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I've been toying with the idea of taking out a fixed immediate annuity with a 20 year period certain but I hate the idea of turning my $1,000,000 over to an insurance co. with no guarantee the company will be there in 20 years or that my hard earned money won't evaporate at some point. I hit on the idea that maybe with $1,000,000 in the bank in CD's why can't I just structure my own annuity to have the bank pay out principle and interest monthly over a 20 year span instead. I retain ownership of my money and don't get charged all those horrendous fees. Can this work out?
I've been toying with the idea of taking out a fixed immediate annuity with a 20 year period certain but I hate the idea of turning my $1,000,000 over to an insurance co. with no guarantee the company will be there in 20 years or that my hard earned money won't evaporate at some point. I hit on the idea that maybe with $1,000,000 in the bank in CD's why can't I just structure my own annuity to have the bank pay out principle and interest monthly over a 20 year span instead. I retain ownership of my money and don't get charged all those horrendous fees. Can this work out?
it isn’t the same thing if you are talking a spia . you can’t get an initial 7% draw rate from cds safely
every dollar you spend reduces the following years income when cds can’t produce that draw rate without consuming themselves in the process .
an annuity holds a constant income stream regardless of how much you spend down of it .
cds and an spia are the reverse of each other .
the cds will fall to zero balance over time as spending drains them towards zero ..
with the spia you are draining the money up front by buying the spia …in turn they now give you back your million over time ,t hen once you get it back is when you get a investment return on their dime.
so imagine three bucks
bucket one has 7 years of cd and cash …. for 20 years you couldn’t get a 4% draw rate inflation adjusted without draining that bucket to zero .
so bucket 2 has fixed income investments like bonds and bucket three all your equity holdings .
so once we drain bucket one down we refill bucket one from bucket two and refill bucket two from bucket three .
with an spia feeding bucket one , that bucket never goes to zero …it has a floor and by having a floor it requires less refilling from bucket two and bucket 3 .
that means more equities can work longer without being used to refill.
so the power of an spia is indirectly in the fact that eventually it can let your equities run longer .
this is why in the 10,000 different scenarios run , a comprehensive plan of an spia , your own investing and permanent tax free life insurance beat buy term and invest the rest ( assuming one even did that ) 67% of all 10,000 scenarios run .
insurance products work very different with other asset classes then they do alone because of other factors like a non draining income stream and taxes
Last edited by mathjak107; 02-15-2024 at 02:28 AM..
I've been toying with the idea of taking out a fixed immediate annuity with a 20 year period certain but I hate the idea of turning my $1,000,000 over to an insurance co. with no guarantee the company will be there in 20 years or that my hard earned money won't evaporate at some point. I hit on the idea that maybe with $1,000,000 in the bank in CD's why can't I just structure my own annuity to have the bank pay out principle and interest monthly over a 20 year span instead. I retain ownership of my money and don't get charged all those horrendous fees. Can this work out?
There are ways to investigate insurance to find the best companies. May not always be the one with highest rates. Could be in your area too many scam chicken dinner seminars. Maybe go for the meal but not for the product they are selling.
Instead of CD's maybe do some bond funds. In a bank CD have limit of $250k for FDIC insurance. Many bond funds pay interest monthly.
every dollar you spend reduces the following years income when cds can’t produce that draw rate without consuming themselves in the process .
an annuity holds a constant income stream regardless of how much you spend down of it .
The OP specified a period certain annuity, not a life annuity, so of course the annuity will also be "consumed" after the specified number of years.
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Back to the question, in principal yes you could do this with CDs, but you might have a hard time finding the longer maturities. Treasuries are equally safe and not callable. On the secondary market you can find a wide range of maturities out to 30 years.
a cd remains all your money and gets interest ….. each payment has less left working for you generating income as you spend it
the period certain , you are out the money up front and then the money is returned to you over time but there is no reduction from spending so to speak
a cd remains all your money and gets interest ….. each payment has less left working for you generating income as you spend it
the period certain , you are out the money up front and then the money is returned to you over time but there is no reduction from spending so to speak
The ladder can be built however a person chooses, giving level payments, escalating payments, or anything else. The ladder will generate more interest in the early years of course, so the tax bill will start out high and end at almost nothing. So that's something to keep in mind if choosing the ladder.
I'm like the OP, I don't want an insurance company in the loop unless it's necessary.
