Retirement planning help

[Homebrew]

I have a friend who needs some direction in planning his retirement and thought the folks here might be of some help. Here's his basic situation:

He will be 64 in June, his wife just turned 59. He will likely retire within the next two years. She will likely retire in 1 to 3 years. He is a govt empoyee with a FERS pension, social security, TSP savings, and a tax deferred account of some sort from a high fee insurance company. She will have social security and has a TIAA-CREF 401(a) savings and a smaller 403(b) account with some rinky-dink company.

His FERS pension and SS will likely fund the bulk of their bills and living expenses, but they will require some other monthly income to fund the remainder of the monthly budget (i.e living expenses and normal spending money). They would also like to maintain access to the "excess funds" for one time large purchases (i.e. a classic sports car, etc.).

Neither of them are comfortable with a do-it-yourself type retirement portfolio. They'd like to have a plan so that they are more or less on autopilot unless they want to pull some funds for a larger unplanned expense. Our employer brought in a consultant who is an expert in govt retirements. They had an individual consultation with this guy who recommended that they basically do in-service withdrawals of all their retirement savings into one account at Mass Mutual and buy a variable annuity. I don't know much about variable annuities, but my gut reaction to this was that it was a terrible idea. However, considering that they have eight million options, what would you folks suggest?

Let's assume that the FERS pension and SS are taken immediately upon retirement (in her case when she hits 62). What's the best course of action? If they roll all of their other money into Vanguard or Fidelity, will those componies help them set up their account so that they can get a guaranteed income stream with part of the funds and an appropriate allocation with rest? Any other thoughts or ideas?

Thanks!

[youbet]

Quote:

Originally Posted by Homebrew unless they want to pull some funds for a larger unplanned expense........... buy a variable annuity.

I think you answered your own question. "pull some funds for a larger unplanned expense" and "buy a variable annuity" are an oxymoron.

[Homebrew]

Thanks for the reply...unfortunately, I don't really understand your point. Maybe I should rephrase the question. First of all, my understanding of a fixed annuity is that you are buying a lifetime income stream for a fixed price. I don't really understand what a variable annuity is....and maybe I don't understand fixed annuities either.

It seems to me that my friend could meet his goals by having a portion of his retirement savings annuitized. The rest could be invested to have for larger purchases, unbudgeted trips, or left for his heirs. I guess the question is two-fold:

1) Since he and his wife are uncomfortable managing all these things, where should he go for help? Vanguard gets high marks by most people, but would they do the hand-holding necessary for this case? Fidelity?

2) If he rolls the unannuitized portion to a place like Vanguard, should they be rolled into and IRA? If so, does he have complete access to funds whenever he wants them, or does he have to follow some kinda distribution rules?

I know this question is pretty vague and the devil is probably in the details, but any suggestions appreciated.

[ats5g]

Quote:

Neither of them are comfortable with a do-it-yourself type retirement portfolio. They'd like to have a plan so that they are more or less on autopilot unless they want to pull some funds for a larger unplanned expense. Our employer brought in a consultant who is an expert in govt retirements. They had an individual consultation with this guy who recommended that they basically do in-service withdrawals of all their retirement savings into one account at Mass Mutual and buy a variable annuity. I don't know much about variable annuities, but my gut reaction to this was that it was a terrible idea. However, considering that they have eight million options, what would you folks suggest?

First, the in service withdrawals into a variable annuity sound absolutely horrid. First, if this is to roll the money into an IRA, then there is no need for a variable annuity b/c the IRA is already tax deferred. Second, if you're talking about taking all the money out of the TSP, 401a + 403b at once, then they'll have to pay income taxes on all that amount before putting it into a variable annuity. Again dumb idea. Run away, FAST.

Quote:

Let's assume that the FERS pension and SS are taken immediately upon retirement (in her case when she hits 62). What's the best course of action? If they roll all of their other money into Vanguard or Fidelity, will those componies help them set up their account so that they can get a guaranteed income stream with part of the funds and an appropriate allocation with rest? Any other thoughts or ideas?

