SPIA and Deferred Annuity questions

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Topic Author
Lyra
Posts: 57
Joined: Mon Jan 22, 2018 8:56 pm

SPIA and Deferred Annuity questions

Post by Lyra »

I'm 67 and retired, and married. I have a pension and SS, and a disability pension. In 2.5 yrs my disability pension stops- so a $4000 a month decrease in income. I would like a solid floor & upside plan. (I don't like the bucket system). I would buy a 120k annuity now and consider another in the future. The reasons I'm considering an annuity are;
1-to remove some money from the market to mitigate SOR risk (this is a big worry for me)
2-to know with clarity how much money I can safely spend each month-bc I would spend less if just taking from investments
3-to not have to watch the market/manage a bucket system later in life when it will be much harder.
4- Interest rates are high right now so annuity payouts are higher.

I'm constrained-I have enough but not a lot extra. (550k in investments, 100k savings, and 2 rental properties). I'm almost ready to pull the trigger on an annuity, but have some concerns. My Fidelity "Advisor" (I don't have 500k in Fidelity so not sure how this woman is still helping me) is suggesting a deferred annuity since I don't need the money for 2.5 years. My most pressing question is; Are deferred annuities more complicated with more "gotchas" to understand? (I would get Fidelity or NY Life). The payout is higher, and that is tempting, but I'm hesitant because I don't know how complicated they are. But an SPIA would start paying within a year and I don't need the money yet.

Second, for a SPIA, I'd be taxed on the whole annuity payments after I reach my "life expectancy", age 86, even if bought with after tax funds. This would be the about the worst time to get hit with taxes- after inflation has already taken from the value of the annuity payments. If markets did poorly I might be in a bad position.
Third, does the income of a SPIA or deferred affect my income taxes, taxation of SS, MAGI, etc. Is it counted as income if purchased with after tax funds? What impacts are likely?

Any thoughts on this? Thanks in advance, there are a lot of questions here.
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nedsaid
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Re: SPIA and Deferred Annuity questions

Post by nedsaid »

Single Premium Immediate Annuities are a good product and I have considered buying one upon retirement so that I would have more guaranteed income each month and to reduce withdrawals from the remaining nest egg. There is a trade-off, an annuity give you a higher effective withdrawal rate than you would have from a portfolio, something like 6% to 7%
compared to 3% to 4% from a portfolio. You get the higher effective withdrawal rate because of mortality credits, in other words you receive a higher payout because of the people who die early. The trade-off, of course is that you have to hand a chunk of money over to an insurance company.

Another issue is that inflation will eat away at the purchasing power of the annuity payments, so I would select a 2% or 3% annual increase in payments. Over long periods of time, US inflation runs 2.5% to 3.0% a year. The trade-off is that your initial payments would be lower in the beginning compared to not taking an annual increase.

You can buy these with a period certain, where you or your beneficiaries are guaranteed payments for a fixed amount of time even if you die early. Another possible solution is a return of premium option if you die early, the beneficiaries would receive your premium minus any payments you received before death. Of course these options will reduce your monthly pay-out.

You can get quotes from websites like immediateannuity.com and Blue Print Income. I would look around before contacting an agent. Problem is, insurance agents don't like to sell these.

A deferred annuity is an option as well. When I met with a Fidelity Advisor a few years ago, we had a discussion about these. These are called MYGAs which stands for Multi-Year Guaranteed Annuities. Stinky has a nice thread where he
discusses these in depth. You can purchase these to defer income for a period of time and then start receiving monthly payments at a later date, be certain to check for a return of premium option as your premature death could surrender the entire amount to the insurance company.

I am not too excited about Single Premium Immediate Annuities right now because we have been experiencing higher levels of inflation in the aftermath of Covid. Inflation can eat away at your purchasing power pretty quickly.
A fool and his money are good for business.
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Stinky
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Re: SPIA and Deferred Annuity questions

Post by Stinky »

Lyra wrote: Sat Nov 18, 2023 9:35 am I'm 67 and retired, and married. I have a pension and SS, and a disability pension. In 2.5 yrs my disability pension stops- so a $4000 a month decrease in income. I would like a solid floor & upside plan. (I don't like the bucket system). I would buy a 120k annuity now and consider another in the future. The reasons I'm considering an annuity are;
1-to remove some money from the market to mitigate SOR risk (this is a big worry for me)
2-to know with clarity how much money I can safely spend each month-bc I would spend less if just taking from investments
3-to not have to watch the market/manage a bucket system later in life when it will be much harder.
4- Interest rates are high right now so annuity payouts are higher.

