Getting Ready to FIRE and need investment advice for income generation

[TimeForFIRE]

Hi everyone,

2nd-time poster and definitely a fan of the site. I have only recently learned about the FIRE community last year but was fortunate to learn early that a solid life strategy would include going the extra mile(s) at work to get additional raises/promotions, always spend less than I earned, invest the rest, stay away from debt, and spend on experiences over 'stuff'. I feel both blessed and burnt out from work for these past years!

I'm currently single, 48, no kids and my assets are approx. 1.7M.

My savings more or less breaks out to:

• 900k in an investment account.
• 600k in IRAs
• 50k in 401k
• 180k in a life insurance policy, cash value
• The rest is in smaller accounts

I'm also expecting an inheritance within the next 10 years or so which will be approx. $750k.

I'd like to move to a FIRE friendly country (low cost of living, high quality of life) like Costa Rica, Panama or Ecuador and spend a good portion of time exploring the world too. Based on many articles, they say $2k/month would be a good budget for a couple. I'm thinking about setting myself up with $3k/month so I can travel as desired, go to workshops and take courses, have money for charity or side-projects and hustles....

I was thinking about converting the life insurance policy into an annuity for ~$800 monthly for life.

Then, do either...

a) convert ~$350k into another set of annuities to provide an additional $2200 for the next 20 years (until I draw social security).
b) convert ~$550k into another set of annuities to provide $2200 for life.
c) shift my portfolio into a dividend producing fund to generate income and allow the principle to be maintained vs. the annuity.
d) use a combination of an additional annuity and dividend generating fund to make up the $2200.
e) ???? 

I've seen some annuity bashing in the past but I'm kind of burnt out from work and a little stressed over where the market will be heading in coming months/years. I'd like to guarantee a more than basic income for my life abroad and allow the remaining funds to be in more growth-oriented investments which would open up additional opportunities to return to the US or live in higher cost of living countries if that's where my desire shifts. Any additional expenses could be drawn down from my investments but I'd like to live within my original budget for the first few years at least.

I only have experience with growth-oriented stocks so I welcome all your advice and thoughts on different strategies to produce the income to fund my next chapter! 

[shinn497]

Can't say too much about annuities. Personally I do not like them since all they are are an investment that is wrapped in a company taking extra from it and giving less ot you. Personally I say cash that life insurance policy ASAP (whole life insurance is terrible) and then put the rest in some dividend investments or some reits if income is what you want.

The retirements i would not touch and then live off your investment account at 3.5 -4% until your iras kick in.

On a side note. Dude well done man! Your gonna be fine no matter one. just get out of that life insurance policy.

[Rob_bob]

Unless you opt for a COLA on those annuities the monthly income will be worth about half the amount in purchasing power by the time you are 68.  You need to read the fine print, I have heard of issues where the reality didn't match up with what the sales guy promised. And ask the sales guy how much he is getting paid by the insurance company to sell it to you.  Ask what "deferred compensation" means. Hint, he says the insurance company pays his fee, not you, but the insurance company has a "surrender fee" if you want out before 7-10 years, why is that?

If you have no dependents why do you have a life insurance policy?  Who is the beneficiary, parents, will they need the money?

As far as income generation some would say total return investments and sell shares to provide income.  Others would say to use some dividend paying stocks.  The arguments there can go on and on and not all points seem to be addressed.

[TimeForFIRE]

Bob, the insurance policy was started when I was a teenager and, sad to say, wasn't necessary as I never started a family. Right now the beneficiary is a sibling. It's not worth keeping as an insurance policy.

Thanks for the insights/questions with respect to potentially purchasing an annuity and the COLA/inflation risk.

[waltworks]

I don't understand the question here - just sell $2-3k worth of stocks every month (or more/less often as needed) and you have your income. Done.

I guess I'd probably sell a year's worth at a time so I didn't constantly have to be dealing with it, but that's just me.

-W

[Andy R]

I believe the idea of annuities is to lower risk. With a withdrawal rate of 1.5%, I think you have lowered your risk of running out of money to zero already, so I don't quite get what you are getting for the price you pay for annuities?

