Help with annuity decisions - size and ownership.

[Garya505]

I'm retiring soon, and planning to use MYGAs, then SPIAs, so ...

1. I'm trying to get a handle on the pros and cons of buying multiple smaller MYGAs vs fewer large ones. Of course if laddering, that automatically means buying a few, and smaller size.

2. Since I'm going to be buying with jointly-owned after-tax money (our taxable side of assets) I'm also trying to get a handle on the pros and cons of buying in one name vs both names. In our case it matters a lot because my wife and I have a large difference in age. It also matters because I'm planning to do a 1035 into a SPIA in a few years, and you can't change the name when doing a 1035.

Thoughts, opinions, rants, raves?

 

[Tahoe Ray]

I'm retiring soon, and planning to use MYGAs, then SPIAs, so ...

1. I'm trying to get a handle on the pros and cons of buying multiple smaller MYGAs vs fewer large ones. Of course if laddering, that automatically means buying a few, and smaller size.

2. Since I'm going to be buying with jointly-owned after-tax money (our taxable side of assets) I'm also trying to get a handle on the pros and cons of buying in one name vs both names. In our case it matters a lot because my wife and I have a large difference in age. It also matters because I'm planning to do a 1035 into a SPIA in a few years, and you can't change the name when doing a 1035.

Thoughts, opinions, rants, raves?

1) Diversifying carriers is smart. God forbid you end up with one in rehabilitation, all of your money is not tied up there. The downside is banding. Many carriers will pay higher rates for larger deposits. They normally top out at 250k.

2) Doesn't really matter for a spouse. Most annuities can be spousally continued as long as they're the sole primary beneficiary. You should be able to name your spouse as an income beneficiary for the income annuity without her actually being an owner. You may want to consider not naming her at all if she's a lot younger than you and rolling the dice on your longevity. You can also purchase a life insurance policy to offset any potential loss (that's the foundation of "pension max").

Hope that helps.

 

[Garya505]

1) Diversifying carriers is smart. God forbid you end up with one in rehabilitation, all of your money is not tied up there. The downside is banding. Many carriers will pay higher rates for larger deposits. They normally top out at 250k.

2) Doesn't really matter for a spouse. Most annuities can be spousally continued as long as they're the sole primary beneficiary. You should be able to name your spouse as an income beneficiary for the income annuity without her actually being an owner. You may want to consider not naming her at all if she's a lot younger than you and rolling the dice on your longevity. You can also purchase a life insurance policy to offset any potential loss (that's the foundation of "pension max").

Hope that helps.

Yes, that helps!

1) Excellent, thanks!

2) I think I'm not getting this one. Because of our large age difference (20+ years), the SPIA payments will be much different. I understand that when doing a 1035, the name(s) on the SPIA must be the same as on the MYGA. Does that mean if the MYGA is in only one of our names, then the SPIA must be for that person's age, and if the MYGA is in both names, the SPIA must be for both ages (joint life)?

Also, I have a life insurance policy on myself that will be expiring in about a year or so. It's $115/mo for $150,000. I don't know what rate they will offer to continue it. My age is 70.

 

[Tahoe Ray]

2) I think I'm not getting this one. Because of our large age difference (20+ years), the SPIA payments will be much different. I understand that when doing a 1035, the name(s) on the SPIA must be the same as on the MYGA. Does that mean if the MYGA is in only one of our names, then the SPIA must be for that person's age, and if the MYGA is in both names, the SPIA must be for both ages (joint life)?

Is the 1035 coming from an existing MYGA? If so, you have a lot of options. 1035s are always "like to like" but you can often add an income beneficiary that isn't "really" considered a party to the contract (as an annuitant or owner).

You should really talk to a knowledgeable agent about this. It doesn't cost you anything and you'll get the same rates as if you tried to go direct to the carrier.

@scagnt83 on here is very good with these cases.

Also, I have a life insurance policy on myself that will be expiring in about a year or so. It's $115/mo for $150,000. I don't know what rate they will offer to continue it. My age is 70.

It is going to go up 10x at a minimum. You should request a conversion option from your carrier asap. 70 is normally the cutoff for conversions (to a permanent policy). At least that way you'll know what numbers you're dealing with.

 

[Garya505]

Is the 1035 coming from an existing MYGA? If so, you have a lot of options. 1035s are always "like to like" but you can often add an income beneficiary that isn't "really" considered a party to the contract (as an annuitant or owner).

You should really talk to a knowledgeable agent about this. It doesn't cost you anything and you'll get the same rates as if you tried to go direct to the carrier.

@scagnt83 on here is very good with these cases.



It is going to go up 10x at a minimum. You should request a conversion option from your carrier asap. 70 is normally the cutoff for conversions (to a permanent policy). At least that way you'll know what numbers you're dealing with.

Cool, thanks.

Yes, I haven't bought the MYGA(s) yet so I can set them up however I want.

 

[Garya505]

OK, I'm looking at my income planning. The goal is income to support the same spending after retirement as before retirement. I nice trick if you can do it.

Due to family circumstances, our SS will be reduced a bit at about 4 years into retirement, and then again at about 6 years into retirement.

Retirement years 1 through 4:
SS + RMDs will get us income we need to match our current spending.

Retirement years 5 and 6:
SS will be reduced by about $12k. $200,000 in a SPIA (joint life) would get us almost exactly that $12k.

Retirement years 7 and beyond:
SS will be reduced by another $12k. Another $200k SPIA (joint life) would get us approximately $12k more.

