Mutual Funds vs Annuity

[pb4uski]

Here is what my most current info states on this Annuity.

Variable Annuity
Non Pension Annuity
Min Guarantee Interest 3.50%
Cash/Accumulated Value $213,006.12
Surrender Charge $0.00
Cash Surrender Value $213, 006.12
Cost basis $160,000.00
Taxable Gain $53,006.12

Usually a variable annuity doesn't have a minimum guaranteed interest rate, unless perhaps that 3.5% relates to the general account option within the VA.

How long have you had this annuity? did you make a single premium payment or have you made monthly or yearly payments? Given the cost basis is a nice round number I'm suspecting that it was a single premium.

Usually a variable annuity has different "subaccounts" that the money is invested in or a "general account" option where it is invested in the insurer's general account. What is your annuity invested in? It should say on your statement.

I'm generally not keen on variable annuities, but if this one has a 3.5% minimum guarantee, that may be something valuable that you can't get today that you can take advantage of.

However, I wouldn't be adding more money to it until you have a clear understanding of it.

Do you own this variable annuity directly or is it in an IRA?

 

[street]

Z3Dreamer >>>> "I would NOT annuitize the account as it represents another chance for the insurance company to make money off of you".

I sometime don't understand what some of you intelligent people are trying to tell. If you would be so kind and explain your quote of advise you gave me.
Thank you so much

 

[Souschef]

Couple of comments on annuities
My wife had one that matured, and she was told she would get a 9% bonus if she rolled it over into another annuity. Well it turned out the fees on that one were higher, and after year 6 she would lose money. I gave the salesman the spreadsheet, and he was surprised.
My broker suggested i look into QLAC for my IRA to cut down on my RMD. I did some research, and found that at my age, I would be lucky to get my initial amount back at age 85!
Same idea on front loading on mutual funds. I was told the fees would be lower, but after running the numbers, you never get back the initial investment.
Buyer Beware!

 

[Ready]

OP:

Your annuity from years ago may not have been such a bad investment if it was purchased when interest rates are higher. In today's low yield environment it seems highly unlikely that an annuity will every outperform a bank CD. And a bank CD has no fees, no surrender charges, and even if you want to exit early to chase a higher rate, they usually have reasonable early termination fees.

Be very leery of a person who earns a commission selling annuities telling you that you should be in annuities.

 

[pb4uski]

What Z3Dreamer is concerned about is whether the annuitization option in your contract is a fair deal vs just rolling the balance into a single premium immediate annuity that has higher benefits than the annuitization option in the contract.

For example, let's say that you want to annuitize and the annuitization option in your contract will pay you a 5% payout rate but the going payout rate for somone in your situation is 6% ... it would be foolish to accept 5% when you can get 6%... all else being equal.

 

[street]

Usually a variable annuity doesn't have a minimum guaranteed interest rate, unless perhaps that 3.5% relates to the general account option within the VA.

How long have you had this annuity? did you make a single premium payment or have you made monthly or yearly payments? Given the cost basis is a nice round number I'm suspecting that it was a single premium.

Usually a variable annuity has different "subaccounts" that the money is invested in or a "general account" option where it is invested in the insurer's general account. What is your annuity invested in? It should say on your statement.

I'm generally not keen on variable annuities, but if this one has a 3.5% minimum guarantee, that may be something valuable that you can't get today that you can take advantage of.

However, I wouldn't be adding more money to it until you have a clear understanding of it.

Do you own this variable annuity directly or is it in an IRA?

It was taken out in 2002 and yes the min. it will earn is 3.5% guarantee rate. He told me that and it is also what it says on the contract which I posted what it reads. I own the annuity directly not in an IRA. There has been the initial payment then I added one more payment through in the 15 years that I owned the Annuity.

Surrender Charge $0.00 >>> what would this mean to you which it states on the contract for the Annuity? I will ask for sure but it would look like I would have NO charge if I surrendered this contract. Would you read it like that?

 

[pb4uski]

If you don't mind me asking how much did you put in 15 years ago and how much later and when? The reason I'm asking is that $53k of growth is not much growth for a 15 year period. Certainly less than 3.5%.

Also, typically the guaranteed rate only applies to the general account option and money in other subaccounts are not guaranteed.

 

[street]

If you don't mind me asking how much did you put in 15 years ago and how much later and when? The reason I'm asking is that $53k of growth is not much growth for a 15 year period. Certainly less than 3.5%.

Also, typically the guaranteed rate only applies to the general account option and money in other subaccounts are not guaranteed.

In 2002 I put in $10000.00 and in 2015 I put in $150,000.00. I know it most likely was a mistake but I did and I did it on my own with no pressure from an agent. Lol

It is what it is and it won't be investing in any more annuities. I still look at it this way I really haven't lost the money and yes I could of done better doing something else with that money but I didn't. Please be easy on me I feel bad enough the way it is. Lol

 

[pb4uski]

You're reading me wrong... I'm not being critical... just trying to understand the situation.

 

[street]

You're reading me wrong... I'm not being critical... just trying to understand the situation.

