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What should I do with my 8 year old variable annuity?
Old 11-03-2013, 06:22 AM   #1
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What should I do with my 8 year old variable annuity?

I'd like to ask a question about variable annuities but I'm relatively new to the forum and don't know to how to start a thread. I'd appreciate any help.

My husband and I both 'invested' in variable annuities over 8 years ago. Fortunately, they are small - 23,000 for me and 24,000 for him. Most of the money is invested in a restricted set of mutual funds.

The annuity guarantees '6%' on the account balance - which is the abstract balance that can be annuitized after 10 years. (It's actually more like 5 1/2% since some of the money has to be kept in cash - found this out later.) There's also a death benefit equal to the account balance. If the cash value (surrender value) gets really low, the account is closed so you are forced to annuitize before it gets to zero.

The contract allows us to take out the 6% rollup every year instead of adding it to the account balance. About 3 1/2 years ago we decided to go start doing just that. So we receive a small check every month.

If you add the total amount of the checks we've received to the surrender value, it looks like we've made about 13% over 8 years time (not PER year but during 8 years.) So we're a little ahead right now.

We're past the surrender fee time and trying to decide what to do. Options:

1) Cash annuities out - it's ROTH money so no taxes (I know, I know...).
2) Continue to draw a small check each month as long as possible (no COLA ,though). If the cash value gets too low we'd annuitize the account balance. If the cash value held, the beneficiary would receive the death benefit.
3) Stop drawing the check, allow the account balance to accumulate and draw a larger check each month in 10 or 15 years. We're both about 60 years old. As in number 2, we'd have the possibility of annuitizing or having the death benefit.

Another thing, the insurance company is now forcing us to put the money in conservative investments - hmph! The guy who sold it to us thinks we ought
to just keep drawing the check every money forever. I think he's already received the bulk of his commission up front so he might be sincere.

I like option 1 but I've heard the insurance company would love to get out of the contract, so I don't know.

What do you think? Thanks a million for your advice.
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Old 11-03-2013, 07:39 AM   #2
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Is the monthly benefit that you would receive under option 2 better than what you would receive if you cashed out and then bought a single premium immediate annuity? (see immediateannuities.com or Vanguard for pricing info). If the benefit is significantly better then that might favor option 2.

The problem with option 3 is that even if annuitization rates are favorable that the incremental fees compared to other alternatives over 10 to 15 years would eat up the favorable annuitization rate so you may not come out ahead and may even come out behind.

You really should assess it in concert with your overall AA and investment plan (if you have one).
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Old 11-03-2013, 03:24 PM   #3
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My short answer is you should google Moshe Milevsky and read several of his recent articles on annuities especially this one on withdrawing from a VA. Also visit his companies website. Milevsky is a finance professor, who has written a book Are you a stock or bond which is popular on the forum. He also has written extensively on variable annuities and has gone from a big critic of them to a advocate of using them in many circumstances.

A big caveat. I've never personally bought an annuity, they are super complicated products and I've never read the 200 page prospectus that comes with yours. I am also going to assume that you have elected some type of guaranteed for life income rider that lets lock in the highest account value each year.
My advice is go with option 2 and take the 6% out each year. I am also going to suggest that you stick as much money as you are allowed in as risky investments as possible. Something like small cap emerging growth fund would perfect, and the Mediterranean fund (Egypt, Syria, Greece, Italy, Iraq ) would be even better.

According to Prof. Milevsky many insurance companies screwed up the pricing of the guaranteed income benefit and instead of charging 1-1.2% should have been charging 2%+. They are now stuck in a super low interest rate environment paying out 6% for life to 60 years (By comparison if you bought a Vanguard VA today it will only pay 4% to a 60 year). They also expected folks to invest more conservatively in their VA, and have to adjust to a vary volatile stock market this century. That is the reason the insurance company would like to get out of the contract and is forcing you to invest more conservatively