Since all money is in MYGAs until they are rolled into the SPIAs and they start their payments, there is no tax on the MYGA interest. This helps a lot with the SS tax torpedo as we are not getting any taxable income we don't need.

So, given all that, here's what I'm thinking:
$200k in 3-year MYGAs, to be rolled (1035) into more 3-year MYGAs at maturity, then rolled into the SPIAs starting in 6 years.
$200k in 4-year MYGAs, to be rolled into the SPIA at maturity.

The MYGAs would be purchased from money current in our taxable account. It's in munis with no cap gains to worry about.

Seems the only thing left is to figure out what size MYGAs to buy. I can probably find 4-5 good insurers (A- or better) so maybe four $50k 3-year contracts and four $50k 4-year contracts would work ok.

Thoughts?

 

[scagnt83]

OK, I'm looking at my income planning. The goal is income to support the same spending after retirement as before retirement. I nice trick if you can do it.

Due to family circumstances, our SS will be reduced a bit at about 4 years into retirement, and then again at about 6 years into retirement.

Retirement years 1 through 4:
SS + RMDs will get us income we need to match our current spending.

Retirement years 5 and 6:
SS will be reduced by about $12k. $200,000 in a SPIA (joint life) would get us almost exactly that $12k.

Retirement years 7 and beyond:
SS will be reduced by another $12k. Another $200k SPIA (joint life) would get us approximately $12k more.

Since all money is in MYGAs until they are rolled into the SPIAs and they start their payments, there is no tax on the MYGA interest. This helps a lot with the SS tax torpedo as we are not getting any taxable income we don't need.

So, given all that, here's what I'm thinking:
$200k in 3-year MYGAs, to be rolled (1035) into more 3-year MYGAs at maturity, then rolled into the SPIAs starting in 6 years.
$200k in 4-year MYGAs, to be rolled into the SPIA at maturity.

The MYGAs would be purchased from money current in our taxable account. It's in munis with no cap gains to worry about.

Seems the only thing left is to figure out what size MYGAs to buy. I can probably find 4-5 good insurers (A- or better) so maybe four $50k 3-year contracts and four $50k 4-year contracts would work ok.

Thoughts?

Since I was tagged I will chime in.

Is the MYGA money coming from IRAs or a 401k?

I would look at $100k premiums for the MYGA because that is usually the "high band" for rates. You could still diversify between 4 different carriers based on your numbers which imo is strong diversification.

Your plan is sound. Grow the money until you need it for income. Avoid taxes while it grows. Move it to an income product when the time is right.


There is however an option you have not mentioned. Indexed Annuities offer something called a "lifetime income rider".

These Riders can often create a higher income vs. using a MYGA + SPIA.

Many offer a fixed rate that is very strong, such as 8%-10% per year. Then you can "turn on income" when you are ready, and they pay lifetime income just like a SPIA does.

The "catch" is that rate is only an "income calculation", not a liquid rate to "cash out" at.

Your liquid account value will grow based on index returns of a chosen market index. Growth will be "Capped" around 8%-9%, and you will have a 0% "Floor", meaning Index Returns will never cause a loss to your account.

So you essentially have 2 different calculations going on. Your liquid Surrender Value. And your Income Value that is only available as an amount to take lifetime income from.

The Income Rider also usually has a fee that deducts from the liquid Surrender Value. So hypothetically if you received 0% index returns one year, you could have 0.5% or 1% loss depending on what that fee is.

Taxation on the income is a bit different as well. A SPIA gives an "exclusion ratio" so taxes are spread out over the life of the income stream. The Income Rider will be LIFO (last in first out) meaning gains will be taxed first, then once you have distributed all the gains, there will be no more taxes.

Another possible con to the Income Rider is that you are not "playing the rate game". If you believe annuity rates will be significantly higher 3-5 years from now, then you might want to go with laddering MYGAs. But they would have to double or triple to get to the accumulation rates Income Riders offer. And some Income Riders give very large upfront bonuses for the Income Account, I think Athene is at 25% right now if I remember right... so your income calculation immediately day 1 starts with a 25% gain...

Different flavor, same general concept.

If you would like to see official illustrations and quotes feel free to private message me and I can send you my email address.

 

[scagnt83]

Also, I have a life insurance policy on myself that will be expiring in about a year or so. It's $115/mo for $150,000. I don't know what rate they will offer to continue it. My age is 70.

It is going to go up 10x at a minimum. You should request a conversion option from your carrier asap. 70 is normally the cutoff for conversions (to a permanent policy). At least that way you'll know what numbers you're dealing with.

Ditto. If you still need coverage you need to ask about conversion options.

What carrier is it? Do you think you are still insurable for life insurance?

You could still get a new 10 or 15 year term policy at your age. Or a permanent policy that lasts to age 100 or 121.

An agent could pre-screen you for a policy to see if you would be likely to qualify. Then you can compare the conversion options to other options available.

Sometimes conversion options are great... other times they are designed with higher than normal premiums to discourage people from converting because the carrier just does not want the business, they made money on the term and want to cash out so to speak... Jackson National is one of those.

 

[Garya505]

scagnt83 - I've heard of the FIA with income rider. I don't understand it so I haven't really given it much consideration. I totally get how insurance companies are able to make money on MYGAs and SPIAs, but I don't get how they could pay out much more on a FIA with income rider, at least not consistently.

 

[Garya505]

scagnt83 - the money is not from a tax-deferred account (IRA or 401k). It's savings, currentlt invested in a muni mutual fund.