I'm constrained-I have enough but not a lot extra. (550k in investments, 100k savings, and 2 rental properties). I'm almost ready to pull the trigger on an annuity, but have some concerns. My Fidelity "Advisor" (I don't have 500k in Fidelity so not sure how this woman is still helping me) is suggesting a deferred annuity since I don't need the money for 2.5 years. My most pressing question is; Are deferred annuities more complicated with more "gotchas" to understand? (I would get Fidelity or NY Life). The payout is higher, and that is tempting, but I'm hesitant because I don't know how complicated they are. But an SPIA would start paying within a year and I don't need the money yet.

Second, for a SPIA, I'd be taxed on the whole annuity payments after I reach my "life expectancy", age 86, even if bought with after tax funds. This would be the about the worst time to get hit with taxes- after inflation has already taken from the value of the annuity payments. If markets did poorly I might be in a bad position.
Third, does the income of a SPIA or deferred affect my income taxes, taxation of SS, MAGI, etc. Is it counted as income if purchased with after tax funds? What impacts are likely?

Any thoughts on this? Thanks in advance, there are a lot of questions here.
So, it sounds like your current thoughts are to buy a deferred annuity, since you don’t need SPIA income for a couple of years. Your advisor suggested two companies - NYL and Fidelity. Both of those are fine companies with great products, but there’s a big difference between the products that you’re likely being pitched.
—— The NYL product is almost certainly a multi year giaranteed annuity, or MYGA. The current rate for a 3 year MYGA with $120k of premium is declining to 4.75% next week. That rate is guaranteed for the full three years. Realize that you have limited liquidity during the 3 year term, with surrender charges and market value adjustments for withdrawals in excess of the free partial withdrawals. Here’s a link to the product from the Blueprint Income site (I hope):
https://www.blueprintincome.com/fixed-a ... 0&state=AL

—- The Fidelity product is almost certainly a low cost variable annuity. You’ll have a choice of investment options - primarily equity and bond mutual funds. Here’s a link to the Fidelity product site:
https://www.fidelity.com/annuities/FPRA ... y/overview

You could park your money in either of these for the next 3 years. You’ll be guaranteed a return with NYL, while you’ll have equity/bond market volatility with Fidelity. Your call.

In three years, you can decide if you still want a SPIA. You say that you’re on disability - if your disability is one that is expected to shorten your life, then you’re likely not an ideal candidate for a SPIA.

A portion of each payment from a SPIA purchased with taxable money is counted as ordinary income, and is reported to you each year on a 1099.

Post back with questions. You probably have some.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
Lyra
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Joined: Mon Jan 22, 2018 8:56 pm

Re: SPIA and Deferred Annuity questions

Post by Lyra »

Thanks for these replies....I didn't think about getting a MYGA, but that is a great idea. It could give me a runway for a few years to decide. But if it's only paying 4.75 I might be better off with CDs that are paying a bit more than 5%-and accomplishing about the same thing in the end (mitigate SOR risk, etc)

Do you think that Deferred Annuities have a lot more issues than SPIAs?
TravelforFun
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Re: SPIA and Deferred Annuity questions

Post by TravelforFun »

Lyra wrote: Sat Nov 18, 2023 9:35 am I'm 67 and retired, and married. I have a pension and SS, and a disability pension. In 2.5 yrs my disability pension stops- so a $4000 a month decrease in income. I would like a solid floor & upside plan. (I don't like the bucket system). I would buy a 120k annuity now and consider another in the future. The reasons I'm considering an annuity are;
1-to remove some money from the market to mitigate SOR risk (this is a big worry for me)
2-to know with clarity how much money I can safely spend each month-bc I would spend less if just taking from investments
3-to not have to watch the market/manage a bucket system later in life when it will be much harder.
4- Interest rates are high right now so annuity payouts are higher.

