Deferring cash payout, IRA or Annuity?

[csgraff]

I'm a new poster here, but have lurked off and on for awhile. Always been impressed with the knowledge to be had here, so I wanted to run something by the forum.
I am a retired police officer, my brother also works for the department and is approaching retirement.

Upon retirement, our state allows and officer to choose between higher monthly pension payments or a partial cash payout. This is an over simplification of the plan, but accurate. Before I invoke any fat pension hostility, we pay 7.5% of our salaries into the system, and my pension is only 50% after 25 years. We receive no medical benefits.

When I left, I elected to take the cash, roll it into a traditional IRA, and wait to access it until sometime in the future. I invest this in a mix of ETFs, mutual funds, etc.

A coworker who retired in 2006 elected to roll his payout into a deferred annuity which will make monthly payments to him in the future. At that time, he was able to find an annuity that would guarantee him a 6% return. He is single with no heirs, and this appealed to him.

My brother was very intrigued by this set-up and has asked me if I had any knowledge of annuities. I have never really been a fan of annuities, as their past reputation was for being expensive for what they provide, and at times uncertain. In the last few years, they seemed to have grown in popularity, though, with many experts allowing there is a place for them.

As my brother has kids, and does not want to sign away his principle, my feelings are that an annuity fitting his needs would likely be a tough find now. Interests rates are so low, that no decent guarantees could be had. Also, variable annuities are probably no better than a mutual fund within an IRA, yet are more expensive.

Does this sound logical? Just looking for views on whether an annuity would currently have any advantages a deferred IRA.

[Sun456]

I think your thinking about it correctly. I've bought 4 annuities but only after spending a year researching them. They are very complex and vary quite a bit from product to product. With kids and not wanting to sign over the principal an annuity might be a poor choice. I modeled the ones I was looking at and they eat the principal pretty quickly after you start taking income. I think they are best for people like me who get the lifetime income rider and don't care about leaving the principal to someone.

There are products that guarantee to pay back the principal (or more) to heirs if you die early but the payout rate is much lower than the best rates. I didn't look too hard at these because I was looking for the best payout rate. Annuity shopping is a royal pain. The sales people only know about a few products so you have to talk to alot of people to find out about alternatives. On top of that they push hard on the ones they are selling and you have to be very firm about your goals and turn them away when they are proposing something that is bad for you.

Your brother should decide what he wants from the money; income, growing the principal, protecting it for a rainy day, leaving an inheritance. Then he can look for investments or insurance products that meet this goal. Most options will only do one or a couple of the above things, not all of them. Annuities aren't investments. They are an insurance product and need to be viewed that way.

If he expects a long life time then the pension may be the best way to go. If there is a history of poor health in the family for old men then maybe take the lump sum and put it into some safe investments.