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.
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.
Rates are fixed
Interest compounds, unlike CDs or Treasuries which are simple interest
Taxation on interest is deferred. And if I do retire early, I will be taxed at a lower bracket than I am today.
These are issued by insurance companies and highly regulated in what they invest in, and the reserves necessary are high
Risks
Default by the insurance company
Higher fees than from a CD if you need the money early
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.
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.
Thanks for the @. Was on vacay for two weeks and was offline as much as possible so just now responding.
@bjurasz
The Pro/Cons in the OP are fairly spot on. You state you are in the highest tax bracket but what about state income taxes?
At first blush, a fixed annuity makes a lot of sense but I am always loath to recommend someone take after tax money and use it to generate taxable income. Additionally, you mention early retirement and if you do retire prior to 59 1/2, the deferred income in that annuity is a lot more difficult to access since it is considered retirement income. You will likely find rates much higher in a 3 or 5 year annuity but your (general) inability to access the income without using the restrictive 72t rule would lead me to likely recommend against this option.
I would probably look toward a laddered CD program or muni bonds, depending on state taxes.
Fixed deferred annuities have no fees to purchase such. It is a common mistake to conflate the fees of a variable annuity, or those with a rider as the same as all annuities when in fact, most annuities sold these days have no fees at all (variable annuities are purchased fair less frequently these days). There are only fees for early termination.
From 2022 to 2024, annuity sales topped $1.1 trillion, according to Limra, a global research organization for the insurance industry. In 2023 alone, annuity sales increased 23 percent over the prior year. Overall, annuity sales are up 70 percent since 2014, Limra reports.
No-frills fixed annuities with a three-year guaranteed interest rate — akin to a certificate of deposit (CD) — are offering up to 5.85 percent in January 2025, compared to the top three-year CD rates of 4.65 percent. Meanwhile, payouts from pension-like immediate annuities are up double-digits compared to their pre-pandemic levels.
In simplest form, fixed annuities are commodity products. You can get competitive bids from multiple sources. They should be identical but look out. They like to dress them up with extra features so they can charge more. Fidelity, Vanguard, and others have them. They should have lowest prices.
Check out the insurance company in AM Best. You want a quality company likely to be around long term. And don’t be surprised if some you encounter are rebranded products offered by others
Thanks. I’m in Texas so no state taxes. Just high taxes on everything else (sales, property, etc.). (we are NOT a low tax state just because we don’t have income tax).
Currently 58 years old. Not wanting to touch the IRA until at least 65. Hoping to retire in 4 years though, unless done so unvoluntarily sooner. (that is a real threat). Schwab has told me that I am “work optional” as of today but don’t really want to stop working, yet. So the question becomes how to best invest the taxable assets I have now, to guard them but let them grow some, in order to use them to fund living expenses until I draw down the IRA at 65. In the era of 5.3% money markets I simply put the money there. Those days are gone, and rates are likely to fall lower. After multiple calls to Schwab plus discussions above I’m strongly considering:
A non insignificant sum in money markets to handle short term needs over the next few years. Car purchase in 2. Vacations for the next several years with wife and daughter (high school age). Home improvement. True emergencies.
A fixed deferred annuity of 3 or 5 years to handle mid-term living expenses.
A municipal bond portfolio (Schwab uses Wasmer Schroeder to manage that, using actual bonds and not funds).
Treasury ladder
If it matters, I’m using Schwab due to their relationship to Nvidia, and the level of service I get vastly tromps what I’m getting today from Vanguard. For free. So using them has been a no-brainer.
Then I would likely give a lot more consideration to a fixed annuity since you are very unlikely to tap the income prior to 59 1/2. You can still find rates over 5% for 3 and 5 yr.
#3 seems very valid as well - but those managed bond ports need to be designed to let the bonds mature and not auto-reinvest the proceeds otherwise you end up with a bond fund and not a true managed portfolio that is designed to be liquidated at the end of that 3-5 year time. My company offers the same so make sure if you go that route that they set it up correctly. Personally, I think I would just buy my own munis over the managed port for what you are trying to do. You likely don’t need their on-going expertise.