Helping my mother choose an annuity

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Topic Author
Trillium
Posts: 53
Joined: Wed Feb 28, 2007 9:19 pm

Helping my mother choose an annuity

Post by Trillium » Thu Mar 14, 2019 4:01 pm

I am helping my mother as she figures out what to do with her remaining rollover IRA funds. Currently the funds are invested in what she thinks is a variable annuity (not sure). She's been withdrawing about $10k/year and it has worked out fine, but she is concerned about her investment being sensitive to market fluctuations. She is looking for a solid, reliable income to supplement her Social Security and pension. She is not concerned about leaving an inheritance.

We've been reading about SPIA's in the wiki, and it seems like this could fit the bill. But neither of us has any direct experience with SPIA's and we want to make sure we're asking the right questions.

SS income: About $2k/month.
Pension income: About $2k/month. Not inflation adjusted.
Income drawn from current IRA investment: $900/month.
Goal: Replace the current IRA investment to provide ongoing additional income of about $1k/month with less risk.
Current expenses: about $5k/month. This includes mortgage, condo fees, food, medical and dental, utilities, and optional expenses like travel, theater, and gifts. Of these expenses, the ones that are subject to inflation are condo fees, dental, food, and entertainment.
State: California
Current age: 83. (Looks younger, she hastens to add.) Very healthy.
Current value of IRA funds: $130k.

Our idea is to move $100k of the IRA funds into an SPIA. We have looked on immediateannuities.com and blueprint.com and we are seeing a product at Blueprint that would give her about $1070/month without inflation adjustment, or about $1020/month with a 1% inflation adjustment. The top rate is from a company called Integrity Life. It seems like a pretty big hit for modest inflation protection, and she is inclined to do the basic rate instead. Is this reasonable? I can provide a safety net in case she takes this approach and then inflation goes crazy.

Has anyone ever used Integrity Life and if so, do you have feedback about it? We have looked at ratings and they seem good, but they are not tippy top. (A+ at A.M.Best, AA- at S&P, and Aa3 at Moody's). We aren't sure how far down the rating scales it is acceptable to go.

Is it reasonable to invest all $100k with one company or is it wiser to spread it across two companies?

Our idea is to create a CD ladder with the remaining $30k, which can be used for extra expenses.

Is there anything to be aware of when transferring the funds from the variable annuity (or whatever it is) to the SPIA?

Are there other questions we should be asking? This is a big change, and we don't want to mess it up.

cashmoney
Posts: 225
Joined: Thu Jun 29, 2017 11:15 pm

Re: Helping my mother choose an annuity

Post by cashmoney » Thu Mar 14, 2019 4:16 pm

I wouldn't split it between 2 companies because you are doubling the admin cost.Look in to 1035 exchange if available for this transaction.

Topic Author
Trillium
Posts: 53
Joined: Wed Feb 28, 2007 9:19 pm

Re: Helping my mother choose an annuity

Post by Trillium » Thu Mar 14, 2019 4:19 pm

Thanks, cashmoney. Question, though - since this is IRA money and will remain IRA money, would there be any taxes when moving from one insurance product to another?

grok87
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Re: Helping my mother choose an annuity

Post by grok87 » Thu Mar 14, 2019 5:02 pm

cashmoney wrote:
Thu Mar 14, 2019 4:16 pm
I wouldn't split it between 2 companies because you are doubling the admin cost.Look in to 1035 exchange if available for this transaction.
+1
RIP Mr. Bogle.

Bronco Billy
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Joined: Tue Jan 23, 2018 11:27 pm

Re: Helping my mother choose an annuity

Post by Bronco Billy » Thu Mar 14, 2019 5:52 pm

There are some real experts on here but have you checked with Vanguard about a SPIA? It might make sense to do a 1035 exchange. They claim to be the lowest price and no surrender charges if you leave early. They really push VA but i believe you can also get SPIA from them.
It's a POOR woman that cannot support ONE man.

Dottie57
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Re: Helping my mother choose an annuity

Post by Dottie57 » Thu Mar 14, 2019 5:53 pm

Hopefully someone else will chime in. I think the annuity in an IRA doesn’t count as RMD. IF THAT IS TRUE, there would be RMDs on the 30k in the IRA and CDs would be difficult to take small amounts out of - maybe a momey market for the 30k instead.

P.s. just a thought, If the money was distribured (100k) from mom’s IRA and then purchased outside of IRA, the monthly payout would be mostly tax free. Most of the payout is her mney with just a small amount of returns. (SPIA). Of course tax on the 100k would need to be paid, but if you could help out......

bsteiner
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Location: NYC/NJ/FL

Re: Helping my mother choose an annuity

Post by bsteiner » Thu Mar 14, 2019 6:18 pm

She has a small IRA and $4,000 a month in pension and social security. If she puts more money into an annuity she’ll lose flexibility and control over it.

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Helping my mother choose an annuity

Post by megabad » Thu Mar 14, 2019 6:33 pm

Trillium wrote:
Thu Mar 14, 2019 4:01 pm
Our idea is to move $100k of the IRA funds into an SPIA. We have looked on immediateannuities.com and blueprint.com and we are seeing a product at Blueprint that would give her about $1070/month without inflation adjustment, or about $1020/month with a 1% inflation adjustment. The top rate is from a company called Integrity Life. It seems like a pretty big hit for modest inflation protection, and she is inclined to do the basic rate instead. Is this reasonable? I can provide a safety net in case she takes this approach and then inflation goes crazy.