His advice is to take the maximum and run the cash value of the annuity to zero as soon as possible. Once the cash value of the policy is 0, you have won and insurance have lost because they have to keep paying you 6% of the maximum account value for the rest of your life, which is likely to be 30 years for at least one of you. If better if we have years like this one with the market up 20% even withdrawing 6% paying 2-3% the account balance should rise and your lifetime payments increase.
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Old 11-04-2013, 04:23 AM   #4
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Wow, thanks! You guys are great! I'll start my research today with the advice you two were so generous to offer.
Clifp, you're right about the 200 page book that came with the annuity. I tried to understand all I could ahead of time - met with the FP (salesman) many times for hours but didn't realize there are things in the small print the insurance company can do to protect themselves and hurt me. Last summer they changed the funds we were allowed to invest in to conservative funds. Worries me what they might do next.
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Old 11-04-2013, 07:40 AM   #5
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Is $47,000 a meaningful amount of money compared to you other assets? If this is portfolio noise, I recommend cashing it in and making your life less complicated. You could roll it into a self-directed Roth and move on from there.
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Old 11-04-2013, 10:24 AM   #6
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Yes, it's meaningful. I'm sort of leaning in your direction because the thing is so complicated. Thank you for your reply.
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Old 11-04-2013, 11:05 AM   #7
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If it is meaningful then I would lean towards option 1 and invest the proceeds in a more conventional investment like Wellington or Wellesley. No guarantees with those products, but they are easy to understand and have a good track record.
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Old 11-04-2013, 11:19 AM   #8
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I too would lean towards cashing them out without surrender and going into low cost VG options. VA contracts from that era had lower costs, but you don't appear to need the "guaranteed growth" aspect of the contract. And yes you are correct, the insurance companies always leave some "wiggle room" with regards to changing the contract in the future as they see fit..........so do yourself a favor and make your life easy...........
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Old 11-04-2013, 02:57 PM   #9
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I too would lean towards cashing them out without surrender and going into low cost VG options. VA contracts from that era had lower costs, but you don't appear to need the "guaranteed growth" aspect of the contract. And yes you are correct, the insurance companies always leave some "wiggle room" with regards to changing the contract in the future as they see fit..........so do yourself a favor and make your life easy...........
It doesn't seem to be much of hassle to just take the monthly check.

Right now an immediate annuity is paying 6.17% for a 60 year old female and 6.41% for 60 year old so the 6% is competitive.

But her VA has considerable advantage over an SPIA. The most important is that 6% based on the account value not the cash value. I am assuming that the account value is higher than the cash value but Happy will need to verify this. Second the VA provides a death benefit equal to the cash value which the SPIA doesn't.

Finally, unlike a SPIA the payments can go up. Now admittedly the insurance companies have heavily stacked the deck to make sure this doesn't happen very often, high fees, requiring conservative investments, means that only when we have a great year in the market like this year will the account value rise. But bull markets do happen and they do benefit VA holders, albeit much less than a normal portfolio would.
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Old 11-04-2013, 06:02 PM   #10
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Thank you all again sooooo much. The account value of the 2 annuities added together is about 59,000 whereas the cash value is about 41,000 because we waited a few years before drawing the annual 6%. I worry that if we keep doing what we're doing the insurance company's manipulations will cause the cash value to will go down too fast, we'll be forced to annuitize and the annuity check we'll receive then will be so tiny that overall this will be a really bad investment. The death benefit also goes away when the account is annuitized.
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Old 11-05-2013, 01:06 AM   #11
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Originally Posted by HappyOutsourced View Post
Thank you all again sooooo much. The account value of the 2 annuities added together is about 59,000 whereas the cash value is about 41,000 because we waited a few years before drawing the annual 6%. I worry that if we keep doing what we're doing the insurance company's manipulations will cause the cash value to will go down too fast, we'll be forced to annuitize and the annuity check we'll receive then will be so tiny that overall this will be a really bad investment. The death benefit also goes away when the account is annuitized.
A few more questions. Is the annual value of the checks ~$3500? If so you are getting 6%*59,000. Which is a lot better than cashing out the policy and getting your $41k and trying to invest it.

Now there are a lot of twist and turns associated with VA, but in general that ~$3500 is guaranteed for a life. Meaning you get the higher of the minimum guaranteed benefit or the value of the cash balance when it is annuitized. When you annuitize the policy you still each get ~$1750/year as long as you live. (This maybe different depending on what type of survivor benefit you elected) The only thing you lose is the death benefit it becomes 0. So don't sweat crashing the cash value, that is exactly what Prof Milvesky advocates and he knows what is doing.

