OT: How To Maximize Fixed Income as a Retiree

[KK1827]

My mother is approaching retirement and has been asking me how to create a cashflow stream from her savings. She’ll have about $800K along with her full SS benefits.

While I can consult her on a variety of real estate related investments, I’d like to learn more about other fixed income avenues for impending retirees like her and what are the typical returns.

Any help and contributions to the thread are appreciated.

 

[mdk02]

You'll need someone more familiar with annuities than me to analyze that possibility but right you might consider setting up a ladder of short term (2 years and less) treasuries with a part of her funds. You can get a totally safe return of around 5%. That could change as interest rates change. You'll also have to review her cash flow needs and tolerance for risk.

 

[gmay8]

This website has been a savior for me and others... if you asked that question on this message board you should receive a host of great options and ideas:

https://www.bogleheads.org/index.php

 

[fg7321]

Check with Fidelity they have annuities that are totally free of any fees. We got one back in Nov. with a 6.4% payout ratio for our lifetime and if we die before the money we put in gets paid back to us that balance goes to our kids.

We also put some cash into a 3 year annuity that pays out 5.1 % that we can take out 10% of the investment each year. Again no fees.

 

[RU Golfer]

Check with Fidelity they have annuities that are totally free of any fees. We got one back in Nov. with a 6.4% payout ratio for our lifetime and if we die before the money we put in gets paid back to us that balance goes to our kids.

We also put some cash into a 3 year annuity that pays out 5.1 % that we can take out 10% of the investment each year. Again no fees.

I set up an annuity with Fidelity as well. If anything is left over out of the initial investment it will go to my beneficiaries.

 

[RUBigFrank]

Short term money markets and t-bills paying 5-525%

 

[T2Kplus20]

Check with Fidelity they have annuities that are totally free of any fees. We got one back in Nov. with a 6.4% payout ratio for our lifetime and if we die before the money we put in gets paid back to us that balance goes to our kids.

We also put some cash into a 3 year annuity that pays out 5.1 % that we can take out 10% of the investment each year. Again no fees.

Seriously, no fees? The one issue with annuities is the fees and crazy costs you need to deal with. I've been a Fidelity customer for years, but never looked into this topic.

 

[KK1827]

Seriously, no fees? The one issue with annuities is the fees and crazy costs you need to deal with. I've been a Fidelity customer for years, but never looked into this topic.

Just did an annuity estimate with them. Female starting at age 67 and $800K input pays 8.2% annually for life. Sounds attactive but i gotta see if theres a catch. Around $5600/month.

 

[T2Kplus20]

Just did an annuity estimate with them. Female starting at age 67 and $800K input pays 8.2% annually for life. Sounds attactive but i gotta see if theres a catch. Around $5600/month.

That's a healthy monthly payout. Does this include the option for unused money going to her kids/beneficiaries?

 

[KK1827]

That's a healthy monthly payout. Does this include the option for unused money going to her kids/beneficiaries?

It does, yes. It seems like a very good option. https://digital.fidelity.com/prgw/d...PfXioAlHHRlQhQbsxtsaAt_6EALw_wcB&gclsrc=aw.ds

 

[mdk02]

It does, yes. It seems like a very good option. https://digital.fidelity.com/prgw/digital/gie/?imm_pid=700000001009713&immid=100732_SEA&imm_eid=ep11003461017&utm_source=GOOGLE&utm_medium=paid_search&utm_account_id=700000001009713&utm_campaign=FLIA&utm_content=58700001290514326&utm_term=fidelity annuities&utm_campaign_id=100732&utm_id=71700000014708535&gad_source=1&gclid=Cj0KCQjw6auyBhDzARIsALIo6v-lBm0h49_76U_9u7vsyBdqj2T-cNf1zBKuPfXioAlHHRlQhQbsxtsaAt_6EALw_wcB&gclsrc=aw.ds

Sounds good for at least a large part. I'd check to see if you can withdraw some if she runs into a large unexpected expense.

 

[phs73rc77gsm83]

If you buy an annuity, only buy a SPIA (single premium immediate annuity). Variable and insurance based annuities have onerous fees and other bad features. SPIA’s are transparent and competitively priced.

 

[RUBigFrank]

Always be careful with the contingency at death - could be an estate killer

 

[KK1827]

Always be careful with the contingency at death - could be an estate killer

Can you explain what this means

 

[MrsScrew_rivals32693]

I'm taking copious notes here.

 

[Morrischiano2]

My mother is approaching retirement and has been asking me how to create a cashflow stream from her savings. She’ll have about $800K along with her full SS benefits.

