In their defense, there is a significant death benefit with this annuity so this very well may work for some people who don’t want to take any risk, but want a stable monthly payment.
But yeah, I ran the numbers also, and came out with a similar conclusion. Our 401K has been given out returns significantly better than 4% for a long time (though who knows how long that will last), so it makes even less sense to change it to an annuity.
How do you feel about a reverse mortgage on a house to supplement your retirement income, especially in high housing cost areas with lots of appreciation in that asset?
I know one could always downsize but if they like the area and size of their current house, could this be another decent income stream in retirement?
Pros and cons?
@shawbridge Sadly, for some, maybe most, 90s are the no no’s. ?
From what I’ve read the disadvantages of DSTs discouraged me from investing in them. The costs, fees and values of your fractional shares are rather opaque and you are at the mercy of the sponsors and management companies. I’ve also read that sometimes the fees you pay may exceed your capital gains taxes. I have done 1031 exchanges into other investment properties that I manage and have sold several properties recently and paid the taxes so I can take control of my money. This is just my position and it may not be appropriate for anyone else.
The commissions are often paid outside your contract directly from the sponsor to the broker/agent.
The salesmen peddling annuities and whole life always tout the tax benefits of these products, so yes, to do a thorough analysis, you need to tax effect the distributions/gains with certain assumed personal tax rates (fed and state) over the investment period and compare that with other investment options, taxable and tax free. But in most cases, for annuities and whole life, they are selling you a very expensive insurance policy for this future stream of income that you could probably replicate through a series of fixed income products (taxable and/or tax free with high ratings) that have laddered maturities. Also, since you own it, you can easily liquidate portions of it and only realize capital gain or loss to handle unexpected major expenses vs having no access or having to pay a penalty.
To me, as I approach retirement, liquidity is a much more important factor since I doubt I can get reemployed other than as the old guy greeting shoppers or wiping down the tables at MickyD’s. Also, it is the first 10 years after retirement that DW and I will still have the energy to be able to hike the Andes, climb Mt Fuji, dive the Barrier Reef, etc …
Different topic. I was looking at long term care products recently. These days it looks like there is a fixed payout over a fixed period of time, unless you want to buy inflation protection which only gives you a max rate on the original contracted amount. I was surprised that DW, who is several years younger than me, had a much higher premium for the same coverage. I guess they assume I am more likely to kick-off before the policy pays or that I won’t last very long once I can collect. What are people’s opinions on these. 2 years vs 3 yrs vs 5 yrs. Last quote for us for $72k in annual benefits each for 5 years (no inflation protection) was about $2,500 in combined premiums.
Except, that is insurance company math. The correct way is to discount the chance that busdriver will even be alive in 10 years to collect. (In the mid-60’s, the chance of dying is ~1% for healthy folks, but by early 70’s, the chance of dying increases to ~3%.) Then, gotta factor in the death benefit and discount that back…
Oh no, hoping I’d be alive in ten years to collect.? But if I wasn’t, there is a death benefit of 800K until the year I collect, and then it starts dropping. Still don’t think it’s a very good deal, at least not for us.
The DST might be too good to be true, will let you know when we liquidate it. So far it has been exactly as advertised, with the costs and fees as told to us, which are far less than the taxes.
Honestly, I can’t tell you how happy we are to rid ourselves of that rental. However, I’m wondering about 1031 exchanging the other properties into a vacation rental property elsewhere )that we don’t manage). I wonder if that happens often, you 1031 tax exchange into a place that you mostly rent out, use a bit for yourself, then eventually convert it into a vacation home for yourself. If that can even be done, tax wise?
Seems like insurance company products that mix insurance, investment, and annuitization just make things more complicated and less flexible to the buyer, with a greater chance of getting a bad deal.
The product being pitched to @busdriver11 seems to mix all of the above, but:
What I really meant was your overall costs and that could include the value assigned when you liquidate. Since expenses are out of your control, you may not realize much gains. If you sell out, you are liable for taxes or you are forced into another DST, tying your money up for another 5-10 years. I don’t see the point of having money when you can’t use it especially during retirement.
