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Back in the summer of 2020 I made a post about the possibility of combining an interest only mortgage with a Single Premium Immediate Annuity (SPIA) and how someone in a certain position might be able to come out ahead with a SPIA+Interest Only Mortgage vs. Paying off a mortgage.

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It has dawned on me that many people on this forum likely took advantage of the low interest rate environment in 2020 and 2021 to refinance their mortgages. Recently we have seen a dramatic run up in interest rates and for people with a low interest rate mortgage it might be more advantageous to buy a SPIA vs. paying off their mortgage.

Take this scenario:

65-year old Male. He has $500,000 in cash to use for something. He can pay off the mortgage or use those funds to purchase a SPIA.

Current Mortgage:
$500,000 fixed rate mortgage at 2.25% with 30 years remaining
Monthly P&I: $1911 (I don't include insurance or taxes since they must be paid regardless of the mortgage status)

A $500,000 Single life immediate annuity would pay $2712/month (State Arkansas--https://www.immediateannuities.com/).

After reading Wade Pfau's book "Safety First" I know that the full value of a annuity payout isn't taxed. I don't really know how to figure out what part is taxable, so I'll show one example where the full payout is taxed at 15% and one where it's taxed at 0%.

Annually--taxed
Annuity Payout: $32544
Taxes: ($4881)
Mortgage P&I: ($22932)
Net annually: $4731

Annually--no tax
Annuity Payout: $32544
Mortgage: ($22932)
Net Annually: $9612

If the individual took the above action he would have successfully combined a nominal liability with a contractually guaranteed nominal income stream. Even assuming the entire amount is taxed at 15%, which I do not believe it would be, he would increase his annual income by $4800/year with virtually no more risk. Assuming a $1,000,000 portfolio and 4% withdrawal rate his yearly income has increased by 10%! And the best part is even after the mortgage is paid off the individual would still be receiving the payments (assuming he is still alive obviously).

I'm really having a hard time thinking of a single good reason why a healthy 65 year like the one outlined above would just straight pay off the mortgage instead of getting some kind of SPIA to make the monthly mortgage payment. Perhaps smarter people on the board than me can point out the flaw in my reasoning.


Disclaimers:
- individuals more interested in a legacy probably wouldn't benefit as much as the individual above
- the numbers might still work for a couple, depending on the details. If interest rates go higher the numbers would likely look even more favorable
- conversely someone could buy a annuity whose payout is exactly the same as the mortgage and invest/spend the difference
- the whole thing works even better if an individual has a 30-year interest only mortgage but with a touch more risk.

Hi! It's definitely worth considering the potential benefits of using the funds for an SPIA rather than paying off the mortgage, especially in a rising interest rate environment. However, it's important to weigh factors like taxes and personal circumstances. Overall, it's a thought-provoking approach that could be advantageous for me. Especially with companies helping to overcome the dept (see turbo debt relief reviews), this plan may work. Thanks for sharing your insights!

Considering the low-interest rates we saw in 2020 and 2021, it's worth exploring this approach. Your scenario with the 65-year-old fella makes sense on paper. Getting that extra income from a SPIA while keeping the mortgage could indeed boost annual cash flow.
As for tax implications, it's a bit complex, and it's wise to consult a tax expert to get the nitty-gritty on how it might play out. But even if there's some tax involved, the increase in annual income seems like a win.
You've made some solid points here, and I don't see a glaring flaw in your reasoning. It's definitely a strategy worth considering, especially for folks in a similar situation.
If you want more insights and financial advice, you might want to check out Mortgage Advice Harrogate. They've got some great resources for navigating these kinds of financial decisions without all the fuss.