Buy SPIA to cover mortgage P&I

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riskreward
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Buy SPIA to cover mortgage P&I

Post by riskreward »

I’m considering buying an immediate annuity to pay for our mortgage P&I. We have 29 years left on 2.75% refi mortgage. My thinking is to align the fixed annuity to the fixed mortgage P&I thereby avoiding the impact of inflation. Even if we move, we will have a mortgage most likely ( I know, i know).

Current IRA is $600k. We are taking out 5% of the balance using VPW table. Portfolio is 30% stocks based on Rick Ferri Center of Gravity recommendation.

Our essential expenses are $90K per year. Social Security covers $72K per year leaving $18K per year to cover from IRA.I am 72 years old, wife is 71.
Annuity for the $700/month ($8,400 per yr) mortgage P&I will cost $145K thru Income Solutions (5.8% payout).
If we buy the annuity, remaining IRA of $450K will need to cover only $10K of essential expenses.
Home is worth $420K. Mortgage is $170K. I could pay off the mortgage with IRA by taking out $240K ( $70K one time tax hit). The $70K tax hit is hard to swallow as annual taxes run $4K per year.

I would appreciate Bogleheads input including buy the annuity or not.
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Stinky
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Re: Buy SPIA to cover mortgage P&I

Post by Stinky »

What are the terms of the SPIA? Is it a "life" SPIA that pays out until the second death, or is it something different?

If it's a life SPIA, I expect that you realize that there could still be some mortgage debt left (and no future SPIA payments) if both of you die before the mortgage is paid off.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
smitcat
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Re: Buy SPIA to cover mortgage P&I

Post by smitcat »

riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
With no legacy plans have you considered a reverse mortgage?
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Watty
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Re: Buy SPIA to cover mortgage P&I

Post by Watty »

riskreward wrote: Sat Oct 16, 2021 7:03 am Annuity for the $700/month ($8,400 per yr) mortgage P&I will cost $145K thru Income Solutions (5.8% payout).
How would the annuity be taxed? If you have a $700 a month mortgage payment then you may need a lot more than that from the annuity to pay taxes and have $700 left after taxes.
riskreward wrote: Sat Oct 16, 2021 7:03 am Our essential expenses are $90K per year. Social Security covers $72K per year leaving $18K per year to cover from IRA.I am 72 years old, wife is 71.
...
If we buy the annuity, remaining IRA of $450K will need to cover only $10K of essential expenses.
What will your numbers look like after one of you dies and the survivor only gets one Social Security check?
riskreward wrote: Sat Oct 16, 2021 7:03 am I could pay off the mortgage with IRA by taking out $240K ( $70K one time tax hit). The $70K tax hit is hard to swallow as annual taxes run $4K per year.
The taxes seem high especially since most states do not tax Social Security so it would be good to double check that. If they are right then you might be able to reduce them by spreading out the withdrawals over several years.

You will likely have some unneeded RMDs starting soon anyway.

For example you could withdraw $50K a year from the IRA to cover your expenses and use the extra to pay off the mortgage over five years or so.
smitcat
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Re: Buy SPIA to cover mortgage P&I

Post by smitcat »

Watty wrote: Sat Oct 16, 2021 8:38 am
riskreward wrote: Sat Oct 16, 2021 7:03 am Annuity for the $700/month ($8,400 per yr) mortgage P&I will cost $145K thru Income Solutions (5.8% payout).
How would the annuity be taxed? If you have a $700 a month mortgage payment then you may need a lot more than that from the annuity to pay taxes and have $700 left after taxes.
riskreward wrote: Sat Oct 16, 2021 7:03 am Our essential expenses are $90K per year. Social Security covers $72K per year leaving $18K per year to cover from IRA.I am 72 years old, wife is 71.
...
If we buy the annuity, remaining IRA of $450K will need to cover only $10K of essential expenses.
What will your numbers look like after one of you dies and the survivor only gets one Social Security check?
riskreward wrote: Sat Oct 16, 2021 7:03 am I could pay off the mortgage with IRA by taking out $240K ( $70K one time tax hit). The $70K tax hit is hard to swallow as annual taxes run $4K per year.
The taxes seem high especially since most states do not tax Social Security so it would be good to double check that. If they are right then you might be able to reduce them by spreading out the withdrawals over several years.