While I can consult her on a variety of real estate related investments, I’d like to learn more about other fixed income avenues for impending retirees like her and what are the typical returns.

Any help and contributions to the thread are appreciated.

Paying into an annuity for someone in their early 60’s won’t get you a return much better than building a bond ladder. It’s fairly easy to do on fidelity or Charles Schwab sites. Depending on her age you can do a 2-5-10 yr structure and hold to maturity and get a 5~5.5 percent return. You just need to figure out her cash flow needs over that timeframe and figure out how much to invest at each tranche.

 

[Morrischiano2]

Just did an annuity estimate with them. Female starting at age 67 and $800K input pays 8.2% annually for life. Sounds attactive but i gotta see if theres a catch. Around $5600/month.

Ok I’m surprised it’s that high. There probably isn’t an estate component with that payout. Meaning if she dies at age 70 the estate gets zero. There are annuities that guarantee a minimum payment for 10, 20, 30 years. So if she dies 1 yr into retirement then the estate gets 9 yr of payments (in the first example)

 

[phs73rc77gsm83]

Be aware that Fidelity offers annuities from third party insurance companies, the annuities are not technically Fidelity products. Be sure to read the contract or prospectus. In my view, the only annuities that that are low cost and transparent are SPIAs.

https://www.fidelity.com/annuities/overview

 

[Vlife]

You'll need someone more familiar with annuities than me to analyze that possibility but right you might consider setting up a ladder of short term (2 years and less) treasuries with a part of her funds. You can get a totally safe return of around 5%. That could change as interest rates change. You'll also have to review her cash flow needs and tolerance for risk.

An additional nice feature of Treasury securities is the income is exempt from state & local taxes

 

[hoquat63]

You can also open a treasury direct account and buy bills, notes and bonds directly from the treasury.
Also for tax purposes Vanguard has a NJ bond fund which is tax free. Probably available from other sources too

 

[fg7321]

Seriously, no fees? The one issue with annuities is the fees and crazy costs you need to deal with. I've been a Fidelity customer for years, but never looked into this topic.

Absolutely no fees

 

[KK1827]

Ok I’m surprised it’s that high. There probably isn’t an estate component with that payout. Meaning if she dies at age 70 the estate gets zero. There are annuities that guarantee a minimum payment for 10, 20, 30 years. So if she dies 1 yr into retirement then the estate gets 9 yr of payments (in the first example)

So I looked into it. If a 67 year old woman puts $800K into an annuity the pay out is like $6200/month which is pretty damn good. And if hypothetically that person dies 3 years later, the heirs would get $800K minus 3 years worth of payments which comes to around $575K. Fidelity has their annuity calculator on their site which I linked above.

 

[KK1827]

You can also open a treasury direct account and buy bills, notes and bonds directly from the treasury.
Also for tax purposes Vanguard has a NJ bond fund which is tax free. Probably available from other sources too

Speaking of taxes. If $800K sits in a traditional 401K for the 67 year old and they want to stuff that money into for example a fidelity annuity product, what are the tax implications on that $800K?

 

[RUschool]

So I looked into it. If a 67 year old woman puts $800K into an annuity the pay out is like $6200/month which is pretty damn good. And if hypothetically that person dies 3 years later, the heirs would get $800K minus 3 years worth of payments which comes to around $575K. Fidelity has their annuity calculator on their site which I linked above.

You lose the interest that accrued for the three years?

 

[T2Kplus20]

You lose the interest that accrued for the three years?

My question as well. That 8% interest should be accounted for each year.

 

[Vlife]

You can also open a treasury direct account and buy bills, notes and bonds directly from the treasury.
Also for tax purposes Vanguard has a NJ bond fund which is tax free. Probably available from other sources too

I use my broker to submit noncompetitive auction bids. Treasury Direct is good but a disadvantage is if you ever want to sell before maturity the security has to first be transferred to a brokerage account.

 

[RUschool]

I use my broker to submit noncompetitive auction bids. Treasury Direct is good but a disadvantage is if you ever want to sell before maturity the security has to first be transferred to a brokerage account.

I found this out later and wish I-never brought long term bonds. Most of my other bonds were. the shorter term bonds, under 2 years matured. Not going to buy more bonds and sticking with short term CD or bonds from brokerage.

 

[KK1827]

You lose the interest that accrued for the three years?

Yes

 

[mdk02]

Speaking of taxes. If $800K sits in a traditional 401K for the 67 year old and they want to stuff that money into for example a fidelity annuity product, what are the tax implications on that $800K?

You DON'T distribute the money to buy an annuity outside of a retirement plan. You can distribute it into a Rollover IRA tax free. The distributions from the rollover account are taxable. As your mother is not a high income taxpayer, NJ is friendly towards distributions from rollover IRAs. Setting up a bond ladder within a rollover account is incredibly easy with Schwab.