No I understand no problem. Lol I'm sure you seen the post what it says on my policy which I posted in above post.

The numbers do work out to where I have put in $160,000 and I show I have $213,006 with a gain of $53,006.. The 53,000 would be what is taxable so far in the annuity.

 

[Texas Proud]

Here is what my most current info states on this Annuity.

Variable Annuity
Non Pension Annuity
Min Guarantee Interest 3.50%
Cash/Accumulated Value $213,006.12
Surrender Charge $0.00
Cash Surrender Value $213, 006.12
Cost basis $160,000.00
Taxable Gain $53,006.12

You also need to look at what happens when you pass....

When my mom purchased and I found out about it years later, we transferred it to another one where there was a life insurance rider on it... so when she passes it will act like a life insurance policy and all gain will not be taxed....

If we had stayed with the one she bought we would have to pay taxes on the full gain... in your example $53K... with MFs, there is not taxable income on any accrued gains....

 

[Scuba]

Another thing I don't like about annuities is the complexity. If you put money in the market, it's totally liquid and if not in an IRA, you have 100% control over timing of withdrawals. I have an MBA and had a career in finance, and still find annuities difficult to understand. I have one annuity through my previous employer. As soon as the surrender charge drops low enough, I'm going to cash it out and invest the net proceeds. Don't like investments I can't easily understand.

 

[pb4uski]

+1 Simple is good.

 

[ncbill]

Keep in mind these equity-indexed products (annuities, UL insurance) usually have a hard cap on the amount of gain.

A few years ago an agent called me up to try to convince me to convert an old, plain-vanilla whole life policy to an equity-indexed UL policy.

His illustration showed 7% annual gain, which was the cap - in other words, no matter how well the equities in the index I chose did that year, I'd never receive more than that 7%.

Looking at the guarantee, it would collapse to zero in under 15 years.

In my personal experience with other UL policies, they all collapsed to the guarantee, and lapsed.

 

[Trooper]

Another thing I don't like about annuities is the complexity. If you put money in the market, it's totally liquid and if not in an IRA, you have 100% control over timing of withdrawals. I have an MBA and had a career in finance, and still find annuities difficult to understand.

+ 1. I have the same background and feel the same way about these things.

In 2002 I put in $10000.00 and in 2015 I put in $150,000.00.

I don't have access to Excel right now...can anyone determine what the rate of return is on the annuity, given the investment amounts and dates above? The return could then be compared to similar vehicles. We would still need to know in which funds ("sub accounts") the money is invested.

 

[street]

+ 1. I have the same background and feel the same way about these things.


I don't have access to Excel right now...can anyone determine what the rate of return is on the annuity, given the investment amounts and dates above? The return could then be compared to similar vehicles. We would still need to know in which funds ("sub accounts") the money is invested.

That would be interesting to know!

I did go see the guy today and asked some questions. I can take everything out of the annuity any time I want. No limit and don't have to take anything if I don't want to, it is non pension annuity. If I want the total there is no surrender charge.

If I die the highest amount on my anniversary date is what I will get if the market has fallen below that. My wife can do nothing or take it out or get any amount she would like. It can be passed on to children when last spouse has passed.

There is a 1.8% fee every year on what that amount is on the anniversary date. I am paying fees I know that but the good thing is I can take it all out if I want with out a surrender charge put of course I would have to pay taxes on income/gains.

 

[pb4uski]

I'm guessing that the 1.8% fee is at the account level and that there are subaccount expenses as well.... so it might be more like 2.3% rather than 1.8%.

Did he give you any insights on what the underlying investments are?

The incidious thing is that the first $53k taken out will be taxed as ordinary income and the remaining $160k will be basis. I would suggest that you look at your tax and ACA situation to see when the best time to get that money out would be.

 

[ejman]

+ 1. I have the same background and feel the same way about these things.


I don't have access to Excel right now...can anyone determine what the rate of return is on the annuity, given the investment amounts and dates above? The return could then be compared to similar vehicles. We would still need to know in which funds ("sub accounts") the money is invested.

A simple XIIR calculation with the information given gives a rate of 7.22% which is really not bad at all (assumes investments at beginning of 2002 and 2015 with the ending value at beginning of November 2017)

 

[street]

A simple XIIR calculation with the information given gives a rate of 7.22% which is really not bad at all (assumes investments at beginning of 2002 and 2015 with the ending value at beginning of November 2017)

Thanks for running those numbers I appreciate that very much. Yes that info is correct in 2002 I started it with $10000 and then 2015 I dropped in $150,000. So for 13 years there was only the $10000 that was generating gains. I could go look what I had in that acct. when I dropped in the $150,000.

No other charges and there are no sub account charges that I can see and that was a question I asked him. He said once a year on anniversary date what that number is they take 1.8%. I can see that deduction from my transaction data and the numbers come out like he says.

For now I will see what I want to do with it. It is a lower one digit % of my portfolio so I will see what happens.