I'm constrained-I have enough but not a lot extra. (550k in investments, 100k savings, and 2 rental properties). I'm almost ready to pull the trigger on an annuity, but have some concerns. My Fidelity "Advisor" (I don't have 500k in Fidelity so not sure how this woman is still helping me) is suggesting a deferred annuity since I don't need the money for 2.5 years. My most pressing question is; Are deferred annuities more complicated with more "gotchas" to understand? (I would get Fidelity or NY Life). The payout is higher, and that is tempting, but I'm hesitant because I don't know how complicated they are. But an SPIA would start paying within a year and I don't need the money yet.

Second, for a SPIA, I'd be taxed on the whole annuity payments after I reach my "life expectancy", age 86, even if bought with after tax funds. This would be the about the worst time to get hit with taxes- after inflation has already taken from the value of the annuity payments. If markets did poorly I might be in a bad position.
Third, does the income of a SPIA or deferred affect my income taxes, taxation of SS, MAGI, etc. Is it counted as income if purchased with after tax funds? What impacts are likely?

Any thoughts on this? Thanks in advance, there are a lot of questions here.
I purchased a SPIA four years ago also at age 67 from New York Life for the same reasons you enumerated in 1-3. The SPIA I got is joint life (it pays until both spouses pass), cash return (it would return the unpaid portion if we pass too early), and has a flat 2% annual increase. Riders like these lower the initial payment but we're comfortable with it. The amount we receive this year will be about 6% of the premium we paid which is higher than the 4% or SWR. The payout rate for future years will be even higher.

I hope one of us lives as long as Taylor Larymore who bought SPIA(s) and is now in his mid 90s.

TravelforFun
rich126
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Re: SPIA and Deferred Annuity questions

Post by rich126 »

I'm wondering for those that have purchased an annuity and maybe of use to the OP, if you put in a good chunk of money, say $500K, would you put it in one annuity or spread the risk over 2 annuities?

I would at least want a top rate company but even then, if I'm doing something to minimize risk, I'd think you'd want at least 2 insurance companies involved. Most state insurance tops out around $250K so that would be another reason I'd want to spread the risks.
----------------------------- | If you think something is important and it doesn't involve the health of someone, think again. Life goes too fast, enjoy it and be nice.
Topic Author
Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

Do you find it easier to spend money knowing another annuity check is coming? I know for myself I'd hesitate to spend if using SWR and the market was down. I'd be living a "we better not do that" life.
Topic Author
Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

rich126 wrote: Sat Nov 18, 2023 6:47 pm I'm wondering for those that have purchased an annuity and maybe of use to the OP, if you put in a good chunk of money, say $500K, would you put it in one annuity or spread the risk over 2 annuities?

I would at least want a top rate company but even then, if I'm doing something to minimize risk, I'd think you'd want at least 2 insurance companies involved. Most state insurance tops out around $250K so that would be another reason I'd want to spread the risks.
I also plan to do this...even tho I'm not buying 500k worth of annuities.
Rex66
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Re: SPIA and Deferred Annuity questions

Post by Rex66 »

Lyra wrote: Sat Nov 18, 2023 6:51 pm Do you find it easier to spend money knowing another annuity check is coming? I know for myself I'd hesitate to spend if using SWR and the market was down. I'd be living a "we better not do that" life.
A lot of that depends on inflation

My parents rely heavily on SS, pension, annuity. They weren’t so happy when inflation spiked especially when there felt there wasn’t an end of high inflation on the horizon.

Regardless of spia or deferred fixed with annuitization or variable/index with either income rider or annuitization, I’d only concentrate on what is actually guaranteed as income and not just illustrated in your situation. The agent can provide illustrations showing what is guaranteed.
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Stinky
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Re: SPIA and Deferred Annuity questions

Post by Stinky »

Lyra wrote: Sat Nov 18, 2023 6:03 pm Thanks for these replies....I didn't think about getting a MYGA, but that is a great idea. It could give me a runway for a few years to decide. But if it's only paying 4.75 I might be better off with CDs that are paying a bit more than 5%-and accomplishing about the same thing in the end (mitigate SOR risk, etc)

Do you think that Deferred Annuities have a lot more issues than SPIAs?
The New York Life 3 year MYGA pays 4.75%. NYL is an absolute top rated company.

You can get a higher rate. Look at blueprintincome.com. The highest rate on a 3 year MYGA for $120k premium is 5.90% for an A- rated company, 5.75% for A rated, and 5.50% for A+ rated.

