nfs said:
Let me pay you a similar compliment. Your position makes sense if we EXCLUDE consideration of the original poster's objective "to preserve and hopefully grow my current assets". Your solution cannot accomplish that.
I challenge him to defend the cost side of the same ledger. Unless modhatter is incredibly risk averse, I suspect the cost of about 400 grand will outweigh the benefits Art has mentioned.
No problem.
You are correct, the SPIA/life combo will not allow him to grow his assets. I'm not sure how important that really is to him, either.
A top-rated UL company using the new 2001 mortality table will cost a preferred plus Male 63 year old Arizona resident a single premium of $251,297.76 (to be exact) for a level $1,000,000 death benefit, or $16,962.41 on an annual pay basis, based on current interest rates and costs of insurance (COI).
If interest rates rise over many years and/or COI drops, he would be able to pay less in the later years.
If interests rates fall over many years and/or COI increases, he would need to pay more in the later years.
COI has dropped steadily for well over 100 years- but mortality rates can theoretically increase based on real doom and gloom.
To clarify this SPIA/Life concept:
If the OP decided at age 65 to invest $1,000,000 of his $1,400,000 after-tax assets (excluding his residence in Arizona and rental property in Arizona) into a Single Premium Immediate Annuity (SPIA) with a top-rated insurer, on a "Life and Installment Refund" basis (there are several settlement options to choose from), here's what he'd get:
30 days after the insurer received his $1,000,000 check, he would receive, by mail- or wired directly into his bank- a check for $6,100.75, every month for the rest of his life, guaranteed. SPIAs have been around for hundreds of years- this is not a new concept.
IF the $1,000,000 was after-tax money, as it is in this case, each $6,100.75 payment would get the benefit of a 61.5% IRS exclusion Ratio, since each payment would consist of his already taxed principal, and his untaxed interest.
So $3,751.96 of each check would be exempt from federal and state income taxes- and $2,348.79 of each check would be taxable.
This would continue for 22.21 years, after which, every check would be 100% taxable.
IF the OP died before recovering his $1,000,000- his beneficiary (probably his son's trust) would continue to receive these monthly checks until the entire $1,000,000 was recovered.
The monthly checks would stop at OP's death, or complete repayment of the $1,000,000 principal- whichever came LATER.
So, if OP lives to be 100, his payout would be $6,100.75 x 12 (months/year) x 35 (years)= $2,562,315. If he lives longer, the checks keep coming.
IF we add this $6,100.75 to his $1,600 Social Security check (increasing annually) and his $800 rental income, he has $$8,500/month (increasing with his SS increases) to live on.
He said he only needs to net $4,000/month.
He says he must gross $5,700/month to net $4,000- and I agree with nfs, I don't think he needs to gross that much, especially with the SPIA's exclusion ratio, but let's be conservative and go with his assumed tax rate.
That leaves $8,500/month (increasing with SS)- $5,700= $2,800/month of discretionary income ($33,609/year) to deal with inflation via I-Bonds, index funds, whatever.
UNLESS we are talking about Weimar Republic type hyperinflation (which, I don't think would have a very positive effect on index funds, either) I don't see any problems with this portfolio surviving forever.
That leaves $400,000 out of the original $1,400,000 to buy a $1,000,000 UL policy on his life (single premium of $251,000 or annual pay of $17,000) to benefit his handicapped son, plus the Arizona residence, Arizona rental, and whatever he saves from his original $400,000 and saves from his $33,600/year discretionary money).
I agree with Brewer that historical MCS and MPT studies say that ports that are entirely fixed income have lower survival rates than those that use equities... BUT... THAT DOES NOT MEAN that an entirely fixed income port with massive amounts of guaranteed income relative to withdrawals will not survive... does it.
As a matter of fact, as long as OP got the Long Term Care Insurance I suggested, it may be possible for him to increase his life insurance for his son without hurting his standard of living one bit.
If you read OP's post, he is burned out on real estate. He never owned a stock in his life, and he is 63- he knows he can lose money in the stock market.
The SPIA/UL approach is safe, simple and effective if backed by quality insurers. With this strategy, he can focus on his life and his son without caring about interest rates or the stock market. It's not for everyone, but it may be right for him. And thanks, Haha, for helping turn the emotional decibel level down a bit. Now, back to the saltmines.