You will likely have some unneeded RMDs starting soon anyway.

For example you could withdraw $50K a year from the IRA to cover your expenses and use the extra to pay off the mortgage over five years or so.
What do their taxes look like if they use a reverse mortgage instead of an SPIA?
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

smitcat wrote: Sat Oct 16, 2021 7:54 am
riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
With no legacy plans have you considered a reverse mortgage?
Thinking of using the reverse mortgage as a last resort if IRA becomes depleted.
smitcat
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Re: Buy SPIA to cover mortgage P&I

Post by smitcat »

riskreward wrote: Sat Oct 16, 2021 9:01 am
smitcat wrote: Sat Oct 16, 2021 7:54 am
riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
With no legacy plans have you considered a reverse mortgage?
Thinking of using the reverse mortgage as a last resort if IRA becomes depleted.
I would model the future total income and tax affects on both - waiting to get the tax incentive income on a home with no legacy is typically not effective.
stan1
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Re: Buy SPIA to cover mortgage P&I

Post by stan1 »

I'd do an SPIA before the reverse mortgage if either of you are in good health and expect to live into your 90s.

No matter how much you enjoy the house now I would not assume you and your wife would want to live in this house for 10 or 15 years. Circumstances change. Health and family situations change. Neighbors change. The income generated by the SPIA could be used for whatever your expenses are in the future. You could do the reverse mortgage and settle up when the house is sold, but at that point there isn't an income stream that persists.

With your asset level and withdrawal rate I think you are just about an ideal candidate for an SPIA if there is such a thing. You might want to diversify by buying from more than one insurer and spread buys over several years (e.g. one annuity from insurer A now, another from insurer B in 3-5 years).

Some people don't want to do business with an insurance company. Sounds like you don't have that hurdle to overcome.
Rex66
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Re: Buy SPIA to cover mortgage P&I

Post by Rex66 »

So you are willing to still pay interest and purchase a product with low return that is not inflation adjusted?

I’d just “stay the course”
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Stinky
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Re: Buy SPIA to cover mortgage P&I

Post by Stinky »

riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
If it makes you feel more comfortable, I’d be fine with buying a SPIA to match off against your mortgage principal and interest. I trust that you realize that the SPIA payments will be fully taxable income, since the money is coming from an IRA.

My only concern would be the loss of “capital” in the event that one (or both) of you is confined to assisted living or a nursing home. The $145k that you pay for a SPIA would not be available to you if your monthly expenses went up due to such confinement. Just something to be aware of.

Please post back and let us know what you decide to do.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Watty wrote: Sat Oct 16, 2021 8:38 am
riskreward wrote: Sat Oct 16, 2021 7:03 am Annuity for the $700/month ($8,400 per yr) mortgage P&I will cost $145K thru Income Solutions (5.8% payout).
How would the annuity be taxed? If you have a $700 a month mortgage payment then you may need a lot more than that from the annuity to pay taxes and have $700 left after taxes.

Annuity is from IRA so it will be taxed as ordinary income just like an IRA withdrawal. My overall taxes of $4k per year will not change with annuity.
riskreward wrote: Sat Oct 16, 2021 7:03 am Our essential expenses are $90K per year. Social Security covers $72K per year leaving $18K per year to cover from IRA.I am 72 years old, wife is 71.
...
If we buy the annuity, remaining IRA of $450K will need to cover only $10K of essential expenses.
What will your numbers look like after one of you dies and the survivor only gets one Social Security check?