I'll suggest a ladder of zero-coupon Treasuries. Each bond will mature with a value of $1000. You buy them at a discount, so for example a bond maturing one year from now might cost $950, but a bond maturing in ten years might cost $650 (those are not actual quotes, but rather just for purposes of illustration).
There's a little bit of math required to figure out the number of bonds per rung. If you want a level payout, add up the cost of the twenty different bonds (I'm assuming one year per rung over 20 years) and then divide your investment amount by that sum.
You could have more rungs if you like, it appears that quarterly is possible but that would mean buying 80 different bonds. Seems a bit much to me.
it isn’t the same thing if you are talking a spia . you can’t get an initial 7% draw rate from cds safely
every dollar you spend reduces the following years income when cds can’t produce that draw rate without consuming themselves in the process .
an annuity holds a constant income stream regardless of how much you spend down of it .
cds and an spia are the reverse of each other .
the cds will fall to zero balance over time as spending drains them towards zero ..
with the spia you are draining the money up front by buying the spia …in turn they now give you back your million over time ,t hen once you get it back is when you get a investment return on their dime.
so imagine three bucks
bucket one has 7 years of cd and cash …. for 20 years you couldn’t get a 4% draw rate inflation adjusted without draining that bucket to zero .
so bucket 2 has fixed income investments like bonds and bucket three all your equity holdings .
so once we drain bucket one down we refill bucket one from bucket two and refill bucket two from bucket three .
with an spia feeding bucket one , that bucket never goes to zero …it has a floor and by having a floor it requires less refilling from bucket two and bucket 3 .
that means more equities can work longer without being used to refill.
so the power of an spia is indirectly in the fact that eventually it can let your equities run longer .
this is why in the 10,000 different scenarios run , a comprehensive plan of an spia , your own investing and permanent tax free life insurance beat buy term and invest the rest ( assuming one even did that ) 67% of all 10,000 scenarios run .
insurance products work very different with other asset classes then they do alone because of other factors like a non draining income stream and taxes
thanks, math for the very helpful info. I've talked with a few agents. Let me tell you good folks what they told me:
Quote:
you can’t get an initial 7% draw rate from cds safely
The 10 highest-rated companies I want to deal with such as MassMutual, Northwestern, NYLife, Prudential, etc. are not offering 7%. MassMutual for example starts a 3.5% and then drops to 2.75 the second year before gradually ascending again. The larger companies are simply not going to compete with the interest rates banks are offering right now which are hovering at 5% (I get 5% on all my CD's).
Quote:
every dollar you spend reduces the following years income when cds can’t produce that draw rate without consuming themselves in the process .
Every fixed annuity that was pitched to me draws down principle along with the interest. So for a 15 year annuity at the 12th month of the 15th year the balance is 0. Now if 5% were the normal rate for CD's then I wouldn't even need an annuity because I could draw the interest indefinitely and preserve the principle for my wife when I'm gone. But when bank interest rates start to fall so will annuity rates.
an annuity holds a constant income stream regardless of how much you spend down of it .
True, but so should a CD if it's structured properly. My problem is that CD's are fixed so that none of the principle can be touched without penalties. Only the interest can be drawn off.
Quote:
with the spia you are draining the money up front by buying the spia …in turn they now give you back your million over time ,t hen once you get it back is when you get a investment return on their dime.
My understanding is that both the CD and the annuity would work about the same. With the annuity you draw down principle and interest in a regularly scheduled manner of equal payments over 15 year. With a CD the principle and interest would be drawn down as well. There is that hitch you mention where the interest would be less and less as the principle shrinks but the payments still stay the same as more and more principle is added to the payout amount. But I see that phenomenon with the annuities too. Now the life with period certain will cover a person if they live past the 20 years but I certainly won't live that long. God-willing my wife will and that to me is the sole advantage of having an annuity over the CD. But handing all that money over still makes me nervous.
The OP specified a period certain annuity, not a life annuity, so of course the annuity will also be "consumed" after the specified number of years.
----
Back to the question, in principal yes you could do this with CDs, but you might have a hard time finding the longer maturities. Treasuries are equally safe and not callable. On the secondary market you can find a wide range of maturities out to 30 years.
Thanks much. The best CD I could find is a 10-year from Chase with a 2.5% fixed. But once again the principle is not drawable and I cannot live on 2.5% on 1M. I'd have to talk to a wealth expert over there but I'm pretty sure he'd say once the principle is locked there's no touching it.
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