SPIA vs. Muni Money

[MuirWannabe]

Currently I have $650K invested in a intermediate term muni fund with Vanguard. It gives off about $1410/month.

I just did a SPIA quote using USAA calculator and it says that same amount would provide $2740/month.

I’m getting myself a little confused. I know the SPIA would terminate on my death and the money is gone at that point. But still, I’m kinda wondering if this money would be better off purchasing a SPIA than in the muni fund. Eliminating bond interest rate risk is another plus for the SPIA I guess.

Can anyone smarter than me help clarify thoughts on pros/cons with this?

Thank you.

 

[REWahoo]

To me it would boil down to this question: Is it worth spending $650,000 to get an additional $1,330 per month in income for the rest of my life?

Ignoring inflation, you'll need to live another 40 years to break even.

 

[jazz4cash]

What does the SPIA net after taxes? Are you married and if so does that SPIA have a survivor’s benefit? What other assets do you have besides the 650k? I think you need to consider overall AA. Not sure but I consider Muni funds to be more stable than comparable corporates.

 

[brewer12345]

I think it will be extremely difficult to justify the purchase of a SPIA on the basis of return. If you are doing so on a risk management basis (assuring a minimum amount of income no matter what), you might get comfy with it. So which is it: return or risk management?

 

[COcheesehead]

If you put $650,000 into PMF, a closed end muni fund, you’d get $2300 a month and your money is only a click away if you want to sell.

 

[Out-to-Lunch]

Can anyone smarter than me help clarify thoughts on pros/cons with this?

We'd really need to know how old you are to help!

 

[MuirWannabe]

I’m focused more on return than pure risk management. I’ll have to look at the muni fund mentioned by cocheesehead. That monthly interest amount is a big difference from the VWIUX fund I’m currently in.

Thanks for the comments. I figured a SPIA was somehow not the way I should go.

 

[MuirWannabe]

We'd really need to know how old you are to help!

I’m 57. Married. DW is 58. The SPIA quote I looked at was for my lifetime only. It was just a quick quote to compare.

 

[GoBears]

The SPIA’s monthly payments include return of your principal. Comparing the monthly SPIA payment to the interest only payment from your muni fund is comparing apples to oranges. With no further interest earned, your $650k would support almost 20 years of withdrawals at $2740 per month. So the first 20+ years of SPIA payments is really just returning to you what you paid to the insurance company and the interest you would have earned had you kept it invested. SPIA’s are generally purchased as longevity insurance, not because of superior returns.

 

[zinger1457]

One issue with dumping that much money into one SPIA is that the guaranty fund in most states will only cover between $100K-$250K in losses if the insurance company fails, could split the purchase among several insurance companies to reduce that risk. A couple financial articles that I've read that somewhat promote the use of SPIA's say not to put more than 25% of your assets into one.

 

[Perryinva]

As a comparison, of annuities, delaying SS for 8 years gets you about a $20k/yr ($1667/mo) for about $200k and spouse can get it. On an ROI basis, that SPIA is no bargain. That would equal about $5400/mo for $650k.

 

[pb4uski]

Currently I have $650K invested in a intermediate term muni fund with Vanguard. It gives off about $1410/month.

I just did a SPIA quote using USAA calculator and it says that same amount would provide $2740/month.

I’m getting myself a little confused. I know the SPIA would terminate on my death and the money is gone at that point. But still, I’m kinda wondering if this money would be better off purchasing a SPIA than in the muni fund. Eliminating bond interest rate risk is another plus for the SPIA I guess.

Can anyone smarter than me help clarify thoughts on pros/cons with this?

Thank you.

You are confusing return with payout. The $2,740/month includes both interest and principal (return of your $650k).... the $1,410/month is interest only.

What you could do is keep the muni fund and set up amonthly automatic withdrawal of $2,740/month from the fund to your bank account.

VWIUX has a 1.52% SEC yield. At that return, $650k could make payments of $2,740/month for 23 1/2 years. Alternatively, if that was in VBTLX which yields 2.23% it would be over 26 years.

