options to cover next 10 years before SS

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ras4250
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options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 12:57 am

without going into too much detail, my mom (59) and turning 60 next year and she is getting a significant pay cut at her job. she has $600k saved up to use for replacement income for next 10 years until she hits 70 and will start claiming SS. She is hoping to take $70k/year.

An annuity for $600k premium paying guaranteed $70k per year is one option. The IRR there is 2.91%.

The other option is to invest it in some conservative ratio (around 50:50) in Total US Stock and Total US Bond and withdraw as needed each year. With this plan, we would hope the market does not have too many down years and running a Monte Carlo on this on portfolio visualizer shows about 80% chance portfolio survives all withdrawals, and 56% chance of survival (with worst 2 years first).

Obviously the risk tolerance will be a personal decision between guaranteed annuity versus leaving in market. But are there any other options to consider? I am tempted to consider making a deal with her to guarantee the 3% return myself, but leaving it invested and taking the risk it doesn't return more than that, because I have a longer time horizon than her, can provide payments from my own income if needed and can wait it out. She can't wait it out. Surely a 50:50 allocation will beat 3% over 10-15 years.

thoughts or suggestions?

PolarBearMarket
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Re: options to cover next 10 years before SS

Post by PolarBearMarket » Sat Dec 08, 2018 1:36 am

Why 50/50? If your time horizon for withdrawal is "now," I would expect ~80% bonds.

justsomeguy2018
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Re: options to cover next 10 years before SS

Post by justsomeguy2018 » Sat Dec 08, 2018 1:37 am

How about a never-recommended variable annuity?

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market timer
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Re: options to cover next 10 years before SS

Post by market timer » Sat Dec 08, 2018 5:13 am

Given that 5-year Treasuries yield 2.69%, I'm surprised the annuity only yields 2.91%. Would suggest shopping around for a better rate.

With regard to your idea of borrowing $600K to invest in a 50/50 portfolio, I think it's very risky.

With regard to your mom's expectation to spend $70K/year, it seems aggressive if all she has is $600K and SS. My guess is $40K/year is more reasonable.

chipperd
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Re: options to cover next 10 years before SS

Post by chipperd » Sat Dec 08, 2018 5:44 am

Using a simple withdrawal calc,if your mom can get 3% return compounded monthly, she will run out about 2/3 of the way through year 9. Using same 3% assumption, she could take out 68k/year and wind up with a few grand at the end of year 10. Hopefully she has other funds after year 10 from another area of her financial life.

johnz1001
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Re: options to cover next 10 years before SS

Post by johnz1001 » Sat Dec 08, 2018 6:41 am

Given the terms of the situation you've provided and leaving aside for a moment issues after 70 with apparently only social security available, I would never put much in the stock market if I needed to spend 70K a year and had $700,000 available. If I put any in stocks, it would be 20 percent in something like Vanguard Life Strategy Income Fund. I'd start by putting 70K in a high yield money market fund or something comparable and then a 5 year rolling CD ladder. Once the 5 year ladder would go beyond 70 years old I would put the money in a 2 or 3 year CD until my last CD would mature when I'm 69. 5 year ladders on Fidelity are available with an APY of 3.23%. This provides her with complete security. But I tend to be very conservative and prefer the security of knowing the money will be available rather than at risk in any way. Any money that I don't need beyond 10 years is invested in a stock fund.

gvsucavie03
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Re: options to cover next 10 years before SS

Post by gvsucavie03 » Sat Dec 08, 2018 7:25 am

Start claiming SS sooner?

onourway
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Re: options to cover next 10 years before SS

Post by onourway » Sat Dec 08, 2018 7:27 am

What will SS payments be?

I agree that $70k/year on a $600k balance seems overly optimistic.

bob60014
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Re: options to cover next 10 years before SS

Post by bob60014 » Sat Dec 08, 2018 8:08 am

Along with the above, are there any lifestyle, housing and other changes that could help cushion this period?

goblue100
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Re: options to cover next 10 years before SS

Post by goblue100 » Sat Dec 08, 2018 8:17 am

I'm confused by the OP, she wants 70k a year for 10 years until SS starts. What happens when SS starts, because it will not be 70K a year?
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

22twain
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Re: options to cover next 10 years before SS

Post by 22twain » Sat Dec 08, 2018 8:26 am

goblue100 wrote:
Sat Dec 08, 2018 8:17 am
I'm confused by the OP, she wants 70k a year for 10 years until SS starts. What happens when SS starts, because it will not be 70K a year?
My thought exactly. $70K annual payout on a premium of $600K says to me that this must be a period certain annuity which pays out for ten years and then stops. There's no way a life annuity is going to pay that much starting at age 60.

