Reader question: After 37 years in sales I plan to retire in 6 months at age 63. I will live off of my severance from a previous job for two years until I reach 65 at which time I’ll start Social Security of about $2,500 per month. My husband is age 70 and has a pension & Social Security of $40,000 per year plus his Required Minimum Distribution (RMD) from his IRA is $2,800 this year. I will be on COBRA for medical and dental insurance until I am 65 and my husband is on Medicare. My savings total $1.3 million including $480,000 after-tax and $820,000 in IRAs. We have no debt and could live comfortably on $6,000/month. Having money left when we die to leave to heirs is not a high priority. I know myself and will be scared to spend my savings for fear I will run out of money. That is why I need to have a guaranteed "paycheck" in addition to Social Security in order to enjoy my retirement.
My question is regarding annuities. I would like to supplement my Social Security with some sort of lifetime guaranteed income. Would you suggest getting a deferred annuity now (age 62 1/2) to start paying at age 65 or wait until age 65 and get an immediate annuity? To fund the annuity, should I use after tax dollars or pull from my IRA? Should I get an inflation adjusted annuity? What % of my assets should be put towards an annuity? Would you recommend investing with one annuity company or investing in a few different annuity companies in case one goes under in the future? S.H.
Answer: First, you and your husband deserve a standing ovation for the job you’ve done regarding preparing for retirement. The fact that you are debt free and have accumulated well in excess of $1 million places you in the top 1% of wealth accumulators in America.
It appears that the combination of your Social Security plus your husband’s Social Security and pension will, for the most part, cover the $6,000 per month expenses you need. My favorite choice would be to take forty to fifty percent of your $1.2 million and invest in blue chip dividend-paying stocks. Right now it’s pretty easy to put together a diversified basket of stocks with average yields above three percent. That way you get good cash flow with lots of long-term upside potential. The balance could be invested in high quality, relatively short-term bonds or CDs. They are not yielding much right now but interest rates are rising and yields should improve in the years ahead. If you do decide to purchase an annuity, I’d wait until you are ready to begin drawing on the money and buy an immediate annuity split among several insurance companies. Interest rates will likely be noticeably higher in a couple of years so you’ll get a higher monthly payout for life. At that time compare a regular annuity versus an inflation-hedged annuity (which will have a lower payout) and decide, based on your view of future inflation, which is best. Finally, your situation is fairly complex and deals with large numbers so I encourage you not to make these decisions in a vacuum. Get some help from an independent advisor such as a Certified Financial Planner, CPA or attorney who has expertise in such matters. One final thought: You’ve indicated that you intend to begin taking Social Security at age sixty-five, which is earlier than your ‘full retirement age’. There may be some advantages to waiting until your full retirement age (66 and a few months). Again, a professional advisor can help you think through this decision.
Reader Question: I inherited an IRA from my father in 1995 and have been taking the annual Required Minimum Distributions (RMDs) based on my life expectancy since that time. I named my son and daughter as beneficiaries on that account. When I die, will they be able to take RMDs based on their life expectancy (or the life expectancy of the oldest beneficiary) or will they have to take the money out immediately? R.W.
Answer: This is a great question and one that we don’t get asked very often. My partner, Michael Wagner, CPA, CFP®, had this to say: “Assuming there’s money left in your inherited IRA when you pass away, your children must continue to take RMDs based on your life expectancy (according the IRS tables of life expectancy). In other words, they are not allowed to begin a new RMD based on their own life expectancy.”
Remember, if it’s a traditional IRA those distributions would be taxable to your children and if it were a Roth IRA, the distributions would be tax free. One strategy to remember is that if you have your own IRA and are in a relatively low income tax bracket, you might consider converting a small amount of your IRA money into a Roth IRA each year. This is a taxable event so make sure you don’t convert so much that you get ‘bumped up’ into the next higher bracket. This way you are able to give your children a gift that is free from future income taxes! You cannot convert an inherited IRA into a Roth.