Thank you for taking the time to read this blog post. I recently received a rather complicated question from one of the frequent readers of this blog. His question was about how he could buy an SPIA inside a Traditional IRA account.
The question came from a reader named Bill. Bill provided me with a good amount of information about his financial situation. Since I am not a financial advisor, I told Bill that I do not give financial advice, but would write about his situation on my blog and request feedback from other readers in the comment section.
Bill is 59 years old. He is going to retire from his career as a truck driver next year when he turns 60 years old. To fund his retirement, he owns three duplex rental properties that produce a generous income of $7,200 per month. He has a portfolio of a few dividends paying individual stocks including Johnson & Johnson (JNJ) and Procter & Gamble (PG) worth $200,000. Bill also has a safety deposit box full of EE Bonds that he has been buying for the past 30 years estimated to be worth about $50,000. Bill also has a 401K with his long-time employer that has a balance of over $650,000.
Bill told me that the income from his rentals and the dividends that he receives is more than enough to cover all of his living expenses. Bill is planning on taking Social Security at age 65, but if money gets tight for some unforeseen reason, he will tap Social Security at age 62 instead of 65. Bill explained that he lives a frugal lifestyle and does not project that happening.
He wants to hold off on taking any money from his 401K that he is going to roll-over into an IRA until he turns 70 years old. His goal is to grow the value of the IRA until he is required to take RMD’s. Bill also wants to invest this money in a way that will provide guaranteed income in the future.
The exact phrase that Bill used was creating a growth and income strategy for himself. He asked me what I thought about taking $600,000 from his IRA and buying a Single Premium Income Annuity (SPIA). An annuity salesman from a major brokerage house quoted him a monthly payment of $2,800 per month, with 20 years certain, and a minimum payout of $665,000.
Bill does not want to spend the $2,800 per month at this time. He wants to take the $2,800 per month and have it invested in a balanced mutual fund with a conservative asset allocation within the IRA. His plan is to do this for 10 years.
At age 70, he wants to spend the $2,800 per month when RMD’s are required. He projects that a balanced fund of 50% invested in stocks and 50% invested in bonds should return around 5% per year over the next 10 years. That would provide him with another $440,000 in retirement savings. Bill estimated his RMD’s to be around 4% and that $440,000 would give him an additional $1,400 in retirement income.
Bill asked me what I thought about his plan. He was not concerned about receiving the best return on investment. He was also not interested in any type of variable rate product. He wants to have a guaranteed income at age 70, but also have some conservative growth over the next 10 years.
I am grateful that Bill took the time to send me an email about his unique idea. He has set himself up for a comfortable retirement. He just does not want to have to deal with market volatility and simply wants to buy himself a pension for the latter part of his life.
Bill does not want to put any of the $2,800 per month of future income in jeopardy. Since he does not need it now, he wants to have it grow and earn a reasonable return. He referred to the extra $1,400 per month as gravy. My thought was that the extra money could come in handy to offset future inflation.
Since I am not a financial advisor and am not familiar with annuities, I told Bill that I would post his situation on my blog and ask for readers to comment. My blog is read by many members of the financial independence community and a few financial advisors. I will ask their opinion.
The main question that I have about Bill’s plan is can an SPIA be purchased in a traditional IRA?
What about the monthly payments, can they be kept within the IRA and be distributed to a mutual fund until RMD’s are due?
Would the combination of payments from the SPIA and withdrawals from a mutual fund impact the RMD’s when Bill is 70 years old?
Thanks again for taking the time to read over Bill’s situation and plan. Bill and I would truly appreciate any feedback about his plan of using an SPIA in an IRA to produce some growth and future income. Please share in the comments section below if you have expertise or experience with using an SPIA in a Traditional IRA.
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