Author Topic: Investment strategy using period certain SPIA annuities - thoughts?  (Read 3443 times)

jim555

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So I was pondering an investment strategy... what do you think?

A 50 yo early retiree has $800,000 after tax, a pension at 65, plans SS at 70.
Our hero needs to get to 65 when his reinforcements take over.
Annual spending is at approx $32,000

The Plan:
Take 33.3% of the $800,000 and buy a period certain 15 year annuity.
$266,666 15 year period certain currently pays 3.18% investment return, or 8.39% payment per year.
$22,376 per year, of which 20.5% is interest and 79.5% is return of capital. 
$533,333 is invested in VTI with a 2% dividend rate.
Annual income is $10,666 dividends, $22,376 is the annuity payment, total $33,042. 
Taxes are low, $10,666 QDI will be at 0%, the exclusion ratio of 79.5 % means the annuity will have zero taxes on $4587 per year.
Income for ACA purposes will be $10,666 + $4,583 = $15,249, the max subsidy possible.

Advantages:
The annuity income will enable a more aggressive investing position, with zero taxes, and max ACA subsides.
Period certain annuities continue payment to the estate even if the person dies, so no risk of loosing principal because of death.
Stability of income means less worry.

Disadvantages:
The $266,666 will be totally returned in 15 years, no principal payment at the end.
Hopefully the $533,333 VTI investment can grow in 15 years to make up the $266,666 being spent.
Annuities are not liquid and this strategy will be locked in once started.

Thoughts:
A person could sell off shares/bonds as needed for a do it yourself annuity, this plan makes things much more simple.

MDM

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #1 on: November 17, 2015, 06:36:09 PM »

Annual spending is at approx $32,000
Constant, or increasing by ~3% inflation each year?

What will the pension and SS pay?  Pension constant or COLA?  Reason not to finance $32K/yr with the SPIA alone?

Those questions came to mind while reading the post, but no real objections to the general idea.  One of many way to skin the cat.

Wolf359

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #2 on: November 18, 2015, 02:56:24 PM »
The math works.  But the lack of liquidity of the annuity makes it difficult to change course if circumstances warrant. 

What's your backup plan if there's a Republican president, with a Republican House, and a Republican Senate, and they either repeal ACA or at least kill the subsidies?  You may need to pick up a job to get health coverage, but you can't turn off your annuity or get the money back.

jim555

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #3 on: November 18, 2015, 04:32:08 PM »
The math works.  But the lack of liquidity of the annuity makes it difficult to change course if circumstances warrant. 

What's your backup plan if there's a Republican president, with a Republican House, and a Republican Senate, and they either repeal ACA or at least kill the subsidies?  You may need to pick up a job to get health coverage, but you can't turn off your annuity or get the money back.
The lack of a way out of the annuity is a big negative.  The 66.6% is still free so that mitigates it a bit. 


jim555

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #4 on: November 18, 2015, 04:35:10 PM »

Annual spending is at approx $32,000
Constant, or increasing by ~3% inflation each year?

What will the pension and SS pay?  Pension constant or COLA?  Reason not to finance $32K/yr with the SPIA alone?

Those questions came to mind while reading the post, but no real objections to the general idea.  One of many way to skin the cat.
I would not like to commit to a 100% annuity position due to its inflexibility and lack of room for growth.  This way the principal COULD survive if the market is cooperative.

Wolf359

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #5 on: November 19, 2015, 01:36:44 PM »
Not sure the SPIA is needed.  800K covers the 32K/annual spending using the 4% SWR rule.  Note that SWR is designed around a 30 year period -- you only need 15 years.

2% dividends/interest from 800K is 16K in income; you'd only need to sell off 16K in capital gains in the first year. 

I don't like plans that depend on the ACA subsidy.  Better to budget for health care expenses without them, then go for the subsidy if you like.  If the subsidy disappears, you're not up the creek.  If it doesn't, you have a little bit of a safety buffer. 

There's also the ethics of a near millionaire taking a subsidy intended for the near-poor.  Sure, it's legal, but it doesn't feel moral.

jim555

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #6 on: November 19, 2015, 05:52:35 PM »
There's also the ethics of a near millionaire taking a subsidy intended for the near-poor.  Sure, it's legal, but it doesn't feel moral.
Please leave the ethics/morals of the ACA to another thread.
The topic has been discussed in depth in other threads. 
 Thanks.

arebelspy

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #7 on: November 20, 2015, 04:43:50 AM »
Sounds like the person way oversaved and has a million options to be completely fine.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jim555

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #8 on: November 20, 2015, 09:42:28 AM »
The numbers are not real, just for illustrative purposes only.

Mighty-Dollar

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #9 on: November 20, 2015, 10:59:33 PM »
So I was pondering an investment strategy... what do you think?
Here's some great quotes for you...

"Almost always, anything that can be done with an annuity can be done a better way" -- Fisher Investments founder

"You never ever want to buy an annuity that has a surrender charge" -- Bob Brinker

"As a general rule, annuities are an inferior investment vehicle" - White Coat Investor

"There's almost never a circumstance when an annuity is called for" -- Clark Howard

arebelspy

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Re: Investment strategy using period certain SPIA annuities - thoughts?
« Reply #10 on: November 21, 2015, 01:10:43 AM »
The numbers are not real, just for illustrative purposes only.

If you use inflated numbers, an annuity is fine. But so are a million other things.

If you use real numbers, an annuity likely leaves you short (or you have to save up so much to get it, you way oversaved and are back in the "you have a million options to be fine" scenario.)

In today's low interest rate environment, annuities just don't make much sense.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.