I would think of it as part of my fixed income allocation that declines as payments are made.I wonder how to think of this annuity income. I had to spread out my distribution from 2 of my father's annuities over 5 years. I could have conceivably taken it all in a lump this year or next, but this would have put my wife and I in a very high tax bracket, and the options were 1 year distro or 5-10. I took 5.
I will be receiving an amount equal to my normal paycheck from this annuity each month over the next 5 years. It is a fixed number per month. Not variable. In Bogleheads three fund thinking, what is this money? Is it a bond? Is it equity? My intuition is to liquidate the bond allocation in the rest of my portfolio and go 100% equities, as even if I lost my job and the stock market tanked, I would be fine for the next 5 years. Obviously, I would step my bonds back up over the last 2 years of the distribution. Thoughts?
Let’s say, for example, that the lump sum you could get today would be $500k. I’d suggest that you consider the full $500k to be fixed income, and then adjust your other assets to get back to the overall asset allocation that you desire.
For simplicity, I suggest that you decrease the “value” of the annuity on a straight line basis over the remaining term. So one year after you start payments, the value will be $400k. And the value will be zero at the end of 5 years.
If you choose to rebalance to accommodate the annuity, you’ll find that you jump up your equity assets when you first include the annuity in your asset allocation calculations. You’ll then gradually shift from equities back to fixed income as the annuity declines in value. You’ll want to do any rebalancing in your tax preferred accounts (traditional or Roth IRA) to the extent possible to avoid capital gains taxes when you rebalance.
What I’ve suggested is what I would do if I was in your situation.
Post back with questions.
Statistics: Posted by Stinky — Fri Mar 29, 2024 10:52 pm — Replies 10 — Views 939