Annuity Advice

[ERPRECY]

When I retired in April 2011 at 56, I rolled part of my 401K into a Variable Annuity which guarantees an 8% return for 10 years and will pay me 5% of the value for life. So basically, here's a table of the value and payout amounts by year of when I start payout.
2011 - $600K - $30K per year
2012 - $648K - $32.4K
2013 - $699K - $34.9K
2014 - $755K - $37.8K
2015 - $816K - $40.8K
2016 - $881K - $44.1K
2017 - $952K - $47.6K
2018 - $1.028M - $51.4K
2019 - $1.1M - $55.5K
2020 - $1.2M - $55.9K

My husband still works and initially we had planned that he'll retire in 2017 when we'll both turn 62 and we can both get early S.S. (about $40,800 for both). With S.S. and $47.6K from the annuity above and my current non-COLA pension of $22,800 we should be fine. Our bare minimum needs are $72,000 per year.

Now, he wants to retire at 60 instead of 62, so I'm thinking of starting my annuity next April ($37,800) set it aside so we can have funds between 60 and 62. We can also sell a rental and get $100K and leave the annuity alone.

We have $150K in cash and currently have $1.2M in our combined IRAs. I am paranoid and don't want to use our cash.

I value the minds of the retirees in this forum. What do you guys think?

Thanks in advance.

 

[Rich_by_the_Bay]

When I retired in April 2011 at 56, I rolled part of my 401K into a Variable Annuity ..So basically, here's a table of the value and payout amounts by year of when I start payout...

Now, he wants to retire at 60 instead of 62, so I'm thinking of starting my annuity next April ($37,800) set it aside so we can have funds between 60 and 62. We can also sell a rental and get $100K and leave the annuity alone.

We have $150K in cash and currently have $1.2M in our combined IRAs. I am paranoid and don't want to use our cash.

I value the minds of the retirees in this forum. What do you guys think?

Thanks in advance.

Welcome. Consider running your numbers through FireCalc. A successful result would reassure you that the cash flow will work.

Please be aware that many members of the board harbor strong negative feelings about variable annuities. It would be wise for you to do a search and read some of the discussions. The reasons include very high up-front commissions, high expense ratios for the invested subaccounts, disregarding of dividend income when adjusting payouts and more. These concerns do not apply to most FIXED annuities. I am no expert in these matters but others who are reinforce these concerns.

Looks like you are well down the annuity path and it worked for you. Best wishes for a prosperous retirement.

 

[ERPRECY]

Rich,

"Negative feeling about variable annuities..." I noticed that.

Did not discover this board until recently and wished I had known that. But, we can only look forward.

Thanks to this board, we have moved our IRAs that were with an FA to Vanguard. Spent many, many log hours reading on the articles and suggestions found on this Board and Bogleheads to now have the confidence to managed our own.

Thanks.

 

[samclem]

Welcome. Probably the only good thing about that variable annuity is this temporary 8% interest rate. If it doesn't have terrible costs or onerous investment restrictions in the later years, I'd say consider making the best of a bad situation and don't take any money out of it for the duration of that 10 year accelerated growth period (unless interest rates zoom and you can do better with your safe outside investments than that 8%). You've got a large amount in your IRAs, and drawing from that pool of money when your husband stops working at age 60 might make good sense from a tax perspective, since (by drawing down that pile of money) it will help you avoid possibly larger taxes on larger RMDs when you turn 70 1/2 years old (and at that point you'll have plenty of money to live on from your annuity + SS + pension + some from the IRA). Do some projections of what your RMDs will be from that IRA when you turn 70 1/2 (given likely growth rates of your investments) and factor in the taxable income from your SS and annuities at that time, and see what your tax rates will be. You'll probably see some advantages (lower tax rates) to reducing those later RMDs by drawing down the IRAs a bit before then.

I'd also consider delaying taking SS beyond age 62. The inflation protection of SS benefits is something you don't have in that VA or in your other pension. Delaying SS is the cheapest way to get that inflation protection.

Just some thoughts, I'm certainly not an expert. In particular, I know virtually nothing about what the policies may be on withdrawals from that VA.

 

[LOL!]

This is so cool! I'm glad you have posted because I don't think I've ever seen anyone with a variable annuity actually report that what was promised was actually delivered. I

So bluntly, is the table you presented really going to happen? Or have some fees crept into the whole equation?

 

[pb4uski]

I would be careful to understand the fine print and what you need to do to ensure that the company needs to live up to its guarantee. See Guaranteed Variable Annuities Aren’t as Safe as You Think - WSJ.com

 

[ERPRECY]

samclem - Thank you for your thoughts on the annuity and delaying S.S. It's never easy to choose which path to take.

 

[ERPRECY]

LOL! Who knows if it will really happen. All I know is that as of April this year, I could have opted to take $34900 a year for life.