MYGAs and SPIAs are entirely different products. MYGAs are analogous to a CD, with a fixed rate of interest for a fixed term, and the availability of return of the accumulated amount at the end of the term. Meanwhile. SPIAs typically pay out monthly while the annuitant is alive.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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nedsaid
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Re: SPIA and Deferred Annuity questions

Post by nedsaid »

Actually, it was Larry Swedroe who introduced me to MYGA's. He said the main drawback to them was the volume of paperwork that a client had to fill out during the purchase process. There is a lot of disclosure with these. Their interest rates are very competitive and back in the days not so long ago of very low interest rates, their yields looked pretty juicy in comparison to other fixed income products.

The Fidelity Advisor that I met with a few years ago introduced me to the Deferred Income Annuity. Essentially it is like buying a pension in advance, in my case I would have collected interest within the annuity for a few years before turning into monthly payments. Again, if you buy one of these, buy a return of premium rider. If you die before the monthly payments start, the insurance company keeps everything. It would be like being vested in a pension but never collecting on it.

For the record, I didn't buy either an MYGA or a Deferred Income Annuity. I do own the low-cost Variable Annuity product from Fidelity, it is invested in a Taylor Larimore 3 Fund Portfolio in the three index funds that are available.

Probably the most important thing I learned in all this research is that MYGA is not a Village People song. :wink: My lyrics now are now out of date as interest rates have gone up a lot since then.
nedsaid wrote: ↑Sun Feb 07, 2021 7:16 pm
Investor, there's no need to feel down.
Investor, pick yourself off the ground,
Investor, don't let low rates get you down,
There's no need to be unhappy.

Investor, there's a place you can go
When you make nothing on your dough
You can stay there, and I'm sure you will find
Many ways to have a good time

It's fun to stay at the M-Y-G-A
It's fun to stay at the M-Y-G-A
A fool and his money are good for business.
Topic Author
Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

Rex66 wrote: Sat Nov 18, 2023 7:28 pm
Lyra wrote: Sat Nov 18, 2023 6:51 pm Do you find it easier to spend money knowing another annuity check is coming? I know for myself I'd hesitate to spend if using SWR and the market was down. I'd be living a "we better not do that" life.
A lot of that depends on inflation

My parents rely heavily on SS, pension, annuity. They weren’t so happy when inflation spiked especially when there felt there wasn’t an end of high inflation on the horizon.

Regardless of spia or deferred fixed with annuitization or variable/index with either income rider or annuitization, I’d only concentrate on what is actually guaranteed as income and not just illustrated in your situation. The agent can provide illustrations showing what is guaranteed.
When you say just illustrated, does that mean to take into account taxes etc, or that the agents will estimate higher than I will actually receive?
Topic Author
Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

nedsaid wrote: Sat Nov 18, 2023 9:51 pm Actually, it was Larry Swedroe who introduced me to MYGA's. He said the main drawback to them was the volume of paperwork that a client had to fill out during the purchase process. There is a lot of disclosure with these. Their interest rates are very competitive and back in the days not so long ago of very low interest rates, their yields looked pretty juicy in comparison to other fixed income products.

The Fidelity Advisor that I met with a few years ago introduced me to the Deferred Income Annuity. Essentially it is like buying a pension in advance, in my case I would have collected interest within the annuity for a few years before turning into monthly payments. Again, if you buy one of these, buy a return of premium rider. If you die before the monthly payments start, the insurance company keeps everything. It would be like being vested in a pension but never collecting on it.

For the record, I didn't buy either an MYGA or a Deferred Income Annuity. I do own the low-cost Variable Annuity product from Fidelity, it is invested in a Taylor Larimore 3 Fund Portfolio in the three index funds that are available.

Probably the most important thing I learned in all this research is that MYGA is not a Village People song. :wink: My lyrics now are now out of date as interest rates have gone up a lot since then.
nedsaid wrote: ↑Sun Feb 07, 2021 7:16 pm
Investor, there's no need to feel down.
Investor, pick yourself off the ground,
Investor, don't let low rates get you down,
There's no need to be unhappy.