Well our income of $72k from SS will be reduced to $42k plus $30k coming from IRA/annuity. The solo income will be about 70% of the current income which is the typical % that a single needs vs a couple.
riskreward wrote: Sat Oct 16, 2021 7:03 am I could pay off the mortgage with IRA by taking out $240K ( $70K one time tax hit). The $70K tax hit is hard to swallow as annual taxes run $4K per year.
The taxes seem high especially since most states do not tax Social Security so it would be good to double check that. If they are right then you might be able to reduce them by spreading out the withdrawals over several years.

You will likely have some unneeded RMDs starting soon anyway.

For example you could withdraw $50K a year from the IRA to cover your expenses and use the extra to pay off the mortgage over five years or so.
Thanks for input. The $4k taxes per year are accurate when taking out $30k per year from IRA/annuity. Anything above that and my marginal rate goes to 28% which I perfer to avoid as long as possible.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

smitcat wrote: Sat Oct 16, 2021 9:10 am
riskreward wrote: Sat Oct 16, 2021 9:01 am
smitcat wrote: Sat Oct 16, 2021 7:54 am
riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
With no legacy plans have you considered a reverse mortgage?
Thinking of using the reverse mortgage as a last resort if IRA becomes depleted.
I would model the future total income and tax affects on both - waiting to get the tax incentive income on a home with no legacy is typically not effective.
Not sure how long I will be living in this house so don’t want to incur the steep upfront fees of a reverse mortgage.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

stan1 wrote: Sat Oct 16, 2021 9:12 am I'd do an SPIA before the reverse mortgage if either of you are in good health and expect to live into your 90s.

No matter how much you enjoy the house now I would not assume you and your wife would want to live in this house for 10 or 15 years. Circumstances change. Health and family situations change. Neighbors change. The income generated by the SPIA could be used for whatever your expenses are in the future. You could do the reverse mortgage and settle up when the house is sold, but at that point there isn't an income stream that persists.

With your asset level and withdrawal rate I think you are just about an ideal candidate for an SPIA if there is such a thing. You might want to diversify by buying from more than one insurer and spread buys over several years (e.g. one annuity from insurer A now, another from insurer B in 3-5 years).

Some people don't want to do business with an insurance company. Sounds like you don't have that hurdle to overcome.
Thanks. My sentinents exactly.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Stinky wrote: Sat Oct 16, 2021 10:14 am
riskreward wrote: Sat Oct 16, 2021 7:14 am Spia pays for the rest of our joint lives. You are correct in that some mortgage could be left but that would be ok as we don’t have legacy issues.
If it makes you feel more comfortable, I’d be fine with buying a SPIA to match off against your mortgage principal and interest. I trust that you realize that the SPIA payments will be fully taxable income, since the money is coming from an IRA.

My only concern would be the loss of “capital” in the event that one (or both) of you is confined to assisted living or a nursing home. The $145k that you pay for a SPIA would not be available to you if your monthly expenses went up due to such confinement. Just something to be aware of.

Please post back and let us know what you decide to do.
Good input. We have long term care policies to address assisted living. Yes, i understand annuity will be fully taxable.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Rex66 wrote: Sat Oct 16, 2021 9:14 am So you are willing to still pay interest and purchase a product with low return that is not inflation adjusted?

I’d just “stay the course”
Thanks. Since the principal and interest are fixed for the next 28 years, I wouldn’t need to worry about the inflation impacts.
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Watty
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Re: Buy SPIA to cover mortgage P&I

Post by Watty »

riskreward wrote: Sat Oct 16, 2021 2:44 pm Not sure how long I will be living in this house so don’t want to incur the steep upfront fees of a reverse mortgage.
One risk with the SPIA is that if you move you may no longer need it if you do not need a mortgage for your next house. For example if you downsize to a less expensive condo at some point.

If you do need t mortgage if you move then the SPIA may not cover the new mortgage payment if interest rates are higher then.
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Re: Buy SPIA to cover mortgage P&I

Post by babystep »

How about withdrawing from the bonds in the IRA up-to the 12% tax bracket and use that money to pay-down the mortgage? How much can you withdraw in 12% bracket?
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Watty wrote: Sat Oct 16, 2021 3:16 pm
riskreward wrote: Sat Oct 16, 2021 2:44 pm Not sure how long I will be living in this house so don’t want to incur the steep upfront fees of a reverse mortgage.
One risk with the SPIA is that if you move you may no longer need it if you do not need a mortgage for your next house. For example if you downsize to a less expensive condo at some point.

