate tab but I would recommend against any annuity option. Until the outcome of the DoL fiduciary rule is determined, I would be hesitant in doing any rollovers to an IRA.

 

[aksteelhead]

Sounds like the annuity is not a great option. The 500k referenced in the original post is in a 457 plan and there are several payout options. Lump sum, monthly, annual or various annuities. Our plan is to drain the account over the 10 year period between 50-60. The balance of the nest egg is 300k in cash (house money) and the rest is in government TSP and 403b accounts requiring us to be 59 1/2.

 

[mrWinter]

We can easily live on the pension.

To me, an annuity could make sense, along with SS, to provide a base level of income that I need to survive on. Then anything above that is luxury expenditure like travel etc. Sounds like you already have that base level of income covered by your pension, your other investments are just for icing on the cake right? I guess it depends what you mean by 'easily', is that also 'comfortably'?

If the market tanks for a few years our travel plans get derailed. I was thinking the annuity could protect us.

If the market tanks on you right after retiring, then it would probably make sense to take a pause or reduction in travel and other luxury expenses anyway as a response to the downturn in the market. Seems to me like your pension is already doing the same job an annuity would.