My wife and I had comparable earnings histories, going slightly beyond the second bend point, and are both delaying SS until 70. After we've both started collecting (there's an age gap), our total will be about $70K per year in today's dollars, i.e. about $35K apiece.
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gvsucavie03
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Re: options to cover next 10 years before SS

Post by gvsucavie03 » Sat Dec 08, 2018 8:41 am

I really don't think it's a great idea to burn 11.5% per year and expect the rest to go perfectly as planned. This is dumber than the Dave Ramsey 8% WR notion. There is no guarantee that any investment will make a real return after 10 years which is the assumption being made here.

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fishandgolf
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Re: options to cover next 10 years before SS

Post by fishandgolf » Sat Dec 08, 2018 8:45 am

ras4250 wrote:
Sat Dec 08, 2018 12:57 am
without going into too much detail, my mom (59) and turning 60 next year and she is getting a significant pay cut at her job. she has $600k saved up to use for replacement income for next 10 years until she hits 70 and will start claiming SS. She is hoping to take $70k/year.
Need more information about her job/pay cut.......can she find another job.....at least part time? I agree with other posters that $70K per year is very aggressive. Are there other ways to cut expenses?

If you can provide more details, there are plenty of talented BH's on this forum that can get you the details to help.

Good luck!

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vineviz
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Re: options to cover next 10 years before SS

Post by vineviz » Sat Dec 08, 2018 9:02 am

ras4250 wrote:
Sat Dec 08, 2018 12:57 am
Obviously the risk tolerance will be a personal decision between guaranteed annuity versus leaving in market. But are there any other options to consider? I am tempted to consider making a deal with her to guarantee the 3% return myself, but leaving it invested and taking the risk it doesn't return more than that, because I have a longer time horizon than her, can provide payments from my own income if needed and can wait it out. She can't wait it out. Surely a 50:50 allocation will beat 3% over 10-15 years.

thoughts or suggestions?
I think your Mom (and maybe you) might have mismatch between circumstance and expectations.

Expecting $600k to provide $70k of annual income for 10 years with ANY degree of certainty is not a realistic expectation, especially since what happens AFTER that is likely to be a much lower income for her if all the $600k is spent. Your first line of defense is to help her find a way to increase her savings and/or reduce her spending.

Also, two things you can be sure of about annuity companies: they operate in a very competitive marketplace and they know a lot about how much return can be had for an acceptable amount of risk. My advice is to accept that the payout rate you quoted is in the ballpark of what a reasonable return is for a 10-year certain income.

That said, if you go ahead I'd probably build a multi prong approach to allocation.

I'd probably spend $300k on the annuity, to provide a floor on her income and protect her against both markets and any temptation to spend more than she really has. This guarantees that she make it age 70 with at least some income. This gives her roughly $35k/year.

I'd probably use $200k to build a ladder of iBonds ETFs (https://www.blackrock.com/tools/portfol ... sis/ibonds). Such a ladder would provide a roughly 3.8% yield over this period depending on how you construct it. This gives her roughly $27/year including coupons and redemptions. These could be liquidated in an emergency, but if held to target will provide a relatively certain yield.

I'd put the remaining $100k in a target retirement income fund like Vanguard Target Retirement Income Fund (VTINX) limit withdrawals to no more than $8k/year. This should last her 10 years at least, plus is place to put any money received from the first two options that she doesn't NEED to spend. It offers a reasonable stock/bond allocation for someone making steady withdrawals.

Both the annuity and ETF ladder leave her exposed to some inflation risk, but the income fund will offer a little bit of protection on that front.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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goingup
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Re: options to cover next 10 years before SS

Post by goingup » Sat Dec 08, 2018 9:19 am

I'd suggest a flexible and easy solution. Put the $600K in Wellesley Admiral fund, which has a 3.4% SEC yield currently and is roughly a 30/70 fund. Your mom probably needs to stay flexible if she plans to stay in the stock market.