If you do need t mortgage if you move then the SPIA may not cover the new mortgage payment if interest rates are higher then.
Thanks. Valid points.
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Re: Buy SPIA to cover mortgage P&I

Post by willthrill81 »

Why not just pay off the mortgage with the funds you would have used to buy the SPIA?

As is, you are borrowing by holding the mortgage to invest with the SPIA, but the embedded interest rate of the SPIA is likely less than your mortgage interest rate, especially after taxes.

Yes, this means that you would need to deplete about 1/4 of your portfolio, but that would be the case with buying the SPIA as well. You will pay taxes on the withdrawal, but you can spread that out over a few years to reduce the tax liability.
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Rex66
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Re: Buy SPIA to cover mortgage P&I

Post by Rex66 »

riskreward wrote: Sat Oct 16, 2021 2:52 pm
Rex66 wrote: Sat Oct 16, 2021 9:14 am So you are willing to still pay interest and purchase a product with low return that is not inflation adjusted?

I’d just “stay the course”
Thanks. Since the principal and interest are fixed for the next 28 years, I wouldn’t need to worry about the inflation impacts.
Yes but all other expenses could sky rocket and you gave the impression that you might move some day which would then change that equation further.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

willthrill81 wrote: Sat Oct 16, 2021 3:55 pm Why not just pay off the mortgage with the funds you would have used to buy the SPIA?

As is, you are borrowing by holding the mortgage to invest with the SPIA, but the embedded interest rate of the SPIA is likely less than your mortgage interest rate, especially after taxes.

Yes, this means that you would need to deplete about 1/4 of your portfolio, but that would be the case with buying the SPIA as well. You will pay taxes on the withdrawal, but you can spread that out over a few years to reduce the tax liability.
Thanks for input. To payoff mortgage will cost $236k. It will then save me $8.4k in annual P&I plus another $1k in taxes due to reduced IRA withdraws or $9.4k savings.
If I buy an annuity to give me $9.4k per year to pay $8.4k P&I plus $1k in taxes that will cost me $162k.
It just doesn’t seem like it’s worth paying off the 2.75% mortgage.
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willthrill81
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Re: Buy SPIA to cover mortgage P&I

Post by willthrill81 »

riskreward wrote: Sat Oct 16, 2021 4:07 pm
willthrill81 wrote: Sat Oct 16, 2021 3:55 pm Why not just pay off the mortgage with the funds you would have used to buy the SPIA?

As is, you are borrowing by holding the mortgage to invest with the SPIA, but the embedded interest rate of the SPIA is likely less than your mortgage interest rate, especially after taxes.

Yes, this means that you would need to deplete about 1/4 of your portfolio, but that would be the case with buying the SPIA as well. You will pay taxes on the withdrawal, but you can spread that out over a few years to reduce the tax liability.
Thanks for input. To payoff mortgage will cost $236k. It will then save me $8.4k in annual P&I plus another $1k in taxes due to reduced IRA withdraws or $9.4k savings.
If I buy an annuity to give me $9.4k per year to pay $8.4k P&I plus $1k in taxes that will cost me $162k.
It just doesn’t seem like it’s worth paying off the 2.75% mortgage.
Yes, that does make sense. I didn't realize that the payout ratios on SPIAs were that good at your ages. I'm guessing that you're only looking at joint life SPIAs.

This means that you'll be very likely to both pass away before the mortgage is paid off, but if you're fine with that, this seems like a good strategy.
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Rex66 wrote: Sat Oct 16, 2021 3:57 pm
riskreward wrote: Sat Oct 16, 2021 2:52 pm
Rex66 wrote: Sat Oct 16, 2021 9:14 am So you are willing to still pay interest and purchase a product with low return that is not inflation adjusted?