Now of course you'll want to verify this with the insurance agent and the company. But in general that is the big advantage of variable annuity a "guaranteed" income for life and it appears you bought one when they insurance companies were being generous. Right now that same type policy would only be giving you ~$2,400 a month for life you'd be better off cashing the policy out.
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Old 11-05-2013, 05:48 AM   #12
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Clifp, you are right on the money! The annual payout is about $3300 and I'm guessing the payout on the annuity of $59,000 at a low interest rate would be about $1750. Wow!
I just wonder if investing the money directly would result in a better payout over time, especially since 3300/1750 won't buy a whole lot in 20 years. Of course we could invest the 3300/1750 every year or use that cash to lower the amount we draw from our brokerage account. I'd feel better about leaving the VA alone if I knew the 3300 would keep coming for a long time and the death benefit stayed in force. It's going to take a long time to just get our initial investment back especially if we have to annuitize early. Thanks a $$$million!
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Old 11-05-2013, 01:46 PM   #13
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Ok 5.5% of 59000 works out to be $3300.
Would you be better of investing the $41,000? My answer is probably not.
The general forum rule of thumb is that you can withdraw 4% of your money each year in retirement. 4% of the 41,000= $1640 or exactly 1/2 of what you are making now.

This is not an an Apple to Apple comparison because the 4% gets increased each year by inflation and in most situations you'd end up with more than $41,000. Still using historically inflation rates it will take 25-30 years for the $1640 to double to be $3300.

On the other hand the annuity has some advantages also, it is guaranteed by an insurance company (again not 100% safe but pretty close). There is a shrinking death benefit for at least 15 years,and it is conceivable that payout could increase.
Anyway 8% is a terrific guaranteed rate today for a 60 year. Anybody would be happy to take it.

Quote:
I'd feel better about leaving the VA alone if I knew the 3300 would keep coming for a long time and the death benefit stayed in force. It's going to take a long time to just get our initial investment back especially if we have to annuitize early
. As I said the $3,300 should be for life, but check with the insurance company and your broker.

Also keep in mind that you bought an variable annuity as an insurance policy more than investment.
You made two bets with the insurance company. The first is would you live a long time, if you and your husband both live to be 100 the insurance company is stuck paying you $3,300 and they lose. If on the other hand you both die in a car crash tomorrow, the insurance company made lots of money from fees, the broker made a commission and the death benefits is less than the company made having your money for 8 years. Now the jury is still out on this bet.

The second bet was the relative to investments returns. The insurance company basically bet they'd never have to pay off on their 5.5%-6% guaranteed rollup/ withdraw rate. Well the insurance lost this bet, due to a wide variety of factors. We know this because they don't offer this rate anymore and they want you to cash in the policy. I say make them pay off the bet, it is pretty rare that insurance companies lose bets.
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Old 11-06-2013, 09:24 AM   #14
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I'd agree with clifp. If you want lifetime income, $3,300 is more than you'd get if you put the $41,000 into a non-COLA'd SPIA. It's also more than most people here would be willing to withdraw if they transferred the $41k to a mutual fund.

OTOH, you're taking inflation risk on the $3,300. If you cashed out the VA and put the money heavily into equities, you might feel better about taking just half the $3,300 in the first year, then increasing withdrawals with inflation.

This is just a portion of all your retirement income plans. What you do with the VA may be influenced by what kinds of risks you have on your other assets.
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Old 11-07-2013, 08:48 PM   #15
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Well, actually the $3300 is not guaranteed for life. The guaranteed minimum income benefit rider on the policy just promises we can annuitize on the account value (the 6% rollup or ratchet ) if the policy is held at least 10 years. If the cash value (surrender value) goes to zero we're forced to annuitize on what's left of the account value. This is supposed to be the worst case scenario. There's also a death benefit that pays out the account value if the policy has not been annuitized yet.
Cash withdrawals are subtracted from the account value on a dollar for dollar basis up to the 6% but pro rata after that. If we did decide to continue the $3300 withdrawals, it probably would be wise to stop taking them if the cash value got too low. Then we could use it as life insurance. Or annuitize.
I wish the riders were guaranteed lifetime withdrawal or guaranteed minimum withdrawal riders.
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Old 11-09-2013, 10:45 PM   #16
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Okay. If I understand this correctly, the "account value" is currently $59,000. It's guaranteed to grow at 5.5%. So in two years it will be about $65,000. At that time, you can convert it into a lifetime, non-cola'd income. The amount of income is determined by purchase rates which should be stated in the contract. You're thinking (or already know) that you'll get noticeably less than $3,300 if you take that route.