[PDXTabs]

Most of the people around here would be comfortable selling 4% of our portfolio a year. You want $36K to live on per year? Put that 180K from the life insurance into your brokerage and you can safely pull $43K per year, just from your brokerage. You don't even need to touch the rest of your accounts.

[Telecaster]

I've seen some annuity bashing in the past but I'm kind of burnt out from work and a little stressed over where the market will be heading in coming months/years. I'd like to guarantee a more than basic income for my life abroad and allow the remaining funds to be in more growth-oriented investments which would open up additional opportunities to return to the US or live in higher cost of living countries if that's where my desire shifts. Any additional expenses could be drawn down from my investments but I'd like to live within my original budget for the first few years at least.

The thing about annuities is you give them a pile of money, and they will give it back to you slowly over time.   After a long period of time, like 20 or 30 years, they will have returned your money back to you.  Not with interest.  Not inflation-adjusted.  Your original money. 

If you are worried about markets, then buy a nice bond fund.  Unlike an annuity, at least you will be earning interest.  And you will at least control the money. 

[MoseyingAlong]

I think annuities are a tool and have their uses.
For example...if you are worried about cognitive decline and making wise investment choices in the future, they are a good way to reduce or remove that risk. I have seen some very intelligent, well-educated, logical people make some crazy investment choices in their later years. It's a risk I'm aware of and take into consideration for my own long term planning. There is some fascinating research on the relationship between people's confidence in their financial decisions and the quality of those decisions as they age.

Another advantage is if you want to transfer some of your longevity risk to the insurance company, you can do it for a price.
Some people are more comfortable with a stable, steady income that they don't have to worry about. So I think there are reasons to buy an annuity. But...
This is an expensive time to buy annuities because of the low interest rate environment. The peace of mind for you may still make them worthwhile.

That being said...if you plan to manage your investments and are willing to rebalance once a year, I'd consider building your own 5-10 year CD/bond ladder. Use individual CDs or bonds, not bond funds for this.
The basic idea.
Buy a 1-year CD for $40K.
Buy a 2-year CD for $40K (include an inflation adjustment if you want).
Buy a 3-year CD for $40K.
etc, etc. out to 5+ years.

Then each year when the CD matures and you're doing your annual rebalancing,
If the stock portion of your portfolio is up, harvest some stock gains and roll the CD to the end of the ladder, such as year 10.
If the stock portion of your portfolio is down, use the cash from the matured CD for your living expenses for the next year, thereby giving the stock portion time to recover.

In this way, your annual income is in a secure investment for the next 5+ year period. So hopefully the stock market will recover from any correction or you will have a few years to make some changes.

Best wishes with whatever you decide.

PS I agree with everyone else. Unless that insurance policy has some fantastic features, I'd get rid of it. If you know any insurance agents you trust, it'd be worth having them look at it and your options before cashing it in.

[MustacheAndaHalf]

Although not typical, an investment in 2013 would have doubled since then.  Insurance simply can't match the growth power of the stock market, especially since they need to both reduce risk and make a profit.

Rather than buy growth stocks, I'd recommend beating 80% of fund managers - buy the S&P 500 index, or the whole U.S. market.  Consider the cost of it: just $4/year per $10,000 invested.  What insurance company can afford to pack it's expenses, risks and operating costs in 0.04%?

Definitely read a book like "A Random Walk Down Wall Street" which will help show how the stock market corrections have looked in the past, and how well the stock market has done over decades.

[TomTX]

I don't understand the question here - just sell $2-3k worth of stocks every month (or more/less often as needed) and you have your income. Done.

I guess I'd probably sell a year's worth at a time so I didn't constantly have to be dealing with it, but that's just me.

-W

He doesn't even need to do that. It looks like he could pretty much just put the investments in VTSAX (or similar) then direct the dividends into an account for expenses instead of reinvesting.

If he converts the life insurance to the annuity, he could meet his stated income needs with dividends + annuity.

Or just cash out the life insurance and add it to the stash. Will likely need to sell a small amount of stock periodically.