Investor, there's a place you can go
When you make nothing on your dough
You can stay there, and I'm sure you will find
Many ways to have a good time

It's fun to stay at the M-Y-G-A
It's fun to stay at the M-Y-G-A
Great lyrics and I'm old enough to remember that song (which will now be stuck in my head all day). I see that a lot of the annuities (at least the SPIA) do offer continued payments for 10 or 20 yrs to the beneficiaries. This is important to me-and being old enough to know your song- a 20 year continuance of payments will probably come in handy to them. I haven't looked into the Variable because I so want to simplify my mess of investments and have clarity around my money later in life.
Topic Author
Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

Stinky wrote: Sat Nov 18, 2023 8:23 pm
Lyra wrote: Sat Nov 18, 2023 6:03 pm Thanks for these replies....I didn't think about getting a MYGA, but that is a great idea. It could give me a runway for a few years to decide. But if it's only paying 4.75 I might be better off with CDs that are paying a bit more than 5%-and accomplishing about the same thing in the end (mitigate SOR risk, etc)

Do you think that Deferred Annuities have a lot more issues than SPIAs?
The New York Life 3 year MYGA pays 4.75%. NYL is an absolute top rated company.

You can get a higher rate. Look at blueprintincome.com. The highest rate on a 3 year MYGA for $120k premium is 5.90% for an A- rated company, 5.75% for A rated, and 5.50% for A+ rated.

MYGAs and SPIAs are entirely different products. MYGAs are analogous to a CD, with a fixed rate of interest for a fixed term, and the availability of return of the accumulated amount at the end of the term. Meanwhile. SPIAs typically pay out monthly while the annuitant is alive.
Thanks for the updates on % rates. Getting 5.90% for a few years would be great and solve the SOR risk-I could move into SPIA in a few years I guess. I have my heart set on NY Life because I do think it's an excellent company (there are a few others I trust too). I use the Charles Schwab annuity calc but will take a look at Blueprint. Thanks for the advice.
dcabler
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Re: SPIA and Deferred Annuity questions

Post by dcabler »

nedsaid wrote: Sat Nov 18, 2023 10:23 am Single Premium Immediate Annuities are a good product and I have considered buying one upon retirement so that I would have more guaranteed income each month and to reduce withdrawals from the remaining nest egg. There is a trade-off, an annuity give you a higher effective withdrawal rate than you would have from a portfolio, something like 6% to 7%
compared to 3% to 4% from a portfolio. You get the higher effective withdrawal rate because of mortality credits, in other words you receive a higher payout because of the people who die early. The trade-off, of course is that you have to hand a chunk of money over to an insurance company.

Another issue is that inflation will eat away at the purchasing power of the annuity payments, so I would select a 2% or 3% annual increase in payments. Over long periods of time, US inflation runs 2.5% to 3.0% a year. The trade-off is that your initial payments would be lower in the beginning compared to not taking an annual increase.

You can buy these with a period certain, where you or your beneficiaries are guaranteed payments for a fixed amount of time even if you die early. Another possible solution is a return of premium option if you die early, the beneficiaries would receive your premium minus any payments you received before death. Of course these options will reduce your monthly pay-out.

You can get quotes from websites like immediateannuity.com and Blue Print Income. I would look around before contacting an agent. Problem is, insurance agents don't like to sell these.

A deferred annuity is an option as well. When I met with a Fidelity Advisor a few years ago, we had a discussion about these. These are called MYGAs which stands for Multi-Year Guaranteed Annuities. Stinky has a nice thread where he
discusses these in depth. You can purchase these to defer income for a period of time and then start receiving monthly payments at a later date, be certain to check for a return of premium option as your premature death could surrender the entire amount to the insurance company.

I am not too excited about Single Premium Immediate Annuities right now because we have been experiencing higher levels of inflation in the aftermath of Covid. Inflation can eat away at your purchasing power pretty quickly.
More than one person has suggested that if you're able to live with the payout reduction of a 2% or 3% annual increase, then why not go with a SPIA without the increase and take the difference and invest that in TIPS. It's not the same as what the old CPI-adjusted SPIAs would do, but it can reduce the effects of inflation, at least for a while. Though it does require some work...