 

[ERPRECY]

I would be careful to understand the fine print and what you need to do to ensure that the company needs to live up to its guarantee. See Guaranteed Variable Annuities Aren’t as Safe as You Think - WSJ.com

Thank you for this link. That's always the tough part (understanding the fine print). I will dig through the Prospectus and have my Annuity Rep confirm to make sure my understanding of my Policy's T&C is correct.

 

[2B]

My father and FIL both had purchased variable annuities. Based on these experiences, my opinion of them go beyond "negative." It's safe to say that you've paid the person that sold it to you a handsome commission and are generating lots of fees for the company that holds it. It sounds like you already know this.

First of all, a 5% payout is pretty low. I noticed it was constant until the last couple of years and the 2020 is 4.65%. Was there a typo on your part? I suspect the nominal 8% yield is actually only guaranteed if you take the annuity payments.

How does the current "value" compare to what you could get if you withdrew your balance? That will tell you what is really going on. If you went to Vanguard or annuity.com for a quote, how does the annuity payout compare with the projected amounts?

I'm suggesting you look at what you'd be able to get if you terminated this annuity or transferred it to Vanguard.

 

[pb4uski]

2B, I think 2020 was a typo and should have been $59.9. All the other numbers are 108% of the prior year and payouts are 5% of the values except for 2020.

 

[jIMOh]

Look into claim and suspend on the SS once you are both 62

You claim and suspend your benefit
Spouse claims and suspends their benefit
then you claim spousal benefit on spouse (50% of benefit?)
and spouse claims spousal benefit on you (50% of benefit?)

Then at age 70, claim your larger benefit on yourself
If both spouses had similar earnings, this might look OK, if one spouse earned >>>> other spouse, then the 50% benefit on lower earning spouse might be a turn off

Might be an end run for tapping into assets sooner, with a higher income at age 70.

 

[RetireAge50]

The annuity feels good because it reduces risk. However the insurance company is going to keep ALL the money you put in and the payouts represent what the money invested would have earned anyway. For me this would cancel out the good feeling.

I would stay away from the "annuity rep" and consider unwinding this deal.

 

[Independent]

Presumably, you bought the VA because you really wanted a lifetime, non-COLA'd income stream. If your opinion on that hasn't changed, deferring the income makes sense.

Note that deferring for one year from 2014 to 2015 means that you trade $37,800 of one year income for $3,000 of non-COLA'd lifetime income. That's like buying a $3,000 SPIA for a premium of $37,800. That's a better purchase price than current SPIA's offer. So if you want that kind of income, deferring the VA seems like a good choice. Additional years are similar.

However, I'm not a big fan of non-COLA'd income streams. Note that deferring SS allows you to buy a COLA'd income at favorable prices. Deferring SS by one year means giving up $40,800 of one year income for $2,720 of COLA'd lifetime income. Given the inflation risk you're carrying on the pension and VA, that seems like the better option.

As Sam mentioned, you can certainly take money out of the IRA to cover a couple years of spending between 60 and 62. You can also use IRA money to allow you to defer the VA and/or SS for additional years. Whether you do that depends on your personal preference for DIY income through managing your own assets and withdrawals vs. automatic income through VA and SS. Spending down the IRA puts the management on somebody else, protecting the IRA by starting income early keeps more of the management with you. That's ultimately a personal "feels right" decision, though lots of people here can argue various pros and cons.

(Many people here would have "bare minimum needs" below $72,000. Are you sure that you aren't including something that's temporary like mortgage, tuition, or caring for a parent? I'm only asking because that could impact your trade-off between current and future spending.)

 

[ERPRECY]

I stayed up till 2am reading through all the fine print and while it does double after 10 years, i.e., contract value of $1.2M and $60K payout for life, the risks are still there since the money is not under my control.

The surrender charge is currently 6.5% will be 5.5% by April 2014 and won't be 0 till 2018.

I will cancel the policy in April, take my losses and move them to Vanguard.

And yes, bare minimum needs is maybe more like $48K. So, I think we'll be fine.

Thanks again for all your advice.

 

[Meadbh]

That was a brave thing to do (canceling the variable annuity and writing about it here!)

I am curious to know how much of the prospectus you read and understood before purchasing the annuity in the first place. How much background research did you do? $600K is a lot of money.

 

[ERPRECY]

That was a brave thing to do (canceling the variable annuity and writing about it here!) I am curious to know how much of the prospectus you read and understood before purchasing the annuity in the first place. How much background research did you do? $600K is a lot of money.

When I retired in March 2011, I was still thinking of the 2008 market where I lost 40% of my 401K which by 2011 had recovered plus some since I stayed in the market. When it was time to rollover my lumpsum pension and 401K into an IRA, I wanted part of it to be guaranteed. At that time, it made sense to me even with the high fees. Also at the time, all I wanted was to visit friends and family and travel as much as I can and did not want to spend any time looking over my money. I was out of the country a total of 10 months since retirement. That's now out of my system and early this year, I discovered this forum. I read various posts for many days, staying up late and learning as much as I can.

