SPIA for an older retired relative

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uniquehorn
Posts: 4
Joined: Tue Aug 07, 2018 3:39 pm

SPIA for an older retired relative

Post by uniquehorn » Tue Aug 07, 2018 4:23 pm

I am a newbie and a first time poster (and I'm surprisingly nervous).

I have an elderly family member who is retired. She has asked me to help her evaluate her situation because she is concerned that her current assets will not be adequate to see her through retirement.

Assets
~$500k in savings
~$200k split between 401k and investments

Income
$1200/month from social security

Her basic and necessary expenses are ~$30k per annum - although her run rate is significantly higher when travel and shopping are added to the top. She has been receiving divorce settlement payments for the last several years which have covered her expenses; but those payments will cease within the next year.

Given that she is in her mid-70's, and leaving a legacy isn't a priority, would an SPIA be a decent choice for her? What are the drawbacks? I'm in my early 40's and have more runway, so my personal strategy has been pay myself first and stick to a budget (and that's working well). But it seems like it would be hard for her to adequately grow assets without adding a lot of downside risk. Plus she'd be constantly reducing the amount of principal available for generating a return. Am I off base?

rgs92
Posts: 2273
Joined: Mon Mar 02, 2009 8:00 pm

Re: SPIA for an older retired relative

Post by rgs92 » Tue Aug 07, 2018 4:36 pm

Sounds like a great idea. At 75, she would get about $700/month for life per $100,000. Go for it.
So for $350K she gets 3.5 x $700 = $2,450/month before taxes. But her tax bracket will be low, so all is well.
I would use about half her money for this and leave the other half for emergency capital.

ExitStageLeft
Posts: 988
Joined: Sat Jan 20, 2018 4:02 pm

Re: SPIA for an older retired relative

Post by ExitStageLeft » Tue Aug 07, 2018 5:31 pm

As a comparison, if she were to invest her assets in a 50/50 portfolio she could spend about $36k per year. This is based on CFIRESim reporting a 94.5% success rate against historical market returns, using $700k in assets and $14.4k in SS.

ETA: And a 20 year time frame.

mhalley
Posts: 6302
Joined: Tue Nov 20, 2007 6:02 am

Re: SPIA for an older retired relative

Post by mhalley » Tue Aug 07, 2018 5:45 pm

Otar has a section in his book Unveiling The Retirement Myth -
Advanced Retirement Planning Based on Market History
on when and how much to annuitize. PDF is $5.99, well worth the read.
http://www.retirementoptimizer.com/

Gill
Posts: 4818
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: SPIA for an older retired relative

Post by Gill » Tue Aug 07, 2018 5:58 pm

rgs92 wrote:
Tue Aug 07, 2018 4:36 pm
Sounds like a great idea. At 75, she would get about $700/month for life per $100,000. Go for it.
So for $350K she gets 3.5 x $700 = $2,450/month before taxes. But her tax bracket will be low, so all is well.
I would use about half her money for this and leave the other half for emergency capital.
Agree. Seems like the perfect situation for this.
Gill

Dottie57
Posts: 4787
Joined: Thu May 19, 2016 5:43 pm

Re: SPIA for an older retired relative

Post by Dottie57 » Tue Aug 07, 2018 6:37 pm

Gill wrote:
Tue Aug 07, 2018 5:58 pm
rgs92 wrote:
Tue Aug 07, 2018 4:36 pm
Sounds like a great idea. At 75, she would get about $700/month for life per $100,000. Go for it.
So for $350K she gets 3.5 x $700 = $2,450/month before taxes. But her tax bracket will be low, so all is well.
I would use about half her money for this and leave the other half for emergency capital.
Agree. Seems like the perfect situation for this.
Gill
Like the plan a lot.

Chaconne
Posts: 141
Joined: Sat Dec 15, 2007 4:18 pm

Re: SPIA for an older retired relative

Post by Chaconne » Tue Aug 07, 2018 7:14 pm

Uniquehorn, since you're new and may not know much about Bogleheads, I promise you that if you were to propose something unfeasible, impractical or just plain stupid, they would tell you and they would leave no doubt about it. I trust the others to answer your particular question much more than I trust myself.