Has anyone ever used Integrity Life and if so, do you have feedback about it? We have looked at ratings and they seem good, but they are not tippy top. (A+ at A.M.Best, AA- at S&P, and Aa3 at Moody's). We aren't sure how far down the rating scales it is acceptable to go.

Is it reasonable to invest all $100k with one company or is it wiser to spread it across two companies?

Our idea is to create a CD ladder with the remaining $30k, which can be used for extra expenses.

Is there anything to be aware of when transferring the funds from the variable annuity (or whatever it is) to the SPIA?

Are there other questions we should be asking? This is a big change, and we don't want to mess it up.
I do not think a SPIA is good for someone in this situation (majority of assets already annuities), but I will offer my opinions on your questions regardless. This course of action will leave individual more exposed to inflation risk and actuarially guarantee a worse financial outcome for her.

*At 83, I think an insurer rated at A+ is perfectly fine, I wouldn't be inclined to go much lower (especially if you exceed the state protected limit).

*"Inflation protection" as sold by most insurers is near worthless in my opinion at 83. True inflation protection is far more valuable but can only be obtained from 1 or 2 major insurers for a very high cost.

*I don't see a reason to split the purchase and I think you will drop below the minimum for some insurers if you do.

*I don't mind the CD ladder strategy (and would prefer that she do that with the entirety of the money instead of the annuities).

*If you move forward with the annuity, you will likely want to ensure that the SPIA portion of the IRA is separated into an Individual Retirement Annuity. Otherwise, you will have an IRS/RMD nightmare on your hands.

grok87
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Joined: Tue Feb 27, 2007 9:00 pm

Re: Helping my mother choose an annuity

Post by grok87 » Fri Mar 15, 2019 5:05 am

Bronco Billy wrote:
Thu Mar 14, 2019 5:52 pm
There are some real experts on here but have you checked with Vanguard about a SPIA? It might make sense to do a 1035 exchange. They claim to be the lowest price and no surrender charges if you leave early. They really push VA but i believe you can also get SPIA from them.
you can. but they just hook you up with other insurance companies. it is not THROUGH vanguard. also only can use vanguard's service for this till age 85...
RIP Mr. Bogle.

Topic Author
Trillium
Posts: 53
Joined: Wed Feb 28, 2007 9:19 pm

Re: Helping my mother choose an annuity

Post by Trillium » Fri Mar 15, 2019 11:08 am

Thanks to all for helping us think this through. We've realized that we left out of the first post something important about my mother's finances. Sorry about that; I know how annoying it is for information to come out in bits and pieces. My mother owns a condo in a VHCOL area. Current equity is about $600k. While she hopes to remain in her condo for the rest of her life, if she needs to move to assisted living, she has this money to draw on. Does this change the risks of having basically all of her income in SS+Pension+SPIA?

Dottie, thank you for bringing up the RMD situation. From our reading, it looks like you're right and any IRA money used for an annuity would no longer be subject to RMD's. But the remaining IRA funds would be subject to RMD's, and she would have to plan for that. Thanks too for your idea of withdrawing the $100k altogether. We will give it some thought.

Megabad, thank you for your many specific responses. If my mother does go forward with the SPIA, she will be careful to use an Individual Retirement Annuity to avoid IRS complications. We read an article about this at White Coat Investor.

Are there other ideas my mother should be considering? Her goal is to maximize her current income while avoiding market fluctuations, which make her nervous. The idea of putting everything in CD's is nice and safe, but the income would be lower. Part of my mother's IRA withdrawals are used for necessities, though she feels that if she were to tighten her belt she could get by without it. This income is also used to improve her quality of life. She walks everywhere and enjoys theater, taking classes, and trying out new restaurants. She hopes to continue doing all these things as long as possible.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Helping my mother choose an annuity

Post by dbr » Fri Mar 15, 2019 11:37 am

I don't think $130k in the IRA is enough to make much difference how she deploys that money, whether by withdrawals or into an SPIA. I think it would be a very bad idea to cut $130k in discretionary money to only $30k.

Without a doubt the assets in condo not being mentioned makes a big difference in theory. If she intends to stay there indefinitely it doesn't make much difference in practice. When/if the time comes she needs to sell the condo to move to a supported living facility there is a huge insurance policy there. Figuring $5K/mo. for such a facility, she would have enough to support herself for ten years plus the pension and SS.

I guess one thought is that if her income is not quite what she wants, then she is "house poor" meaning her assets are tied up in owning a home while her income is inadequate. I guess theoretically the way to extract that asset for income is to sell and rent. In that case, just winging some numbers, she might withdraw $2500/mo. from the $600,000 invested, rent an apartment for $1500/mo and add $1000/mo to her income. If she needs sometime to go to a supported living facility her usable income would be $2000+$2000+$2500 = $6500. That in today's dollars would be adequate for a pretty nice facility.

Just some thoughts.

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