Q. I am a 63 year old firefighter who will be retiring in a little over a year. I expect to receive a pension of about $ 5,400 a month. In addition, I am currently receiving a military pension from the Marine Corps Reserve of $800 a month. I also expect a small benefit from Social Security— about $400 a month— when I reach full retirement age.
Recently, a financial planner suggested that I buy a fixed annuity that would pay me about $16,000 a year starting at age 70. In order to do this I would take money from my traditional IRA with Vanguard to make the purchase ($250,000-$300,000).
Is this a good idea— or should I just keep the money with Vanguard? He suggested that I use money that is now in the bond funds I have: GNMA, Total Bond Market Index, Inflation-Protected Securities and Short-Term Investment-Grade Bond Fund.
My wife and I have about $700,000 in the Vanguard IRAs— split between traditional and Roth. My wife is 62 and collects $756 monthly from Social Security. —J.H., by email
A. Either you have left out some information or your “financial planner” is jumping the gun to make a product sale. Let me explain why. The good news is that you will have a monthly retirement income of $6,600 from three different pensions. You and your wife also have the additional security of $700,000 in retirement assets.
That pension income is roughly equivalent to having something over $1 million in fixed income investments. So the idea of converting a big slug of your retirement savings from one form of fixed income investment (mutual funds) to another (insurance) doesn’t strike me as very productive.
You might do better by considering some amount of equity investment. Since most of your income does not depend on the stock market, you could easily commit a portion of your retirement savings— such as your Roth accounts— to equity investments. This would give you the prospect of a higher long term return with no tax liability. Buying an insurance product with the same assets would reduce your prospective returns and would add no tax benefit.
More important, you may not have addressed what happens to your household income when you die. Unless your firefighter and Marine Corps pensions are 100 percent joint and survivor pensions, your wife could experience a major decline in standard of living if you die. Those are the kinds of issues a financial planner needs to address up front. Only when that is done do you start to consider how your money is invested and what products should be used.
Q. Given our current economic climate, when would it be a good time to begin to purchase individual municipal bonds, investing $50,000? —S.M., Round Rock, TX
A. First, check your tax bracket to see if you would actually benefit from making tax-free investments. It’s possible that you won’t benefit, in part because tax-free income is included in the formula that determines whether your Social Security benefits are taxed. More important, the tax-free bonds that offer the largest increase in yield over taxable bonds are very long term. That means the value of your tax free bonds could go down quite a bit if interest rates rise in the future.
Many people are tax-phobic. They invest in tax-free bonds that provide them with no spendable benefit. Let me give you an example. Single persons have a standard deduction of $5,700 and a personal exemption of $3,650 this year. After that $9,350, they can have an additional income of $8,350 that is taxed at only 10 percent. And beyond that, they can have another $25,600 that is taxed at 15 percent. So you can have $43,300 of income and pay at a tax rate no higher than 15 percent.
There is little or no reason for people in this position— and that’s a lot of people— to buy tax-free bonds, particularly if they are investing $50,000. Another reason is that if you are buying individual tax-free bonds in such small quantities they won’t be priced to your advantage when you buy, or when you sell.