Fixed deferred annuity question

Investing Strategies Retirement Investing
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I just talked with my Schwab guy about some taxable money that we are earmarking to fund an early retirement, in the 3-5 year time frame. This would be a bridge before drawing actual IRA funds. So the desire for risk here is low, especially compared to the risk I tolerate in the IRA. More concerned about return-of-capital, because at my age if I get laid off I will have a hard time finding work again. So early retirement might be forced upon me. And I don’t want that to happen coincidental to a stock market drop - I don’t want to be invested in stocks if I am forced into early retirement because then my portfolio is also likely hurting at the very time I need the funds.

Also important, this is a taxable account. I’m in the highest tax bracket.

They have suggested a portion of that money in a fixed deferred annuity. Which is not the type of annuity that has a bad reputation on TV ads. Some information: https://www.schwab.com/annuities/fixed-annuities/rates

I would probably put 25-33% of my portfolio there, for 3 years. Or maybe some at 3, some at 5 years.

Benefits are several.

  1. Rates are fixed
  2. Interest compounds, unlike CDs or Treasuries which are simple interest
  3. Taxation on interest is deferred. And if I do retire early, I will be taxed at a lower bracket than I am today.
  4. These are issued by insurance companies and highly regulated in what they invest in, and the reserves necessary are high

Risks

  1. Default by the insurance company
  2. Higher fees than from a CD if you need the money early
  3. Less liquid than CD, Treasury

A suggestion for another bucket of money was an SMA invested in municipal bonds, given my tax bracket. The fee is 0.35%, but some quick math is that after-tax returns, even given the fees, beats CDs and Treasuries pretty easily.

The remaining bucket would be money markets and Treasury ladder.

Thoughts on any of this? Personally I feel this is a good start on a solid plan. Thanks.

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Hawkwin knows a lot about this he might have something to say. @Hawkwin

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The traditional way to deal with this is a laddered maturity bond portfolio to cover five years of living expenses. Each year you sell stocks to replace the maturing bond. But when stocks are down you defer replacement until recovery and live off the maturing bond and interest.

You need equity investments to keep up with inflation—especially when people will be retired 30 years or more.

Bond portfolio is a better choice than annuity. Annuities tend to have high fees. Profitable to the people who sell them.

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