I’ve invested in real estate and equities and I find real estate is best suited for younger people who can better deal with a host of maintenance problems. I plan to sell my remaining residential real estate in the next few years, pay the taxes and invest into more liquid assets. My kids have absolutely no interest in inheriting and taking care of any residential real estate. I am trying to lessen their burden once I pass. However, I do have some commercial real estate with triple net leases that are professionally managed. I think they won’t mind inheriting this relatively hassle-free income stream since there are no mortgages involved.
You can do it, you have to hold the rental long enough to convince the IRS it’s a real rental and you’re not just playing a shell game.
This amount of time is not codified, but generally a year is the minimum, and two years is pretty safe.
If you sell it after living there long enough to meet the 2/5 rule, you can’t exclude the entire gain, you have to prorate it, and pay cap gains on that part and depreciation recapture.
In general, you can roll a 401k amount into an annuity pre-tax, so you pay taxes when the annuity pays out. I assume that is what BD’s FA recommends.
Out of curiosity, I just ran the Charles Schwab RMD calculator on busdriver’s 401(k). If you leave the $800K in the 401(k) and assume a modest return of 4% annually on low-risk investments, it will produce an income stream in the form of RMDs beginning at around $54K annually in 10 years (assuming you’re 72 by then). As the investment continues to grow the RMD eventually increases to over $180K per year by the time you’re in your 90s. Unlike the annuity/life insurance produce, the 401(k) doesn’t die with you. Who needs to purchases an expensive death benefit when you’re potentially leaving a multi-million dollar 401(k) to your designated beneficiary? Amd who needs a $44K per year level-payment income stream that gets eaten away by inflation when you can have a larger income stream that continues to grow over time?
That investment advisor beongs behind bars.
Although I’m not a big fan of retirement/insurance investments, I’ll admit it has been nice and simple to be recipient of life insurance policies - tax free, no further paperwork needed.
Nah, I’m sure he would say he was just trying to give us a diversified plan, and cover different options. He didn’t push it at all, just gave us the recommendation and showed the numbers. But it is obviously not the right move for us.
1031 into a vacation rental (that eventually turns into a first or second home) seems pretty common, from looking online. It would be worth it if our state turned into a high tax state (instead of zero tax), or if there was a place we really loved to go to, enough to make the hassle of a rental/eventually vacation home worth it. I can’t think of anywhere that great right now.
Of course that’s what he’d say. But the subtext is that he was trying to diversify the ownership of your money, so instead of your owning the entire amount, both he and the insurance company would own substantial parts, while your share would shrink in proportion. “Share the wealth,” some call it, though that typically contemplates sharing with the poor, not the greedy.
@busdriver11 , you’re very generous. I don’t believe in an afterlife, but if there is one, I hope you’re the judge at the pearly gates when I arrive. ?
I don’t know anything about DSTs and 1031s, but nobody needs an “indexed annuity.” NOBODY - other than the salesperson.
I work with someone who wanted to buy an annuity without a death benefit. He was willing to accept the risk that he would die tomorrow. He claimed it was pretty much impossible to find. Not sure if he ever found one or if one is even available.
SPIAs are widely available without a death benefit. The scam annuities might not be.
ETA: that’s because SPIAs are simple contracts, easy to compare, and simple enough to explain to a smart 12 year old. Scam annuities are complicated, full of riders and non-intuitive components, and are impossible for even college graduates to understand.
It’s like the difference between keeping a single ball from hitting the ground and juggling a few chain saws.
Okay, @IxnayBob, in that case, I’m giving you an advance pass through those pearly gates.?
Honestly, this advisor is very reputable, and I do think this product might have been good for my parents. They are so fearful to do anything with their money, it’s just sitting there doing nothing, and they are living a long time. This is a single premium fixed index deferred annuity…doesn’t seem too complicated. But definitely not for anyone who is remotely interested in investing.