I’d just “stay the course”
Thanks. Since the principal and interest are fixed for the next 28 years, I wouldn’t need to worry about the inflation impacts.
Yes but all other expenses could sky rocket and you gave the impression that you might move some day which would then change that equation further.
Valid points. Thanks
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

willthrill81 wrote: Sat Oct 16, 2021 5:49 pm
riskreward wrote: Sat Oct 16, 2021 4:07 pm
willthrill81 wrote: Sat Oct 16, 2021 3:55 pm Why not just pay off the mortgage with the funds you would have used to buy the SPIA?

As is, you are borrowing by holding the mortgage to invest with the SPIA, but the embedded interest rate of the SPIA is likely less than your mortgage interest rate, especially after taxes.

Yes, this means that you would need to deplete about 1/4 of your portfolio, but that would be the case with buying the SPIA as well. You will pay taxes on the withdrawal, but you can spread that out over a few years to reduce the tax liability.
Thanks for input. To payoff mortgage will cost $236k. It will then save me $8.4k in annual P&I plus another $1k in taxes due to reduced IRA withdraws or $9.4k savings.
If I buy an annuity to give me $9.4k per year to pay $8.4k P&I plus $1k in taxes that will cost me $162k.
It just doesn’t seem like it’s worth paying off the 2.75% mortgage.
Yes, that does make sense. I didn't realize that the payout ratios on SPIAs were that good at your ages. I'm guessing that you're only looking at joint life SPIAs.

This means that you'll be very likely to both pass away before the mortgage is paid off, but if you're fine with that, this seems like a good strategy.
Yes only looking at joint life. Thanks for your help.
Big Dog
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Re: Buy SPIA to cover mortgage P&I

Post by Big Dog »

if my math is correct, with a ~$90k drawdown you are right at the top of the 12% backet or bottom of the 22% marginal bracket (federal). Why not drawn down and pay an additional principal against the mortgage, say an extra $20k per year? (Don't forget SS is going up quite a bit in Dec.)
bberris
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Re: Buy SPIA to cover mortgage P&I

Post by bberris »

I don't get it. Wouldn't the return be better by paying off the mortgage? The annuity comes with counterparty risk, and tax on the income portion of the annuity payment. Both are avoided by using the money that would have bought the annuity to pay off the mortgage.
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Re: Buy SPIA to cover mortgage P&I

Post by willthrill81 »

bberris wrote: Sat Oct 16, 2021 7:16 pm I don't get it. Wouldn't the return be better by paying off the mortgage? The annuity comes with counterparty risk, and tax on the income portion of the annuity payment. Both are avoided by using the money that would have bought the annuity to pay off the mortgage.
That was my knee-jerk reaction as well, but keep in mind that SPIA payouts at the OP's and spouse's ages are starting to get good, 5.8% in this instance. Since the principal & interest portion of the mortgage is a fixed nominal obligation, offsetting that with a SPIA is perfectly viable.

As I pointed out above, the OP and his wife are very likely to pass away before the mortgage is paid off, which is where part of the 'saved' capital is going. If there was a desire to leave the house behind free and clear for others, which the OP isn't concerned about, this strategy wouldn't make as much sense.

Taxes must be paid either way, whether on a withdrawal to pay off the mortgage or on the SPIA's payout. During the OP's lifetime, the SPIA payout will almost certainly be less than the amount needed to pay off the mortgage, so taxes will actually be lower by going with the SPIA.

Counterparty risk is the only potential rub I see with this plan, and I don't know that it's big enough to justify the amount that the OP would save in this instance, $74k plus lower income taxes.
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ScubaHogg
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Re: Buy SPIA to cover mortgage P&I

Post by ScubaHogg »

I suggested something similar in a different thread. If you are going that route maybe you can do a little better even and get an interest only mortgage?

viewtopic.php?t=323961
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riskreward
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Re: Buy SPIA to cover mortgage P&I

Post by riskreward »

Thanks to everyone for helping me out. I’ll noodle on your responses and let you know what I decide.
Thanks again. Much appreciated!
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