 

[pb4uski]

If there are subaccount charges, as would be typical, you would never see them as they are embedded in the subaccount unit values just like mutual fund expenses are embedded in net asset values.

 

[street]

If there are subaccount charges, as would be typical, you would never see them as they are embedded in the subaccount unit values just like mutual fund expenses are embedded in net asset values.

Thanks for your help I appreciate it very much.

 

[Trooper]

If there are subaccount charges, as would be typical, you would never see them as they are embedded in the subaccount unit values just like mutual fund expenses are embedded in net asset values.

Agree. You're likely paying somewhere between 50 and 100 basis points (0.5% and 1%) per year for the funds in which your money is invested, and those charges won't be itemized on your statements. This is on top of the 1.8% that you see on your statement.

The annuity probably isn't the best investment for you, but you will have to decide whether the exit costs (mainly taxes) are worth getting out.

 

[street]

Agree. You're likely paying somewhere between 50 and 100 basis points (0.5% and 1%) per year for the funds in which your money is invested, and those charges won't be itemized on your statements. This is on top of the 1.8% that you see on your statement.

The annuity probably isn't the best investment for you, but you will have to decide whether the exit costs (mainly taxes) are worth getting out.

It might not be the best, I do agree with you. On the other hand the acct. really hasn't done horrible with the gains it has accumulated. If I would of had in fixed acct. MM/CD I would of never even seen close to this return.

My take on it is yes not a good investment but have not had to pay taxes on the money (until I take it). Money is fully invested in equity/bonds. It has earned 5 to 8% through those 15 years even with fees taken out.

Yes I could of saved that money in fees/costs but I didn't, I also with the costs involved do have some safe harboring and guarantee built into this account and that costs money. It is not RMD required, no surrender charges except taxes on earned moneys and I look at it better then money in a bank and is liquid to my asking. Most defiantly pros and cons.

Thanks for all your help and you all made me dig deep into this product good or bad. To answer my on question Annuity vs Mutual Funds. I most likely will never put money back into an annuity in y life. For reason I don't need that type of an acct. to pay me a fixed amount each month/year etc.. As for investing in equity/bond etc. I will keep buying and growing in y life time.

Thanks

 

[Trooper]

It might not be the best, I do agree with you. On the other hand the acct. really hasn't done horrible with the gains it has accumulated. If I would of had in fixed acct. MM/CD I would of never even seen close to this return.

Yes, totally agree versus a MM/CD. Below I put together (unaudited - LOL) what your investments would be worth had they been invested in Vanguard's S&P index fund. Given your sub-accounts have bond holdings, we would expect your ending balance to be lower than the S&P fund.

My take on it is yes not a good investment but have not had to pay taxes on the money (until I take it). Money is fully invested in equity/bonds. It has earned 5 to 8% through those 15 years even with fees taken out.

Agree also. Deferral is good, as taxes are an expense that can otherwise be invested. Keep in mind however that annuities are taxed at ordinary income rates, while if you had the money in a taxable portfolio and paid taxes on dividends and capital gains distributions along the way, those taxes would be at the preferred capital gains rates (0%/15%).

Thanks for all your help and you all made me dig deep into this product good or bad. To answer my on question Annuity vs Mutual Funds. I most likely will never put money back into an annuity in y life. For reason I don't need that type of an acct. to pay me a fixed amount each month/year etc.. As for investing in equity/bond etc. I will keep buying and growing in y life time. Thanks.

We all make mistakes and learn from them! I know what I know about annuities because I was sold them also. If you don't want to take the tax hit upon liquidation, but want to lower your fees, you can do a 1035 (tax-free) exchange into one of Vanguard's annuity products. That is what I did a few years ago.

If you want help analyzing the mutual funds you have with Thrivent, it might be best to start another thread and provide further details. Good luck.

 

[street]

Yes, totally agree versus a MM/CD. Below I put together (unaudited - LOL) what your investments would be worth had they been invested in Vanguard's S&P index fund. Given your sub-accounts have bond holdings, we would expect your ending balance to be lower than the S&P fund.



Agree also. Deferral is good, as taxes are an expense that can otherwise be invested. Keep in mind however that annuities are taxed at ordinary income rates, while if you had the money in a taxable portfolio and paid taxes on dividends and capital gains distributions along the way, those taxes would be at the preferred capital gains rates (0%/15%).



We all make mistakes and learn from them! I know what I know about annuities because I was sold them also. If you don't want to take the tax hit upon liquidation, but want to lower your fees, you can do a 1035 (tax-free) exchange into one of Vanguard's annuity products. That is what I did a few years ago.

If you want help analyzing the mutual funds you have with Thrivent, it might be best to start another thread and provide further details. Good luck.

Thank you for all the illustrations and advise and I will be definitely will be looking into those options you noted. Thank you!

I look back on how I got to where I'm now financially and really can't believe I ever saved as much money as I did. I KNEW NOTHING but I saved. Thank God with all the things I did wrong I have way more then I could ever spend not knowing anything. Luck these mistakes along the way didn't hurt me where I couldn't RE. Lol