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Ask an Advisor: Should I Cash Out My $200k in Annuities and Buy a Rental Property That Will Bring in $1,500 Per Month?


I’ve already retired and I’ve got $200,000 in annuities and I’m 60 years old. Should I get a monthly income from my annuities (which will be about $1,000 or withdraw all of the annuities, pay the 30% tax and invest in a rental property and use that money — approximately $1,500 — for an income? I’m already getting a pension as a monthly income but will be needing more later on in life to get by until I get my Social Security.

– Larry

Larry, that’s a great question and I think it’s smart to consider your options. The rental property will potentially bring in more money. However, I think the decision comes down to how hands on (or off) you want to be, and your willingness to take on the inherent risks associated with owning rental property. If you have similar questions or concerns about your retirement plan, consider speaking with a speaking with a financial advisor.

Annuity Income vs. Rental Income

Assuming you have life annuities, the income is pretty straightforward: you’ll collect about $1,000 per month as long as you live. It’s unlikely – but not impossible – that this income will adjust with inflation so understand that your real purchasing power will decline over time. Depending on the type of annuity you have, all or a portion of it will be taxable.

In addition to the $1,500 gross income you estimate the rental property will generate, there are a few other financial considerations that affect this comparison:

  • Additional expenses: You’ll have additional expenses from the rental property, such as insurance, property taxes and maintenance. You can get a quote for insurance and estimate on property taxes, but you’ll need to estimate the maintenance costs. Some common rules of thumb are to set aside 50% of your rent each month to cover operating costs (including the mortgage, insurance and property taxes, or 1% of property value. 
  • Depreciation: On the plus side, you’ll also get to depreciate the rental property and deduct ordinary expenses. If we generalize by taking the $200,000 and subtracting out the 30% you mention for taxes, then we have a $140,000 property. The standard depreciation period is 27.5 years, so you’d get to deduct about $5,091 per year in addition to your expense deductions.
  • Inflation protection: You can adjust how much you charge in rent over time to keep pace with inflation, protecting the real value of your income. Your annuities likely do not include inflation protection.

A point I want to highlight about your deductions and expenses that is sometimes glossed over is that your cash expenses – repairs, taxes, insurance, etc. – are still real expenses that reduce the amount of money that’s in your bank account. Deducting them just means you save a little on taxes, but they don’t put you ahead on a net basis. (And if you want to take a deeper look at the financial implications of owning a rental property, talk it over with a financial advisor.)

Consider the Time Commitment

A man who recently retired does some rough calculations comparing his annuity income to potential rental property income.

Also consider the time commitment and effort required of either option. To collect the annuity check you simply need to be alive and have an account for the deposit to go into. That’s pretty simple.

I’m not sure if you have any experience with rental properties, but they aren’t always as passive as you might think. Of course, you can hire a property manager, which will eat into your cash flow and reduce your profit margin. Property management fees typically range from 8% to 12% of the monthly rent, which could come out to between $120 and $180 each month.

Otherwise, you’ll want to consider the effort and hassle that might accompany collecting rent, responding to tenant’s requests and concerns, finding new tenants, making repairs and doing maintenance. I’m not saying it will be a hassle – only that it’s something to consider. Some people even enjoy property management and don’t mind the work that it entails. It’s a personal preference.

Whether you’re buying an annuity or investing in real estate, a financial advisor can help you project the impact that different decisions can have on your financial plan.

More Uncertainty Surrounds Rental Properties

Another consideration is the potential uncertainty around your monthly income. Annuity payments are guaranteed, but rent is not.

The degree of uncertainty may vary with the type and nature of the property, but most properties will experience vacancies or missed payments over time. I suggest contacting others investors with the same type of rental property in the general location that you’re considering, and get some estimates of what to expect. You can then plug these estimates back in as “expenses” to get a better financial comparison.

If you need help analyzing investment opportunities you’re interested in, consider connecting with a financial advisor.

Bottom Line

The rental property may bring in more money on a gross basis but that difference will probably shrink once you consider the additional expenses associated with owning and managing a rental property. For instance, if you have several months where the property sits vacant, face major repairs or need to hire a property manager, the $500-per-month difference between the annuity and rent payments may evaporate. I also think it’s important to decide if it’s worth it to you after considering how much time, effort and stress will be involved in owning a rental property.

I’m not against owning rental properties. They can be good tools. But when deciding whether or not to buy one it’s important to compare them against truly passive – and in this case guaranteed – income sources appropriately.

Retirement Planning Tips

  • Required minimum distributions (RMDs) play a pivotal role in many people’s retirement plans. These mandatory withdrawals begin at age 73 (age 75 for people who turn 74 after Dec. 31, 2032) and they can increase your tax liability and tax rate. That’s why it’s important to plan for them. SmartAsset’s RMD calculator can help you estimate how much your first RMD will be and when you’ll need to take it.
  • Remember, you don’t have to build a retirement plan alone – a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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