 

[KK1827]

You DON'T distribute the money to buy an annuity outside of a retirement plan. You can distribute it into a Rollover IRA tax free. The distributions from the rollover account are taxable. As your mother is not a high income taxpayer, NJ is friendly towards distributions from rollover IRAs. Setting up a bond ladder within a rollover account is incredibly easy with Schwab.

Gotcha. So basically you roll the 401K into an IRA and then use the $800K to buy an annuity through there and the lets say $6200/month distributed via the annuity is then taxed. Am I following correctly?

 

[newell138]

@socaldave

 

[RUTGERS95]

You can also open a treasury direct account and buy bills, notes and bonds directly from the treasury.
Also for tax purposes Vanguard has a NJ bond fund which is tax free. Probably available from other sources too

sgov is another one yielding 5.15 with no state income tax. it's short term if anyone just wants and easy etf

 

[mdk02]

Gotcha. So basically you roll the 401K into an IRA and then use the $800K to buy an annuity through there and the lets say $6200/month distributed via the annuity is then taxed. Am I following correctly?

Check with the vendor of the annuity. Someone made a good point above about "Term certain". That's important.

 

[Extra Point_rivals157299]

Thinking about the annuity, dividing 800K by the annual payout of 67,200 would last almost 12 years. If the average woman's life span is 80, 80 minus 67 is 13 years, only a year longer than if she spent the 800K getting 0 interest on it. I guess an annuity makes sense for people who have good genes and will live a long life, to 90 or 100 years old and for people who want to leave their offspring a chunk of money.

 

[mdk02]

Thinking about the annuity, dividing 800K by the annual payout of 67,200 would last almost 12 years. If the average woman's life span is 80, 80 minus 67 is 13 years, only a year longer than if she spent the 800K getting 0 interest on it. I guess an annuity makes sense for people who have good genes and will live a long life, to 90 or 100 years old and for people who want to leave their offspring a chunk of money.

A fair point, but I believe the average life expectancy for a 67 year old woman is more like 85.

 

[RUschool]

Does she have a decent social security payment? Does she need more than $5,000 month which is $60,000 annually especially if the mortgage is paid off and probably translate to $80,000 salary before taxes and deductions?

 

[T2Kplus20]

Does she have a decent social security payment? Does she need more than $5,000 month which is $60,000 annually especially if the mortgage is paid off and probably translate to $80,000 salary before taxes and deductions?

It really seems like a competent financial planner/manager can do a lot better job than an annuity. Generate the required cash flow with better preservation of principle.

Perhaps KK should call Fidelity or another big shop and speak with a wealth manager?

 

[phs73rc77gsm83]

It really seems like a competent financial planner/manager can do a lot better job than an annuity. Generate the required cash flow with better preservation of principle.

Perhaps KK should call Fidelity or another big shop and speak with a wealth manager?

I don’t use an advisor but Vanguard’s Personal Advisor program charges 30 basis points annually for that asset amount. I think Schwab and Fidelity would be comparable. That’s on top of any fees for funds and/or annuities that may be purchased, but lower than Fisher or other groups of that ilk. Anyone (an advisor or otherwise) would want to know SS, equity in home, other income streams, goals (leave KK or siblings an inheritance), expenses, discretionary wishes beyond necessary expenses, etc.). Also, i am guessing KK could be a “backstop” in a worst case scenario so that could increase flexibility.

 

[KK1827]

Does she have a decent social security payment? Does she need more than $5,000 month which is $60,000 annually especially if the mortgage is paid off and probably translate to $80,000 salary before taxes and deductions?

She will get about $3400/month SS and an additional $1200/month from a prudential an old annuity and then she will have this $800K to decide what to do with. These annuities actually seem like a pretty solid option if the only concern is cashflow

 

[KK1827]

I don’t use an advisor but Vanguard’s Personal Advisor program charges 30 basis points annually for that asset amount. I think Schwab and Fidelity would be comparable. That’s on top of any fees for funds and/or annuities that may be purchased, but lower than Fisher or other groups of that ilk. Anyone (an advisor or otherwise) would want to know SS, equity in home, other income streams, goals (leave KK or siblings an inheritance), expenses, discretionary wishes beyond necessary expenses, etc.). Also, i am guessing KK could be a “backstop” in a worst case scenario so that could increase flexibility.

Yeah me and my sister do well for ourselves so were not banking on inheriting anything from my mother so my main thing is maximizing her retirement cashflow. She plans on retiring after her 67th bday which will October 2028 so we have some time to plan