Yes, they can get personal Financial Planning Services from Vanguard, pretty cheaply if they roll a goodly amount of money over when they retire. If they want additional monthly income that is guaranteed like the FERS pension + SS, he could look into annuitizing his TSP. I'm not sure if he can just do some of it. They could also look into annuitizing some of her 401a money with TIAA, although the TSP has the option of increasing payments, while TIAA doesn't. And of course, you can buy immediate annuities [fixed or cola'd] with any money rolled into an IRA at Vanguard through their Lifetime Income Program.

One idea would be to figure out how much they'll need above and beyond FERS pension and SS for living expenses, and then annuitize enough of the other money to cover this - hopefully utilizing cola'd or inflation adjusted immediate annuities from the likes of the TSP or Vanguard. Then let the rest of it just sit there until they need it for whatever [boats, cars, etc.].

- Alec

[ats5g]

Quote:

Originally Posted by Homebrew Thanks for the reply...unfortunately, I don't really understand your point. Maybe I should rephrase the question. First of all, my understanding of a fixed annuity is that you are buying a lifetime income stream for a fixed price. I don't really understand what a variable annuity is....and maybe I don't understand fixed annuities either. It seems to me that my friend could meet his goals by having a portion of his retirement savings annuitized. The rest could be invested to have for larger purchases, unbudgeted trips, or left for his heirs. I guess the question is two-fold: 1) Since he and his wife are uncomfortable managing all these things, where should he go for help? Vanguard gets high marks by most people, but would they do the hand-holding necessary for this case? Fidelity? 2) If he rolls the unannuitized portion to a place like Vanguard, should they be rolled into and IRA? If so, does he have complete access to funds whenever he wants them, or does he have to follow some kinda distribution rules? I know this question is pretty vague and the devil is probably in the details, but any suggestions appreciated.

I think we were posting at the same time, and we came up with about the same thing, but here goes on these questions:

1) Vanguard's financial planners will definitely do some hand holding, especially if you roll over $500,000 and up.

2) Yes, roll the money over to the IRAs. After 59.5, they should be able to withdraw whatever, whenever they want. After they reach 70.5, then the IRS mandates how much they have to take out. I know that if you've got an IRA at Vanguard, you can have Vanguard automatically take out these Required Minimum Distributions [RMDs] and deposit them wherever you want.

- Alec

[FinanceDude]

Quote:

Originally Posted by Homebrew Thanks for the reply...unfortunately, I don't really understand your point. Maybe I should rephrase the question. First of all, my understanding of a fixed annuity is that you are buying a lifetime income stream for a fixed price. I don't really understand what a variable annuity is....and maybe I don't understand fixed annuities either.

You need a little clarification:

1)SPIA: Single Premium Immediate Annuity: You pay a lump sum in, and you get monthly payments for either life, a period certain for 20 years, or some other time period. They can be set up to increase the payments over time or the same payment every month. This kind of annuity is "annuitized", meaning the control over the money is given to the insurance company, and you have no further right to it other than the monthly payments.

2)Fixed annuities: They have been around forever. "Fixed" means you get a fixed rate. In the early 80's, these annuities sold like hotcakes because of the high interest rates. These days, companies offer "teaser" rates like 6% to get your money, and usually the rate drops in the years ahead. Most fixed annuities have a "minimum" rate they pay, like 2-3%. You don't have to annuitize this money, but you can be restricted on how much you can take out with some companies.

3)Variable annuities: The money you give them is invested in the equities and fixed income markets. Your account value can change, depending on how the market goes. youbet has had bad experiences with VA's, but they can work in certain circumstances with certain people.

