What is the best strategy to meet income needs until full retirement and beyond?
In January 2019, I will reach my full retirement age of 66 years old. I am single, currently work part time and earn $45,000 per year. I need to supplement my income by $1,500 per month. Would it be better to draw down on a $100,000 IRA account that I own until I begin collecting Social Security in January of next year, or should I turn on an annuity I own which has a $406,000 account value and $549,000 lifetime income basis that will pay me $2,200 per month for life? The annuity has a guaranteed interest rate of 6%, compounded daily. Alternatively, should I consider cashing out the annuity (which is out of a penalty period) and investing in another financial instrument that would better serve my income needs now and in the future?
There are a lot of moving parts to your question. It is hard to give advice without more information. Here are a few things to consider while making your decision (this is by no means an all-encompassing list of what to consider for retirement planning):
- Make sure you take taxes into consideration. You want to look at net numbers and make sure you don't get stuck with unexpected taxes later.
- Is the annuity after tax dollars or was it funded by a retirement account? The distribution is taxed differently based on the answer to that question.
- If the annuity will pay you $2,200 and Social Security will cover your income shortfall, what is the purpose of paying M&E and Rider fees in the annuity? I recommend you research the internal costs of the annuity and find out if it fits your future goals.
I'll be straight with you, the reaosn nobody has answered this question is because what you are asking requires a lot more due diligence to approach. Just giving an answer on here opens any advisor up to liability because this is a much deeper conversation.
If you would like to discuss further, feel free to contact me and I will help the best I can.
I promise you the annuity does not have an interest rate of 6%. When insurance agents quote numbers like that, they're including the return of your own money. It's like a bank offering a CD for 101% because when it gets cashed out 1% is interest and the other 100% is your own money. The 6% could also apply to what they call the "benefit base" which is nothing you can directly access unless you annuitize the contract.
Find a fee-only advisor in your area that acts as a fiducary and can provide you an impartial view of how to best use that annuity.
Let me add to the "hedges" of those who have already replied; i.e. it is difficult to provide you with a solid answer without knowing more details. Consequently, I'll add some general thoughts that I hope will prove to be helpful, starting with a few questions.
First, how did you arrive at the $1500/month figure? At first blush it sounds as though you have some income available to you that does not include your Social Security, annuity or IRA draw-down. If that's the case, then how long will this income last? If it is some sort of a pension, then it would likely last as long as you. If not, then when will it stop being available?
Second, are you open to waiting before you file for Social Security? Which also begs the questions, "How long has your family members lived?" Sorry, but if your parents, grandparents, aunts, and uncles regularly celebrate centennial birthdays then you should consider waiting until your 70 before you file. This will give you about 32% more each month and the higher amount will be used when determining any cost of living adjustments. If you decide to wait before filing, you could fund your shortfall ($1500/month) from either your IRA or your annuity. Keep in mind, however, that if you choose your IRA you won't have much left in the account by the time you are done. In part, then, the issue touches on how much "cash" you need to feel comfortable?
I told you it would be difficult to answer.
With regard to your annuity, once again, my nuanced response is, "it depends." Since you have already paid for it and are past the penalty period, you are right - in my opinion - to consider it as one of the options available to fund your retirement. To be honest, I don't think anyone is qualified to tell you what to do with it without first reading the policy. Only then would I be able to have a discussion that shows you the different impact of 1) turn it on, 2) wait a bit, or 3) cash it out. With that discussion, we would likely land on some different possibilities for you to consider. And more than likely, we would find one that gives you the most comfort/confidence in your new future.
Congrats on your retirement! I personally am not a big fan of annuities at all. I have my insurance license and don't sell them. This is due to the high fees, narrow choices, & limitations they have. Many of the fees are layered or "hidden" within the contract and hard to ferret out easily. But without knowing your other assets, investment strategies especially inside the IRA, type of annuity - indexed, variable, fixed, life expectancy -, whether the annuity is inside an retirement account (IRA) or taxable, your estate wishes & life expectancy, I cannot give you sage advice. All things being equal though, I would lean toward taking the money from the annuity. But do NOT annuitize or "turn it on," simply take a distribution as needed until you decide what you are going to finally do.
BTW, did you know that there are commission free annuities with no surrender penalties with enormous investment choices? They can offer a guaranteed fund, stock funds, bond funds, commodity funds, indexed funds, leveraged index funds both long and short, precious metals funds, and even professionally managed niche funds. They cost .45%/ year for the annuity itself, and then if you want an advisor/money manager to manage, their fee. But no big up front huge commissions and therefore no surrender penalties. You can put the money in one week and take it out the next without any costs or fees. You never hear about these because there are no big commission generated for the sales agent. I still don't recommend these and only occasionally do them when a client has an old annuity with big taxable gains so we do a like-kind exchange to this annuity.
Regarding "turning it on" or annuitizing it, I am REALLY not a big fan. Once you annuitize the lump sum, you are trading an asset (lump sum) for an income stream and it is an irrevocable decision you can never take back, modify, or change. And if you get hit by a bus a few months after annuitization the whole $400k or whatever is left goes to the insurance company. At $406k & taking $2200/mo, that is over 15 years with no growth whatsoever. With any growth, it is considerably longer. That $549k "lifetime income basis" is really a meaningless number to you because that isn't a lump-sum you could ever access but what your "income stream" is based upon unless it is also some type of long-term care rider too. Bottom line is you are giving up $406k for $2200/mo. I believe you will be better off managing yourself or having someone qualified to manage for you who is not a salesperson and has a background in asset management. Thus you could create your own "annuity income stream" and you can change or tweak as needed & coordinate with your other assets & social security. I do believe you will need some type of sell discipline in retirement to manage drawdown risk. For me, it is about strategy not products.
Now if you do decide to annuitize, at least shop the lump-sum around to at least 3 to 4 different carriers letting them know it is a competitive bid so you get the best deal. How do you know $2200/month is all you can get? Maybe another company will offer $2300. Finally, be sure you are comparing apples to apples as insurance companies are great at obfuscating the numbers.
I think this should be enough information for you to research. I wish you the best of luck in your retirement. Dan Stewart CFA®