10 year Gap until pension?

[FREE IN 23]

Hello, planning to retire in June of this year, 2023. I will be 51 in April, I can draw my first railroad retirement check May 1st of 2034 so I have about a 10 year, 10 month income gap to fill. I will have around $350,000.00 in savings to work with.
Still fine tuning the budget but it looks to be around $38000.00 per year.
What would be the best vehicle to use to fill the 10 year, 10 month gap?
I could purchase a 10 year income annuity for 350000.00 that would pay around 42500.00 a year according to the Schwab site.
I could use Treasury Direct to try and earn 3.55 percent on US treasuries according to a drawdown calculator, which would make it possible to withdraw the same 42500.00 as the annuity.   
Also have 53000.00 in a company 401k.
I plan to put all this in a Case Study Format when we finish the budget/spending plan soon. Just wanted some ideas about how to deploy the savings to get me to the pension at 62.  Thanks

[nouseforausername]

Might want to factor in the different taxation treatments (will the annuity be purchased w/ pretax v. post-tax dollars, etc.).

I got roughly the same #s as you running the Schwab calculator and throwing in a random state -- but, unclear what other fees, if any, would be involved that aren't shown on their calculator.

I suspect others might say this is a "tie goes to the DIY annuity" situation, rather than losing control over the corpus of your savings.

See also this discussion, re: annuities generally:
https://forum.mrmoneymustache.com/investor-alley/why-you-should-never-buy-an-annuity!/

[six-car-habit]

  Will you be eligible for a social security retirement check at 62yo or older --- in addition to the railroad retirement check ?

  {  I'm under the impression that railroad employment is one of the few careers where paying into Social Security could be optional, depending on the employer ??...at least that was the case decades ago}

 When you get the railroad retirement check [ plus SS if applicable ]  in 10 yrs, will the amount be greater than $ 50,000 annually ?

[FREE IN 23]

It will be after tax dollars, so maybe no tax during return of money years?
Not sure about additional fees after purchase of income annuity, got to research that more.
Read the attached link, boy annuities are a polarizing issue.
I'm leaning toward the Treasury Direct DIY method, even if i don't match the returns i will still have more options and access to my savings for longer.
 

[FREE IN 23]

six-car-habit
No Social Security. Railroad retirement pre-dates SS, so it is all rolled unto one pension.
Pension payment will be around $43000.00 subject to COLA increases like SS.

[reeshau]

What will your health care be like for these gap years?  Not only is the insurance a significant expense for most people, (clearly, a RR job w/ pension may be the exceprion) but expenses you are on the hook for can add a lot, too.  If you are thinking of going the annuity route, you should hold back a significant emergency fund, including car, house, and medical.

[FREE IN 23]

reeshau
I am still researching healthcare. I am getting some encouraging quotes from Health Sherpa that are comparable to what I pay for railroad insurance now.
I am leaning toward just buying treasuries, so i won't have to surrender my savings to buy the income annuity. E*TRADE has a good bond site and zero fees on US treasuries.   

[BicycleB]

Since you can create a Roth ladder from the 401k, you can include that in your plans. This gives you some wiggle room. Remember that the annuity leaves you nothing after the payment period, while your own investments can leave you with money left over to supplement the railroad pension. In your shoes I’d figure out the minimum needed in Treasuries or the like and leave the balance in stock index fund or stock index ETF, because that would probably give me better long term value.

Using this period to maximize the amount in your new Roth account will give you tax advantages later.

You may want to make a year by year plan to make sure you have enough income to qualify for ACA health insurance. If I understand what Health Sherpa is, it leads you to enroll in ACA insurance - usually a great choice, but there is an income minimum; make sure your financial plan allows you to meet the minimum income for that type of health insurance.

[Wintergreen78]

I was looking at CD ladders recently through Fidelity. A 2-year ladder averages 4.6% per year. That would take care of your first couple of years. You could still use treasuries or some other option to hold your money for the rest of the time before your pension kicks in.

[Finances_With_Purpose]

I was looking at CD ladders recently through Fidelity. A 2-year ladder averages 4.6% per year. That would take care of your first couple of years. You could still use treasuries or some other option to hold your money for the rest of the time before your pension kicks in.

Definitely DIY the ladders.  Fidelity will auto-select ones that can be called, which may not be good in this rate environment.  (*someone who buys a lot of CDs via Fidelity.)

As to op, I would sit down with a CPA.  I've helped manage retirements, and the top two issues are: (1) managing taxes (thus the CPA) and (2) large, unexpected/unplanned expenses (medical, car, injury, soaring insurance costs, etc.).  Plan out various scenarios, including some worst-case scenarios and see how they look.  You also need to consider how much in savings/EF you need rolling into your traditional retirement as well and plan now for that. 

The treasurys route would be tempting if I were setting this up for someone today: you keep the corpus of the savings and rates aren't bad now.  You may also want to throw in some i-bonds in there for the early years especially, with rates where they are - no downside there (after the first year, where those aren't liquid).  I manage one retirement with a large position of CDs and treasurys for that reason. 

You also want to consider taxes because you may want to start slowly withdrawing your 401(k) funds, too, in lieu of using the savings, in order to diminish your RMDs and to give you more control over when you have to take income (and thus potentially increase tax brackets and/or tax other income).  E.g., you may have to pay more taxes if your 401(k) (which I suspect is more likely in stocks) soars while you're not withdrawing any funds such that you have to take larger RMDs/more income later on in your retirement.

Your numbers seemed a little tight to me given your plan, however, you may want to do a full case study so that we can see the overall picture rather than a few pieces, as time permits. 

In short, there's no easy answer or one-size-fits-all here, especially with your unique facts - you need professional advice on it, especially re: the taxes. 

[Must_ache]

reeshau
I am still researching healthcare. I am getting some encouraging quotes from Health Sherpa that are comparable to what I pay for railroad insurance now.
I am leaning toward just buying treasuries, so i won't have to surrender my savings to buy the income annuity. E*TRADE has a good bond site and zero fees on US treasuries.   

The E*Trade site does allow zero fees US treasuries but they are second hand.  There is a better place to get them. From the US Treasury of course! 

You can put the $$ in your checking account and link it to Treasury Direct and avoid all any middlemen at all.  The site works fine, it looks a bit dated but completely functional.  You can see the results of recent auctions, you select an amount and a term you want a few days after the auction closes it shows up in your account. 

You won't see the details on E*Trade itself, maybe it's worth buying them secondhand to see your inventory and to be able to trade them off, there is that consideration.  I've done both.  If you were buying it as an investment to sell, you would avoid Treasury Direct.

I would be tempted to put a chunk of it in 6-mo bills right now which yielded 4.685%. In the last two auctions.  Of course yields are expected to go lower in the future.   

Some stocks are probably appropriate too.  Maybe put a chunk some of it in something boring like DVY.  Dividend heavy, it was much less exciting than the S&P.  In the last 5 years it went up an average of 4.0%/yr (navigating the pandemic) and it's current dividend yield is 3.4% which could have totaled 7.4% not bad.   Even if you got no appreciation from the stock, the dividends alone wouldn't be far off the Treasury option.

One big question: where is that $350K currently?  Is it actual liquid savings or is it tied up in a 401k/IRA?  Getting that money out might not be as easy as you think - but not necessary impossible.