If you don't do that, then you just have a normal mutual fund with a $41,000 balance, and you're taking $3,300 annually out of it. Well, it probably isn't "normal", it probably has abnormally high expenses.

So now you have to compare what you're really going to get if you annuitize, to what a low load mutual fund could give you. Odds are, the mutual fund will win, but it would be good to see the numbers.
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Old 11-12-2013, 05:17 AM   #17
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Sorry to hear that you were sold one of those dreaded annuities, one of the most expensive of all financial products. Obviously you went to a non-fiduciary "adviser". Stop dealing with non-fiduciaries.

Your goal should be to 1) get your money out of that annuity any way you can as long as it doesn't cost too much and 2) lower your annuity expenses if you remain in it.

I agree with the earlier poster who mentioned Vanguard. Vanguard annuities are VASTLY lower cost than the ridiculously expensive "retail annuities" that insurance agents, brokers and other non-fiduciaries sell. Vanguard does not pay sales commissions to ANYONE. This keeps YOUR fees really low AND Vanguard does not have surrender penalties. Do a 1035 tax free exchange to Vanguard. Again don't go to Mr. Broker / agent for advice because he will tell you to stay. Annuity salesmen earn 1/4% sales commissions every year that their name is listed on your quarterly statements. He will start earning NOTHING if you switch to Vanguard.

You didn't mention your age. If you're less than 59 1/2 then you should set up a 72(t) program and withdraw approximately 5% per year. Do this even if you DON'T need the money! Invest it in ETF's instead and enjoy the normal capital gains tax rate. Keep in mind that once you want to start taking money out of an annuity (time of distribution) that ordinary income rate is a killer. As a result you need to tightly control that amount that you withdraw each year. I'm sure your annuity salesman never told you that.

If you're really really young then paying the 10% penalty might become a net gain after many years. This is because you will lower the expense ratio, the unneeded mortality and expense fees, etc. And you won't have to pay that dreaded ordinary income tax rate on gains. You want the capital gains tax rate.
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Old 11-12-2013, 01:47 PM   #18
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Thanks to all of you for your help. We're still trying to decide. I say BAIL! but my husband is hesitant. It's ROTH money and I'd just like to throw it in with our larger brokerage account which is also ROTH. Next year when my husband draws social security we shouldn't need the check every month for living expenses any more.
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Old 11-12-2013, 03:31 PM   #19
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Thanks to all of you for your help. We're still trying to decide. I say BAIL! but my husband is hesitant. It's ROTH money and I'd just like to throw it in with our larger brokerage account which is also ROTH. Next year when my husband draws social security we shouldn't need the check every month for living expenses any more.
"Bail" as in pay the 10% (plus state tax) and bail out of annuities all together? Before you do that you would want to crunch the numbers in Turbo Tax. Compare how much you would be losing each year in a Vanguard annuity versus if you were invested outside of the annuity in ETF's.

Vanguard annuities typically have separate account fees of 0.30% annually. Their subfund passive management fees are about 0.40% more than with ETF's. So if you switch to the absolute lowest cost annuity (Vanguard) you're still losing 0.7% per year in unnecessary fees.

If you live in California (for example) you pay a 10% Federal penalty plus about a 1% state early withdrawal penalty if you withdraw before age 59 1/2. So it would take almost 16 years to make up for that.

Of course the money would grow without being taxed at the ordinary income rate. Read Wealth Manager's article "Photo Finish" and you will see that the so-called "advantage" of tax deferral is over-rated. They concluded that you wind up losing money in an annuity.

Anyway talk to a tax accountant / financial planner who will give you fiduciary advice and not try to sell you something. You want FIDUCIARY advice -- not a salesman next time!
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Old 11-13-2013, 05:09 PM   #20
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Thank you, ETFS_Rule. We're both about 60 so we're safe with the 10% penalty. The reason we bought into these annuities in the first place was that we were fightened to death of the stock market and thought this would help us overcome our fears. Also, a friend of ours had put his entire 401K money into this when he retired at 62 and he seemed to do well with money.
That was 8 years ago - almost 8 1/2. Fortunately we didn't put our 401K into this just some ROTH money we had in CDs that were paying next to nothing in 2005. Since then we've opened a brokerage account for the 401K and have been through the 2008 melt-down and recovery. I'm no longer so terrified of the market and have now have no desire for an annuity. I'm trying to figure out the best way to play this. Thanks again.
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