Retiring at 55: Should you buy an annuity or do a Roth conversion on $2 million or more?


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I was lucky enough to retire at 55. I use the rule of 55 to withdraw money from my $2 million worth of 401(k). I also have about $50,000 in a Roth IRA and $200,000 in a taxable brokerage. My annual expenses (all inclusive) are about $66,000 and I live in California. I’m 65 and will be on Social Security, which is about $2,571 a month, and I’m single.

Does it make sense to use an all taxable brokerage firm to buy a fixed income annuity or should I use it to convert part of my 401(k) to Roth? heard that it is better to pay using “external” money than to deduct taxes from the conversion.

The Roth transformation minimizes the minimum distribution required later in life, but getting a guaranteed income in an annuity sounds just as good. A $200,000 fixed annuity would be approximately $1,051 per month.

Is it a good strategy to use at this point in my retirement?

thank you,


Dear Rick

When people talk about early retirement with financial independence (the FIRE movement), they’re probably thinking of scenarios like yours. You can save a lot of money and spend relatively little, so you can have a lot of fun.

Your question is what to do with the money in your taxable brokerage account, but it’s your 401(k) that really needs the most attention.

Impact of early retirement

The 55 rule means you can receive distributions from your 401(k) before you turn 59½ without paying the 10% early withdrawal penalty. However, you will have to pay income tax on the money you withdraw.

If we remain cautious about our spending, we could unwind $66,000 a year and, assuming a very slow average growth rate of 5%, we could end up spending significantly more in 40 years than we started with. I have.

You can play around with the numbers using our online savings distribution calculator to see how long your $2 million will last depending on how your annual withdrawals and balance grow over time. Please plan accordingly. You don’t want to run out of money when you retire at 55 and get back to work in your 80s too late.

Your looming RMD

That spending cut plan will only work for a while. Based on the Secure 2.0 rules implemented this year, you should plan ahead for your minimum distribution number (RMD), which is likely to start at age 75.

The government will require you to withdraw about 4% of your account balance initially, and then it will change over time. If he turns 73 this year (he’s RMD now), he’ll have to pay around $75,000 even if he doesn’t need that much to spend.

That’s why Scott Bishop, a financial planner at Avidian Wealth Solutions in Houston, suggests looking at your 401(k) first to see what transactions you plan to make with your annuity, then use the funds to make the purchase. . What the annuity does for you is take a portion of your $2 million and turn it into a guaranteed monthly payment.

And maybe not even just a pension. According to Bishop, there are several different types of annuities to consider, some that provide immediate income and others that wait until you’re older.

You may soon be able to purchase annuities within your 401(k), but that will depend on how quickly your company’s plan adopts the new option. Allocation over time.

“There is a lot of innovation in this space.

Overall planning matters

What you are looking for is diversification of your retirement income. You don’t have to go all-in on one type of account. Tax-deferred growth requires a 401(k), tax-free growth requires a Roth IRA, flexibility requires a brokerage account, and guaranteed income requires a pension and social security.

Looking at the big picture and wanting to shift further from that big 401(k) balance, I recommend doing a Roth transform along the way. Bishop says 55 is the perfect age to consider this. This is until you enroll in Medicare at age 65. After that, increased income can cause headaches as higher IRMAA premiums and higher taxes on social security benefits. You can make small payments over the next 10 years to reduce your tax burden. The answer is complicated, so you can consult an accountant for the most efficient way to pay your taxes.

With that said, why make Social Security age 65? Given your wealth, waiting until full retirement age of at least 67 will earn you more, and waiting until 70 will maximize your monthly checks.

Bishop says there are two key questions to ask yourself:

  • How much income do you need?
  • How can you “silence” your future taxes? For example, if you annuitize a brokerage firm and grow your 401(k), you may have major RMD problems later on.

So what do you do with your brokerage account? Maybe just leave it alone. “A brokerage account can also be used for unexpected ‘lump sum’ spending, so it’s not all regular income,” Bishop says. “What if you need to pay for medical bills or fix your roof?

Keeping that account invested for capital gains and eligible dividend processing will help you have an overall balanced portfolio.

April is National Financial Literacy Month. To mark the occasion, MarketWatch is publishing a series of “Financial Fitness” articles to help readers improve their financial health and offer advice on how to save, invest and spend money wisely. Click here for details.

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