Cheers.
snic
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Re: SPIA and Deferred Annuity questions

Post by snic »

Lyra wrote: Sun Nov 19, 2023 6:53 am
Stinky wrote: Sat Nov 18, 2023 8:23 pm
Lyra wrote: Sat Nov 18, 2023 6:03 pm Thanks for these replies....I didn't think about getting a MYGA, but that is a great idea. It could give me a runway for a few years to decide. But if it's only paying 4.75 I might be better off with CDs that are paying a bit more than 5%-and accomplishing about the same thing in the end (mitigate SOR risk, etc)

Do you think that Deferred Annuities have a lot more issues than SPIAs?
The New York Life 3 year MYGA pays 4.75%. NYL is an absolute top rated company.

You can get a higher rate. Look at blueprintincome.com. The highest rate on a 3 year MYGA for $120k premium is 5.90% for an A- rated company, 5.75% for A rated, and 5.50% for A+ rated.

MYGAs and SPIAs are entirely different products. MYGAs are analogous to a CD, with a fixed rate of interest for a fixed term, and the availability of return of the accumulated amount at the end of the term. Meanwhile. SPIAs typically pay out monthly while the annuitant is alive.
Thanks for the updates on % rates. Getting 5.90% for a few years would be great and solve the SOR risk-I could move into SPIA in a few years I guess. I have my heart set on NY Life because I do think it's an excellent company (there are a few others I trust too). I use the Charles Schwab annuity calc but will take a look at Blueprint. Thanks for the advice.
I might be wrong about this, but the annuity experts here will know: At the end if its term, I think you can transfer a MYGA to a SPIA or another MYGA without having to pay taxes on the income. So you can defer taxes until the point at which you want to annuitize (i.e., start receiving annuity income). That's one advantage of a MYGA vs just buying a CD with a similar term. The other advantage is that the MYGA interest rate can be higher. But that's coupled with the disadvantage, which is that MYGAs are not federally insured - and as Stinky pointed out, the higher the rate, the lower the rating.
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Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

So the CD tax would be due when I cash them in? And the MYGA I can "rollover" and defer taxes within an annuity? The thing about the SPIA that scares me is the taxes become due later in life when you can ill afford it-when inflation has already taken a toll on your fixed income.
I'm hoping my investments will offset these two issues, but with a bad market I just don't know ..
Rex66
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Re: SPIA and Deferred Annuity questions

Post by Rex66 »

Lyra wrote: Sun Nov 19, 2023 6:44 am
Rex66 wrote: Sat Nov 18, 2023 7:28 pm
Lyra wrote: Sat Nov 18, 2023 6:51 pm Do you find it easier to spend money knowing another annuity check is coming? I know for myself I'd hesitate to spend if using SWR and the market was down. I'd be living a "we better not do that" life.
A lot of that depends on inflation

My parents rely heavily on SS, pension, annuity. They weren’t so happy when inflation spiked especially when there felt there wasn’t an end of high inflation on the horizon.

Regardless of spia or deferred fixed with annuitization or variable/index with either income rider or annuitization, I’d only concentrate on what is actually guaranteed as income and not just illustrated in your situation. The agent can provide illustrations showing what is guaranteed.
When you say just illustrated, does that mean to take into account taxes etc, or that the agents will estimate higher than I will actually receive?
Illustrated is a non guaranteed estimate

As a general rule insurance companies do not give out “tax advice”.
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Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

Ok thank you....
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Stinky
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Re: SPIA and Deferred Annuity questions

Post by Stinky »

Lyra wrote: Sun Nov 19, 2023 8:06 am So the CD tax would be due when I cash them in? And the MYGA I can "rollover" and defer taxes within an annuity? The thing about the SPIA that scares me is the taxes become due later in life when you can ill afford it-when inflation has already taken a toll on your fixed income.

I'm hoping my investments will offset these two issues, but with a bad market I just don't know ..
My understanding is that taxable income on longer term CDs is reported every year. It is reported whether the CD holder receives the interest or it is left to compound in the CD.

Annuities work differently. No taxable income is reported until a withdrawal is made.

Applying this to MYGAs - at the end of a fixed term, the annuitant could receive the accumulated proceeds, and taxable income would be reported for all earnings on the MYGA.