An annuity is a "certain" solution but it will deplete that whole amount. An annuity gives the annuitant "permission to spend" so it's wise to make sure that's a good spending level going forward.

You haven't disclosed her other assets or sources of income which is why posters are so dour about the situation.

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Watty
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Re: options to cover next 10 years before SS

Post by Watty » Sat Dec 08, 2018 10:03 am

ras4250 wrote:
Sat Dec 08, 2018 12:57 am
without going into too much detail, my mom (59) and turning 60 next year and she is getting a significant pay cut at her job. she has $600k saved up to use for replacement income for next 10 years until she hits 70 and will start claiming SS. She is hoping to take $70k/year.
The elephant in the room is what happens when she turns 70? If she spends all of her savings by then will she be living on just Social Security which would be a lot less than $70K a year.

She also needs to consider how she will handle unexpected large expenses which will occasionally happen.

Unless there is a lot going on that you didn't mention I don't think she can afford to retire and spend that amount of money.

The good news is that finding a different job or even working part time can drastically change her numbers for the better and may increase the amount of Social Security she eventually gets.

If one of her large expenses is rent or a mortage payment then one option to consider would be to buy a place to live for cash so that expense would be eliminated. That would not work if she is in an expensive area but there are lots of places where a very acceptable house or condo can be bought for less than $200K. Eventually that home equity could be tapped by selling the property or getting a reverse mortage when she needs it.

The Social Security options can be complex.

If she was divorced after ten years of marriage she may be planning to claim spousal benefits if her ex husband earned a lot more than her. I am pretty sure that spousal benefits don't increase beyond her full retirement age which would be around when she is 66 so if this is the case then waiting until she is 70 would not be a good idea.

If by any chance she was widowed then the Social Security options are even more complex. There was a post a while back by someone who was helping her Mom who was about the same age. She did not have a lot because she had been widowed in her 20's and struggled as a single parent. She did not realize that she could still get benefits based on her late husband's Social Security short earning history which was adjusted for his early death.

If you are not 100% certain of what her Social Security options are then it would be good for her to schedule and appointment to go into the Social Security office to find out more.
PolarBearMarket wrote:
Sat Dec 08, 2018 1:36 am
Why 50/50? If your time horizon for withdrawal is "now," I would expect ~80% bonds.
+1

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 10:57 am

There are other sources of income. My dad works. They have retirement funds. Without going into too much detail, this amount is specifically saved from her job (where she also getting a salary of $70k) and next year the salary will stop but she will keep working the job and so the plan is to make this $600k replace the $70k salary for the next 10 years, until parents will slow down/retire, get SS, reduce expenses and the $70k is not needed. It is needed to bridge the 10 years between now and SS.

So we don't need the $600k to last anymore than the 10 years. Its purpose always has been to replace the income when the salary stopped.

It is a period certain annuity. It is 10 years paying $70k then stops. With a $600k premium that is what I can get, but the IRR is 2.91%. That is guaranteed. But it is low and I was thinking with risk I could do better.

I'll look at all these suggestions - thank you all. But if that helps clarify and there are any other things to think about, that would be appreciated.

ionball
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Re: options to cover next 10 years before SS

Post by ionball » Sat Dec 08, 2018 11:22 am

ras4250 wrote:
Sat Dec 08, 2018 10:57 am
It is needed to bridge the 10 years between now and SS.
I would make a deep assessment of what is meant by "needed" in your definition. To me, "needed" would lead me to take zero risk if possible. If not possible, evaluate the necessary risk impact and acceptable volatility levels.

victw
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Re: options to cover next 10 years before SS

Post by victw » Sat Dec 08, 2018 12:01 pm

ras4250 wrote:
Sat Dec 08, 2018 10:57 am
There are other sources of income. My dad works. They have retirement funds. Without going into too much detail, this amount is specifically saved from her job (where she also getting a salary of $70k) and next year the salary will stop but she will keep working the job and so the plan is to make this $600k replace the $70k salary for the next 10 years, until parents will slow down/retire, get SS, reduce expenses and the $70k is not needed. It is needed to bridge the 10 years between now and SS.
Was 70k what she cleared after taxes and insurance. If it was straight up salary - then the replacement is actually lower.