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GerryL
Posts: 1949
Joined: Fri Sep 20, 2013 11:40 pm

Re: SPIA for an older retired relative

Post by GerryL » Tue Aug 07, 2018 7:41 pm

Uniquehorn,
Two bits of advice to add on: 1) She should shop around as not all SPIAs will be equal. 2) She should develop a budget that includes a line item for those "travel and shopping" expenses, not just the necessities. That way she can know where she stands and can enjoy those things that are important to her.

uniquehorn
Posts: 4
Joined: Tue Aug 07, 2018 3:39 pm

Re: SPIA for an older retired relative

Post by uniquehorn » Thu Aug 09, 2018 9:37 am

rgs92 wrote:
Tue Aug 07, 2018 4:36 pm
Sounds like a great idea. At 75, she would get about $700/month for life per $100,000. Go for it.
So for $350K she gets 3.5 x $700 = $2,450/month before taxes. But her tax bracket will be low, so all is well.
I would use about half her money for this and leave the other half for emergency capital.
I gather that if she is investing "after tax" money such as savings then her payments will be taxed like capital gains. Does anyone have any more clarity about the tax implications of receiving annuity payments?

uniquehorn
Posts: 4
Joined: Tue Aug 07, 2018 3:39 pm

Re: SPIA for an older retired relative

Post by uniquehorn » Thu Aug 09, 2018 9:39 am

mhalley wrote:
Tue Aug 07, 2018 5:45 pm
Otar has a section in his book Unveiling The Retirement Myth -
Advanced Retirement Planning Based on Market History
on when and how much to annuitize. PDF is $5.99, well worth the read.
http://www.retirementoptimizer.com/
Thanks for this. I will certainly look into this before she makes any decisions.

uniquehorn
Posts: 4
Joined: Tue Aug 07, 2018 3:39 pm

Re: SPIA for an older retired relative

Post by uniquehorn » Thu Aug 09, 2018 9:43 am

GerryL wrote:
Tue Aug 07, 2018 7:41 pm
Uniquehorn,
Two bits of advice to add on: 1) She should shop around as not all SPIAs will be equal. 2) She should develop a budget that includes a line item for those "travel and shopping" expenses, not just the necessities. That way she can know where she stands and can enjoy those things that are important to her.
I completely agree. Our deal is that she will develop a budget and I will try to find a solution for how to manage what she has left.

Any suggestions about good places to evaluate SPIAs?

ExitStageLeft
Posts: 988
Joined: Sat Jan 20, 2018 4:02 pm

Re: SPIA for an older retired relative

Post by ExitStageLeft » Thu Aug 09, 2018 2:14 pm

uniquehorn wrote:
Thu Aug 09, 2018 9:37 am
rgs92 wrote:
Tue Aug 07, 2018 4:36 pm
Sounds like a great idea. At 75, she would get about $700/month for life per $100,000. Go for it.
So for $350K she gets 3.5 x $700 = $2,450/month before taxes. But her tax bracket will be low, so all is well.
I would use about half her money for this and leave the other half for emergency capital.
I gather that if she is investing "after tax" money such as savings then her payments will be taxed like capital gains. Does anyone have any more clarity about the tax implications of receiving annuity payments?
The amount paid out above and beyond the premium (amount paid in) is taxed as ordinary income, on an annual basis.

The money you invested in the immediate annuity is returned in equal tax-free installments over the payment period. If you have a life annuity with payouts that will stop when you die, for example, then that payment period is the IRS's life-expectancy number for someone your age. You'll owe taxes only on any portion of each payout beyond the tax-free return of principal.

Say, for example, you invest $100,000 in an immediate annuity and the annual payouts are $8,000. If the IRS considers your life expectancy to be 20 years, divide $100,000 by 20 to determine how much of each payout will be a tax-free return of investment. In this case, $5,000 of each $8,000 payout would be tax-free and $3,000 would be taxed at ordinary income-tax rates.
https://www.kiplinger.com/article/insur ... taxed.html

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