Tag Archives: Retirement

A Reader Asks: SPIA inside of an IRA

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.

This post might contain affiliate links.

Please be sure to read the Disclaimer page.

Keep Your Hands Off My 401K

This morning, I sent an email to my Congressman.  The Financial Journeyman is not a political blog.  This blog is not right or left-leaning.  In general, I do not oppose or support any political party.  The only time that I will write about politics is when it is related to personal finance.

Over the past few weeks, there have been many news reports about Congress wanting to reduce the amount that an employee can contribute to their 401K from $18,500 (2018 limit) to only $2,400.  There have been other reports that suggest it might be capped at $9,000.  There are even other conflicting reports that state it will be increased to $20,000, but switched to a Roth based format.

The reason for these proposed limits on 401K contributions is due to the tax cuts and the tax overhaul that is being drafted by Congress with the 2017 Tax Bill.  To fund these tax cuts, Washington will need a boost in revenue to prevent the deficit from skyrocketing.  A quick solution is to drastically reduce the amount of money that 55 million American’s put into their tax-deferred retirement accounts.

As a member of the financial independence community, being able to save as much as possible in a 401K account is important for me to reach my retirement goals.  Since most American’s do not have a defined benefit pension, they are left with a defined contribution plan such as a 401K.  If these accounts are capped at $2,400, it will have a negative impact on how many people are saving for a secure retirement.  That can ultimately lead to more people having to rely on government assistance later in their life.

You might be thinking, there is nothing that I can do about this.  The next election will not be held for a year.  All I can do is sit back and hope for the best.

That is not entirely true.  Yes, the next election is not for twelve months, but you still have a voice.  You have a voice and there are many channels to express your concerns to your Congressman.

You might not realize this, but your Congressmen whats to hear from you.  They want to know what they can do to help the constituents they represent.  They do not want to wait until Election Day to learn if they are doing a good job or not.

If you feel as strongly as I do about reducing the limits on how much you can save in your 401K, reach out to your Congressman.  You can send them an email, a fax, or a written letter.  Below is the email that I wrote and sent to my Congressman Tom Marino:

Sample Email

Subject: Tax Cuts & Reducing the Contribution Limit on 401K Plans

Dear Congressman Marino,

As one of your constituents, I am writing you this email to voice my concern over the proposed reduction in contribution’s that people will be able to make to their 401K retirement accounts.

Since most employees do not have access to a defined benefit plan, making contributions to their 401K is their primary source for retirement savings.

While tax cuts are important, they are not more important than middle-class Americans having access to an adequate retirement savings plan.

Without having enough money saved for retirement, people will be forced to demand more out of entitlement programs such as Social Security and Medicare.

I strongly suggest that you vote “No” when it comes to reducing how much your constituents can save to secure their financial future.

Based on your history of being a fiscal conservative, I know that I can count on you to not jeopardize the defined contributions retirement system that most of your constituents are relying on to support themselves when they retire.

Thank you,

My Name

My Contact Information

Keep it Simple

The email that I wrote was short and to the point.  Contrary to popular belief, these are extremely busy people and are always being pulled in many different directions.  I feel that there is a better chance of having your email or letter read if it is not full of fluff.

In this email, I stated my concern, why he should be concerned, and what he can do about it.  Be positive, show support, and be respectful.  Do not be condescending or threatening in any way.

Who to send it to

It is important that you send your letter to the correct legislator.  To find out who your Congressman is, go to https://www.house.gov/representatives/find/.  Other than being able to identify who your Congressman is, you will be able to find their email, address, phone number, and fax.  You can call their office, but I suggest a written communication.  That way you can be sure to not come off as being subversive.

Conclusion

Now is the time for you to communicate your concerns to your Congressman.  Remember, even if you did not vote for them, they work for you.  If your goal is to reach financial independence and retire early, voice your concerns over these proposed changes that could prevent you from reaching your financial goals.

I am challenging you to become an advocate for your financial future.  Please take 10-15 minutes of your time and send an email to your Congressman.  If you don’t communicate this message to them, how will they know that it is such an important issue?