Alternatively, a taxable annuity can be 1035 exchanged into another MYGA, and reporting of taxable income can be further deferred. A taxable annuity can also be exchanged into a SPIA, and income will be reported over the lifetime of the SPIA.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
snic
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Re: SPIA and Deferred Annuity questions

Post by snic »

Lyra wrote: Sun Nov 19, 2023 8:06 am So the CD tax would be due when I cash them in? And the MYGA I can "rollover" and defer taxes within an annuity? The thing about the SPIA that scares me is the taxes become due later in life when you can ill afford it-when inflation has already taken a toll on your fixed income.
I'm hoping my investments will offset these two issues, but with a bad market I just don't know ..
Don't you pay taxes throughout the period of time that you receive annuity payments? Part of each payment would be taxable and part would be return of principal and therefore not taxable. I guess you mean that after you reach your life expectancy on the date you annuitized, the entire amount of all subsequent payments are taxable (because the principal was returned to you in its entirety through all the previous annuity payments)?

The increased tax hit is not the only thing to worry about. I'd also be worried about inflation. A $2000/month annuity payment might meet your needs perfectly well now, but in 30 years the purchasing power of $2000 might be half as much. You can buy annuities that include an annual increase to your annuity payment, but then the starting amount is much less. So that makes the "longevity insurance" offered by SPIAs quite expensive.

EDITED TO ADD: Re-reading your first post, I see that you did mean the bolded part.

I was also struck by the fact that you have a pension, SS AND two rentals. I don't know how much those are relative to your expenses, but you do have several reliable sources of income, some or all of which come with a degree of inflation protection. Do you really need to add yet another in the form of an annuity? Do the existing income sources not provide enough "hedge" against SOR risk?
TravelforFun
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Re: SPIA and Deferred Annuity questions

Post by TravelforFun »

Lyra wrote: Sat Nov 18, 2023 6:53 pm
rich126 wrote: Sat Nov 18, 2023 6:47 pm I'm wondering for those that have purchased an annuity and maybe of use to the OP, if you put in a good chunk of money, say $500K, would you put it in one annuity or spread the risk over 2 annuities?

I would at least want a top rate company but even then, if I'm doing something to minimize risk, I'd think you'd want at least 2 insurance companies involved. Most state insurance tops out around $250K so that would be another reason I'd want to spread the risks.
I also plan to do this...even tho I'm not buying 500k worth of annuities.
Don't buy more than the limit up to which your state can protect you. In TX, it's $250K.

TravelforFun
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Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

snic wrote: Sun Nov 19, 2023 4:45 pm
Lyra wrote: Sun Nov 19, 2023 8:06 am So the CD tax would be due when I cash them in? And the MYGA I can "rollover" and defer taxes within an annuity? The thing about the SPIA that scares me is the taxes become due later in life when you can ill afford it-when inflation has already taken a toll on your fixed income.
I'm hoping my investments will offset these two issues, but with a bad market I just don't know ..
Don't you pay taxes throughout the period of time that you receive annuity payments? Part of each payment would be taxable and part would be return of principal and therefore not taxable. I guess you mean that after you reach your life expectancy on the date you annuitized, the entire amount of all subsequent payments are taxable (because the principal was returned to you in its entirety through all the previous annuity payments)?

I think that's true if it's qualified (purchased with tax deferred money) If purchased with brokerage or savings then you get tax free payments until you reach life expectancy and then you get hit with taxes....at a time when inflation has already taken a toll.


The increased tax hit is not the only thing to worry about. I'd also be worried about inflation. A $2000/month annuity payment might meet your needs perfectly well now, but in 30 years the purchasing power of $2000 might be half as much. You can buy annuities that include an annual increase to your annuity payment, but then the starting amount is much less. So that makes the "longevity insurance" offered by SPIAs quite expensive.
Yes, this is a big concern for me. I will be investing the balance and hopefully it grows to counter inflation-and ideally I have more dependable income to spend while still able to enjoy it. Anyway that's my hope.

EDITED TO ADD: Re-reading your first post, I see that you did mean the bolded part.