Last month, I moved all of my money from a Financial Advisor into Vanguard, and am now using various Admiral Funds for my Asset Allocation.

 

[2B]

That was a brave thing to do (canceling the variable annuity and writing about it here!)

+1

ERPERCY,

It took me months to convice my siblings to cash in my father's VA. They only saw the cancellation fee and not the annual fees for the longest time. We were all trapped unless we all agreed to cash it in. There weren't individual policies for us as heirs. Even the company said it was a strange contract.

Eventually, they realized that they could get a better return by paying about 2 years in fees as the penalty. It helped that one brother needed/wanted the cash.

 

[ERPRECY]

Update: I am so blessed. It took forever but I finally surrendered my annuity. After surrender charges and other miscellaneous charges, I transferred $630K to Vanguard. I look at it as regaining control and making roughly 1.6% return per year since I put in $600K in April 2011. I just want to thank the smart members of this Board for all the great advice. My DH is on track to retire in April 2016 at 60.5, which is when our house will be fully paid for. We also plan to do the file and suspend at FRA. Thanks again to all of you. Have a great day!


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[Senator]

My DH is on track to retire in April 2016 at 60.5, which is when our house will be fully paid for

Look at paying off the mortgage early as an annuity.

The initial immediate return is your interest rate. It is guaranteed by RE. And, at the end of your original mortgage payoff date, you get 100% of your principal back, your property.

 

[lynxville]

Your 8% return might be some interest and some principal returned to you. In my opinion annuities are bad investments.They also add bonus cash and that is mystery money, but on paper it looks like growth of principal. I have attended annuity sales lunches, just for the food. To listen to these sleezy salesman makes the hair on the back of my neck stand on end. All they want is there comission and when you sign the contract you agree to something you probably never read and if you did you didn't quite understand. The big money in annuities is selling them.

 

[2B]

Update: I am so blessed. It took forever but I finally surrendered my annuity. After surrender charges and other miscellaneous charges, I transferred $630K to Vanguard. I look at it as regaining control and making roughly 1.6% return per year since I put in $600K in April 2011. I just want to thank the smart members of this Board for all the great advice. My DH is on track to retire in April 2016 at 60.5, which is when our house will be fully paid for. We also plan to do the file and suspend at FRA. Thanks again to all of you. Have a great day!


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Unfortunately, a bear market is the annuity salesman's best friend.

For future reference, what were all of the "miscellaneous charges" and what was the surrender charge? How does what you finally received compare with the rosey predictions made by the VA salesman?

I am assuming from your comment that you made a grand 1.6% return on your money during one of the great bull runs of my lifetime.

I'm not wanting to beat up on you but this can be solid data to present to future posts talking about the great VA offer they have received.

 

[Ronstar]

I'm somewhat in the same situation. My accountant recommended (and sold me) an annuity more than ten years ago. I made deposits totaling $150k and now have around a $220k balance. I'm trying to get out of this with the least amount of pain. I don't want to pay taxes on the gain, or penalties.

So I'm thinking just start taking an income stream and burn through this $ before any other assets now that I'm retired.

The company I bought the annuity from has not been helpful yet, and I've been approached by another financial advisor that suggests I roll it into an Allianz annuity. But this annuity has a payout supposedly for life.

I'm thinking getting my money out in ten years. He as on option for this as well, (looks like 3-4% return), but would rather see me in the Allianz long term product.

I know this is just an overview of the situation, but doesn't getting the money out in 10 years seem like the way to go? I haven't assessed the tax bite, penalties, etc if I just yank it out. And if I did now at a market peak, where would I put it that could get me more than the 4% that the 10 year annuity payout would give me?

 

[nun]

Most VAs are to be avoided, however, if you are in TIAA-CREF for retirement saving all their funds are strictly speaking Variable Annuities. They have expense ratios that are around 0.4%...not great, but there are far worse out there and you have complete freedom to move money and roll over funds without any fees. TIAA-CREF encourages you to annuitize a portion of your funds, but their fixed annuities are pretty good with lifetime payout rates of 8% for a single premium male starting at age 55. But I'm going to use TIAA-Traditional which guaranteed at least 3%, is currently paying 4.72% and you can get at your principal by doing equal payouts over 10 years...so it's a bit like a 10 year CD, not quite as safe, but a better interest rate and you can get at your money a bit quicker.

 

[pb4uski]

I'm somewhat in the same situation. My accountant recommended (and sold me) an annuity more than ten years ago. I made deposits totaling $150k and now have around a $220k balance. I'm trying to get out of this with the least amount of pain. I don't want to pay taxes on the gain, or penalties. ....

How about a 1035 exchange to a Vanguard annuity of your choice?