 

[GravitySucks]

PMF is not without it's yield risk. And is pretty well correlated with the SP500.
https://www.dividendchannel.com/symbol/pmf/

I’m focused more on return than pure risk management. I’ll have to look at the muni fund mentioned by cocheesehead. That monthly interest amount is a big difference from the VWIUX fund I’m currently in.

Thanks for the comments. I figured a SPIA was somehow not the way I should go.

 

[COcheesehead]

PMF is not without it's yield risk. And is pretty well correlated with the SP500.
https://www.dividendchannel.com/symbol/pmf/

The OP is looking for a "yield shield" not a low volatility NAV bond fund.
So if the NAV of PMF bounces around (though its lifetime NAV return is 7%), the whole dollars paid each month remain relatively the same with one click liquidity. Isn't that what they are looking for? Unless I read the OP wrong, I think that is what they are saying.

 

[MuirWannabe]

I’m the OP. And I’ll admit that sometimes I’m not even sure what I’m looking for.[emoji3]

Guess it boils down to this. I was trying to evaluate the return I’m getting on my muni fund money versus other options. I looked at a SPIA, but now realize how that is very much not apples and oranges, as several of you have pointed out. I’m no longer considering a SPIA for this purpose.

I originally put money into the muni fund for the tax help when I was still w*rking. Happily retired now, and not sure I need the muni fund anymore. Although I’m happy with my overall AA.

I’ll look at the other bond funds mentioned by folks in this thread. It would be nice to gain more in interest than I’m currently getting from VWIUX, as long as I’m not assuming substantially greater risk to achieve that.

I haven’t responded individually to each post, but I’m grateful for each reply. Y’all have been helpful in clarifying my confusion and forming some thoughts. Thanks.

 

[pb4uski]

If you're looking for reliable cash distributions you might look at VPGDX... it's a bit of a qwirky fund but seems to be a reliable performer and distributes about 4% annually (though some of it is return of capital).

The Managed Payout Fund is designed to give you regular monthly payouts that can help you manage a portion of your retirement expenses. The fund is intended to supplement your other sources of retirement income.

The Managed Payout Fund targets an annual distribution rate of 4%. To accomplish this, the fund’s portfolio managers aim to adjust the fund’s overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term.

The fund invests in a broad range of asset classes and other investments and aims to balance risk and returns.

 

[GravitySucks]

But the yield doesn't stay constant. It's 6¢ a month now. It was 8¢ a month a couple years ago.

Other reasons I'd avoid is the high costs and the current 12% + premium.

Do appreciate the suggestion though as I am in search of something that yields decently myself.

.

The OP is looking for a "yield shield" not a low volatility NAV bond fund.
So if the NAV of PMF bounces around (though its lifetime NAV return is 7%), the whole dollars paid each month remain relatively the same with one click liquidity. Isn't that what they are looking for? Unless I read the OP wrong, I think that is what they are saying.

 

[COcheesehead]

But the yield doesn't stay constant. It's 6¢ a month now. It was 8¢ a month a couple years ago.

Other reasons I'd avoid is the high costs and the current 12% + premium.

Do appreciate the suggestion though as I am in search of something that yields decently myself.

.

The dividend just dropped, but the NAV went up so its sort of a wash. You are still getting nearly the same in whole dollars. All fixed income yield was higher two years ago.
The expenses are meaningless since this fund provides a proprietary strategy. It does not try to follow an index where expenses then become a drag. The premium is there because people want the cash flow. You are buying future cash flow, not just an NAV.

 

[capjak]

If you are looking for lifetime income to mitigate outliving assets than a SPIA is a good option. It is not an investment it is insurance against outliving your $$$.

immediate annuity quotes $2920 for your life only or $2772 with cash refund (i.e. if you die your beneficiary will get whatever $$ is left from the original premium, in this case the $650,000). If you want it for both you and your spouse (i.e. joint) the payout is $2596 per month.

The decision could be a mix (i.e. some in SPIA ladder over several years) while keeping rest in the munibond pool.

If you want COLA 1-5% that can be purchased as well but IMO better to not purchase this and just purchase additional SPIA over time and address inflation risk outside SPIA with other assets.

Lots of options to get there and without losing any $$ to insurance company if you are unfortunate (i.e. you can purchase the cash refund or installment refund as described).