Covering Mortgage Payment: Annuity vs. 30 Year Treasury

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Topic Author
AllUnderControl
Posts: 4
Joined: Tue May 14, 2024 2:39 pm

Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by AllUnderControl »

Hello all, I am 52 and have about $1.5MM in retirement accounts, roughly allocated 65% stock index funds, 30% bond index funds, and 5% cash. I would like to have an income stream locked in to cover my mortgage (currently at 2.375 with about 27 years remaining). With a 30 year bond yielding 4.63, I'm wondering if I should take maybe $400K of my retirement funds and lock in that rate? Or would an annuity be a better way? I'm not close to voluntarily retiring, but my current job security is up in the air over the next 12-18 months, there are restructurings being considered. I have to assume it could take me quite a while to find a new role, based on my age and industry. Any thoughts or advice?
toddthebod
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Joined: Wed May 18, 2022 12:42 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by toddthebod »

How much is the mortgage? $400k?
bombcar
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Joined: Sun Aug 12, 2007 6:41 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by bombcar »

You want to lock in a guaranteed return to pay off a fixed rate mortgage, and thereby arbitrage between your rate and what you can get.

This is almost a textbook example of where a bond setup can do what you want, but consider this - if you sell the house for whatever reason (especially if you end up moving because of a job change) you may NOT be able to "unlock the money" depending on how you built your mortgage covering device.

If you bought bonds and then sold them in 18 months, they might have gone down (or up) in value. An annuity might not be cancelable.

I would say do NOT setup something to cover the mortgage payments and instead do the math of potential "early retirement" which may not be retiring but may involve working at a lower-paying job you're more interested in.
Topic Author
AllUnderControl
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Joined: Tue May 14, 2024 2:39 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by AllUnderControl »

toddthebod wrote: Tue May 14, 2024 4:23 pm How much is the mortgage? $400k?
Hi, it’s about $300k.
Topic Author
AllUnderControl
Posts: 4
Joined: Tue May 14, 2024 2:39 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by AllUnderControl »

bombcar wrote: Tue May 14, 2024 5:53 pm You want to lock in a guaranteed return to pay off a fixed rate mortgage, and thereby arbitrage between your rate and what you can get.

This is almost a textbook example of where a bond setup can do what you want, but consider this - if you sell the house for whatever reason (especially if you end up moving because of a job change) you may NOT be able to "unlock the money" depending on how you built your mortgage covering device.

If you bought bonds and then sold them in 18 months, they might have gone down (or up) in value. An annuity might not be cancelable.

I would say do NOT setup something to cover the mortgage payments and instead do the math of potential "early retirement" which may not be retiring but may involve working at a lower-paying job you're more interested in.
I appreciate the points you raised, thank you!
samulta52
Posts: 82
Joined: Mon Mar 18, 2024 12:26 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by samulta52 »

Can't you a TIPS ladder where you get something every 1 yr or even every 6 months? Mortgage is like any other expense.
Topic Author
AllUnderControl
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Joined: Tue May 14, 2024 2:39 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by AllUnderControl »

samulta52 wrote: Tue May 14, 2024 7:48 pm Can't you a TIPS ladder where you get something every 1 yr or even every 6 months? Mortgage is like any other expense.
Oh, that’s an interesting idea. I’ll do a little research. Thanks!
LotsaGray
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Joined: Sat Mar 25, 2023 2:08 pm

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by LotsaGray »

The problem I see is that your funds are tax deferred. So you can build a TIPS ladder, buy a 30 yr treasury, whatever to create the cash flow. But you can't use that cash flow to pay the mortgage w/o a tax and penalty problem.
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by babystep »

AllUnderControl wrote: Tue May 14, 2024 2:57 pm Hello all, I am 52 and have about $1.5MM in retirement accounts, roughly allocated 65% stock index funds, 30% bond index funds, and 5% cash. I would like to have an income stream locked in to cover my mortgage (currently at 2.375 with about 27 years remaining). With a 30 year bond yielding 4.63, I'm wondering if I should take maybe $400K of my retirement funds and lock in that rate? Or would an annuity be a better way? I'm not close to voluntarily retiring, but my current job security is up in the air over the next 12-18 months, there are restructurings being considered. I have to assume it could take me quite a while to find a new role, based on my age and industry. Any thoughts or advice?
What do you mean by "I should take maybe $400K of my retirement funds"?
What is distribution of 1.5M across different types of accounts?
How much stocks and bonds you have in the taxable account?
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TheRoundHeadedKid
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Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by TheRoundHeadedKid »

LotsaGray wrote: Wed May 15, 2024 10:21 pm The problem I see is that your funds are tax deferred. So you can build a TIPS ladder, buy a 30 yr treasury, whatever to create the cash flow. But you can't use that cash flow to pay the mortgage w/o a tax and penalty problem.
Ditto.

And I would pay off the mortgage before going into retirement (with nonqualified funds) even with the loan's low interest rate. It is priceless for the peace of mind. My mortgage has been paid off 20 years early.

But that gives me an idea about purchasing an annuity at retirement from a 401k to cover the California property tax of a home. It would be a perpetual life annuity with 2% increase per year which exactly matches the percent California property taxes can increase.
All 86 Vanguard ETFs equally invested.
ScubaHogg
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Re: Covering Mortgage Payment: Annuity vs. 30 Year Treasury

Post by ScubaHogg »

samulta52 wrote: Tue May 14, 2024 7:48 pm Can't you a TIPS ladder where you get something every 1 yr or even every 6 months? Mortgage is like any other expense.
It’s not though because, uniquely, a mortgage is a nominal liability, not a real one

OP, I made a similar suggestion sometime ago. I’m excited to see someone consider it. You can likely “pay off” your mortgage via an annuity for a fair amount less than actually just paying it off

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