Quote:

s to me that my friend could meet his goals by having a portion of his retirement savings annuitized. The rest could be invested to have for larger purchases, unbudgeted trips, or left for his heirs. I guess the question is two-fold: 1) Since he and his wife are uncomfortable managing all these things, where should he go for help? Vanguard gets high marks by most people, but would they do the hand-holding necessary for this case? Fidelity? 2) If he rolls the unannuitized portion to a place like Vanguard, should they be rolled into and IRA? If so, does he have complete access to funds whenever he wants them, or does he have to follow some kinda distribution rules? I know this question is pretty vague and the devil is probably in the details, but any suggestions appreciated.

Vanguard and Fidelity are NOT hand-holding type of places. They do provide some guidance, but they're DIY places. Folks on here may disagree but it's the truth.

IMO, rolling one's 401K or 403B to an IRA is the best way to go. The positives are endless, the negatives are few. The bigger question is HOW to invest those proceeds to meet the CLIENT'S objectives.

Your friend's choices are pretty simple:

1)Become more educated about their money, and work within Vanguard or Fidelity or Schwab. If they have enough money, Vanguard will give them a free financial plan from a CFP. I am not sure on the dollar amount for that service.

2)Take on an advisor to help them. Some companies have their 401K provider come in and offer financial advise. Or have their CPA or estate attorney give them a referral.

[FinanceDude]

Quote:

Originally Posted by ats5g First, the in service withdrawals into a variable annuity sound absolutely horrid. First, if this is to roll the money into an IRA, then there is no need for a variable annuity b/c the IRA is already tax deferred.

Your comment is a common misconception about why anyone would have a VA in an IRA. In some special circumstances, a VA can work in an IRA.

Quote:

Second, if you're talking about taking all the money out of the TSP, 401a + 403b at once, then they'll have to pay income taxes on all that amount before putting it into a variable annuity. Again dumb idea. Run away, FAST.

He's not saying that. The Mass Mutual rep is suggesting doing an non hard-ship ROLLOVER into an IRA in the person's name, and investing in a VA. Not that I agree, but I needed to clarify that.........

[CyclingInvestor]

Quote:

Originally Posted by Homebrew They had an individual consultation with this guy who recommended that they basically do in-service withdrawals of all their retirement savings into one account at Mass Mutual and buy a variable annuity.

Remember, the over-riding motivation of "this guy" is get get as much as possible
of the $$ into the variable annuity, which pay him a much larger commission than
most other products, whether or not it is a good idea for the client. While there are
some FAs who always put the clients welfare first, there are many in every profession
who do not.

[Homebrew]

It sure seemed to me that this planner was giving bad advice. The problem is, since I don't really understand the variable annuity thing, I couldn't really say too much. My buddy says the planner is super nice, really know his stuff, etc. and other folks who have had the individual consultation with him have said what a great product this VA was. I'm not ready to say the guy is a crook, but I sure hope he's not fleecing all these people. I just recommended to my buddy that he study up a little more and get another opinion from another planner. And of course, I told him I'd post this on this forum to get some other ideas.

Thanks to all the folks who have taken the time to respond...much appreciated!

[travelover]

Quote:

Originally Posted by Homebrew ................I just recommended to my buddy that he study up a little more and get another opinion from another planner...............

Please make sure that you recommend an hourly fee planner. The new Bogleheads book has a good section on how to find one. I just finished this book and highly recommend it.

[FinanceDude]

Quote:

Originally Posted by CyclingInvestor Remember, the over-riding motivation of "this guy" is get get as much as possible of the $$ into the variable annuity, which pay him a much larger commission than most other products, whether or not it is a good idea for the client. While there are some FAs who always put the clients welfare first, there are many in every profession who do not.

The key is the name of the firm, I believe it was Mass Mutual. Of course a Mass Mutual rep would recommend an insurance product, he is compensated on insurance products, probably at a higher commission rate than non-insurance products.

Have your friend ask the Mass Mutual guy ETF's, or closed end funds. I'll bet the silence will be deafening.........

One telling thing you said is ALL the other folks who have met with rep agree how WONDERFUL the VA is, which to me is another danger sign........how can the SAME VA be good for EVERYONE he talks too??