It really seems like it might be better to look at the bigger picture. There seems to be a presumption of reducing expenses right when SS begins?

Vic

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Re: options to cover next 10 years before SS

Post by arcticpineapplecorp. » Sat Dec 08, 2018 12:07 pm

ras4250 wrote:
Sat Dec 08, 2018 10:57 am
There are other sources of income. My dad works. They have retirement funds. Without going into too much detail, this amount is specifically saved from her job (where she also getting a salary of $70k) and next year the salary will stop but she will keep working the job...
Why would she work a job where she no longer gets income? Is she going from an employee to a volunteer?

Why wouldn't she get a different job that pays something, anything? Isn't some income better than no income? If she gets a different job and makes $30,000 a year she doesn't need an annuity or other that pays $70k a year, she'd only need something that generates $40k a year.

I'm confused about the "keep working but salary will stop part" and think you have to provide some more detail even though you don't seem to want to.
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nix4me
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Re: options to cover next 10 years before SS

Post by nix4me » Sat Dec 08, 2018 12:22 pm

I have no idea why someone would do this or what she is trying to do.

But what I do know, NO annuities - never!

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 12:40 pm

Sorry don't want to. I am being purposely vague and I understand why it doesn't make sense, but it does.

Bacchus01
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Re: options to cover next 10 years before SS

Post by Bacchus01 » Sat Dec 08, 2018 12:47 pm

ras4250 wrote:
Sat Dec 08, 2018 12:40 pm
Sorry don't want to. I am being purposely vague and I understand why it doesn't make sense, but it does.
Except it makes it virtually impossible to really help you with options

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 1:16 pm

Bacchus01 wrote:
Sat Dec 08, 2018 12:47 pm
ras4250 wrote:
Sat Dec 08, 2018 12:40 pm
Sorry don't want to. I am being purposely vague and I understand why it doesn't make sense, but it does.
Except it makes it virtually impossible to really help you with options
So this is not the only retirement assets. There are another $2m+. This specific pot of $600k is meant to be used as income over the next 10 years. So any worry or concern about lowering expenses or money running out or other assets (is a smart point to make, and appreciated) but not relevant for this question. I am looking for best way to maximize using $600k as salary/income over next 10 years. Ideally it would be nice to have something left over, but not going to take a lot of risk to make that happen. I.e., taking the annuity and guaranteed payments of $70k for 10 years will leave it with $0. But that is a small return of 2.91% and so is there a better option to consider?

Bacchus01
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Re: options to cover next 10 years before SS

Post by Bacchus01 » Sat Dec 08, 2018 1:58 pm

ras4250 wrote:
Sat Dec 08, 2018 1:16 pm
Bacchus01 wrote:
Sat Dec 08, 2018 12:47 pm
ras4250 wrote:
Sat Dec 08, 2018 12:40 pm
Sorry don't want to. I am being purposely vague and I understand why it doesn't make sense, but it does.
Except it makes it virtually impossible to really help you with options
So this is not the only retirement assets. There are another $2m+. This specific pot of $600k is meant to be used as income over the next 10 years. So any worry or concern about lowering expenses or money running out or other assets (is a smart point to make, and appreciated) but not relevant for this question. I am looking for best way to maximize using $600k as salary/income over next 10 years. Ideally it would be nice to have something left over, but not going to take a lot of risk to make that happen. I.e., taking the annuity and guaranteed payments of $70k for 10 years will leave it with $0. But that is a small return of 2.91% and so is there a better option to consider?
With less risk? Not many. As others have suggested, CD ladders might do better.

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Watty
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Re: options to cover next 10 years before SS

Post by Watty » Sat Dec 08, 2018 2:20 pm

A big problem with the annuity is that it is not adjusted for inflation. The math gets funky but 3% inflation for ten years would be almost a 30% reduction the purchasing power by the tenth year.