I was also struck by the fact that you have a pension, SS AND two rentals. I don't know how much those are relative to your expenses, but you do have several reliable sources of income, some or all of which come with a degree of inflation protection. Do you really need to add yet another in the form of an annuity? Do the existing income sources not provide enough "hedge" against SOR risk?
All great questions...I'm hoping to be done with one of the rentals soon because it's getting to be too much to manage (I spend way too much time with repairs, etc.) It's true the other rental, SS and the pension are all a hedge against inflation. I was more worried about a big market downturn 2.5 yrs before I lose the $4000/month-and then needing to take from investments. That said, I will review your question more carefully and see if it's enough of a hedge against SOR, which it might be. The other reason for the annuity is that I don't want to watch the market, and stress over corrections. I want to simplify. But you might be right-maybe I don't need to do it. Thanks for your input!
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

I have no idea how to post a reply to a specific person without including all previous text. I'm sorry if my responses seem erratic.
I appreciate all the input from all of you-as always the Bogleheads are a helpful and generous group.
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Re: SPIA and Deferred Annuity questions

Post by Stinky »

Lyra wrote: Sun Nov 19, 2023 7:39 pm I have no idea how to post a reply to a specific person without including all previous text. I'm sorry if my responses seem erratic.
I appreciate all the input from all of you-as always the Bogleheads are a helpful and generous group.
To reply to a specific post, click on the "quote" marks, as you've done. That pulls up all of the text that you are quoting.

Then, you can delete any or all of the quoted text, as you desire. If you delete anything, just don't delete the two machine-generated things in brackets that start with "quote" and "/quote" - those are the things that tell the website that your post is pulling in a quote from elsewhere.

Please let us know if you have any remaining questions.

Best to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: SPIA and Deferred Annuity questions

Post by snic »

Lyra wrote: Sun Nov 19, 2023 7:36 pm
snic wrote: Sun Nov 19, 2023 4:45 pm
I was also struck by the fact that you have a pension, SS AND two rentals. I don't know how much those are relative to your expenses, but you do have several reliable sources of income, some or all of which come with a degree of inflation protection. Do you really need to add yet another in the form of an annuity? Do the existing income sources not provide enough "hedge" against SOR risk?
All great questions...I'm hoping to be done with one of the rentals soon because it's getting to be too much to manage (I spend way too much time with repairs, etc.) It's true the other rental, SS and the pension are all a hedge against inflation. I was more worried about a big market downturn 2.5 yrs before I lose the $4000/month-and then needing to take from investments. That said, I will review your question more carefully and see if it's enough of a hedge against SOR, which it might be. The other reason for the annuity is that I don't want to watch the market, and stress over corrections. I want to simplify. But you might be right-maybe I don't need to do it. Thanks for your input!
(Putting the selective delete method to work... :wink: )

Re the rental you want to get rid of, one thing to think about is whether handing it over to a property management company might make sense. They do charge about 10% of the gross rent, and you'd have to pay for the labor for repairs that you were doing yourself. I can see how that would then make keeping the rental unprofitable - but maybe not. Depends on your specific numbers. (My elderly mother rented her house out more than 10 years ago when she moved into a senior living community. She's used the same property manager ever since then and it's worked out quite well. The rental income definitely helps, and the house has appreciated considerably so if she lives long enough to need the cash, she can sell it and live off the proceeds for a few years.)
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Lyra
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Re: SPIA and Deferred Annuity questions

Post by Lyra »

snic wrote: Mon Nov 20, 2023 7:47 am
Lyra wrote: Sun Nov 19, 2023 7:36 pm
snic wrote: Sun Nov 19, 2023 4:45 pm
I was also struck by the fact that you have a pension, SS AND two rentals. I don't know how much those are relative to your expenses, but you do have several reliable sources of income, some or all of which come with a degree of inflation protection. Do you really need to add yet another in the form of an annuity? Do the existing income sources not provide enough "hedge" against SOR risk?

(Putting the selective delete method to work... :wink: )

Re the rental you want to get rid of, one thing to think about is whether handing it over to a property management company might make sense. They do charge about 10% of the gross rent, and you'd have to pay for the labor for repairs that you were doing yourself. I can see how that would then make keeping the rental unprofitable - but maybe not. Depends on your specific numbers. (My elderly mother rented her house out more than 10 years ago when she moved into a senior living community. She's used the same property manager ever since then and it's worked out quite well. The rental income definitely helps, and the house has appreciated considerably so if she lives long enough to need the cash, she can sell it and live off the proceeds for a few years.)
That is something we've thought about-and given that my main concern is SOR risk that would make a lot of sense (maybe more so than an annuity). Thanks for bringing it up. I also love this farm and it makes me sad to think about selling it.It's just so much work that I'm not living a life.
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