It could be that a ladder of TIPs that mature each year would be a better choice. For example she could buy $60,000 in TIPS that mature each year for ten years. This would actually provide a bit more income especially in the early years since the TIPS are yielding almost 1%. By the tenth year there would be little interest income but the $60K, adjusted for inflation, would likely be worth a lot more than a $70K annuity that is not adjusted for inflation.

Be sure to understand the possible tax issues with owning TIPs in a taxable account.

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Watty
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Re: options to cover next 10 years before SS

Post by Watty » Sat Dec 08, 2018 2:26 pm

One more thought, since there is a living husband that works her optimal strategy may be to start her Social Security before 70.

https://opensocialsecurity.com/

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tennisplyr
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Re: options to cover next 10 years before SS

Post by tennisplyr » Sat Dec 08, 2018 2:32 pm

Why not take SS at 62 and let the investments grow. At 70 you're getting paid with inflated dollars and have a looong time to breakeven.
Those who move forward with a happy spirit will find that things always work out.

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 3:11 pm

Watty wrote:
Sat Dec 08, 2018 2:26 pm
One more thought, since there is a living husband that works her optimal strategy may be to start her Social Security before 70.

https://opensocialsecurity.com/
thanks I'll look closer at that.

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 3:11 pm

tennisplyr wrote:
Sat Dec 08, 2018 2:32 pm
Why not take SS at 62 and let the investments grow. At 70 you're getting paid with inflated dollars and have a looong time to breakeven.
thanks. I will take a look.

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 3:12 pm

Watty wrote:
Sat Dec 08, 2018 2:20 pm
A big problem with the annuity is that it is not adjusted for inflation. The math gets funky but 3% inflation for ten years would be almost a 30% reduction the purchasing power by the tenth year.

It could be that a ladder of TIPs that mature each year would be a better choice. For example she could buy $60,000 in TIPS that mature each year for ten years. This would actually provide a bit more income especially in the early years since the TIPS are yielding almost 1%. By the tenth year there would be little interest income but the $60K, adjusted for inflation, would likely be worth a lot more than a $70K annuity that is not adjusted for inflation.

Be sure to understand the possible tax issues with owning TIPs in a taxable account.
This is something I do need to consider. good point. thank you.

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 3:12 pm

thanks to all who commented. I certainly appreciate it.

ras4250
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Re: options to cover next 10 years before SS

Post by ras4250 » Sat Dec 08, 2018 3:15 pm

market timer wrote:
Sat Dec 08, 2018 5:13 am
Given that 5-year Treasuries yield 2.69%, I'm surprised the annuity only yields 2.91%. Would suggest shopping around for a better rate.
I got that from immediateannuities.com. Are there any other places I should look?

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BL
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Re: options to cover next 10 years before SS

Post by BL » Sat Dec 08, 2018 4:08 pm

I suggest looking as SS carefully. Some decisions may depend on the PIA amounts for each. There were changes made a couple of years ago, so be sure to get the latest info. Mike Piper has written an updated book on SS that might be useful. (Take link to Amazon from here.)

Know answer to these details:
Does her spouse have the greater SS PIA? Is it over twice hers?
Is he planning to wait until age 70?
AFAIK:
If he passes, she would get his amount, if greater, and she is FRA (66-67?).
Statistics show wife is expected to live ~3 years longer than male. Any health or genetics to contradict those expectations?
The most important is for higher income spouse to wait until age 70. Less critical for other spouse, who could start as early as age 62. Trade-off: lower ss while spouse is living, but no change for survivor later. Pro: income early on if needed. Maybe higher tax bracket while spouse is working.

SPIAs would pay more if she waited until age 75 or so, and she isn't desperate with that 2M.

I like the combo of Prime Money Market (Vanguard) and a ladder of CDs. Use the CD interest and take the rest from PMM. There may be something left at the end this way.

chipperd
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Re: options to cover next 10 years before SS

Post by chipperd » Sat Dec 08, 2018 6:46 pm

Again
chipperd wrote:
Sat Dec 08, 2018 5:44 am
Using a simple withdrawal calc,if your mom can get 3% return compounded monthly, she will run out about 2/3 of the way through year 9. Using same 3% assumption, she could take out 68k/year and wind up with a few grand at the end of year 10. Hopefully she has other funds after year 10 from another area of her financial life.

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