Fidelity Deferred Fixed Annuity

[rkser]

- I know Variable Annuities have high hidden expense ratios and Immediate Annuities could make sense for a small portion of your retirement portfolio at the start of/later in your retirement.

Having said that, I am investigating/researching the deferred fixed annuities from 4 reputable insurance companies being sold through Fidelity.

I am asking for your advice, your experience, your take on the often despised topic of annuities, although these deferred fixed annuity look to be a newer animal, at least to me.

Here is my info and present situation, please ask any other information you may need to formulate your advice.

I am 57 and DW is 52, we have at present a 95%/high success score of a financially comfortable retirement with FireCalc, Fidelity RIP and Financial Engines by Vangaurd at a 3.5% SWR. We have a all vangaurd 55% Stock/45% Bond portfolio.

I and DW work part time now at our self owned place of work, we are still accumulating for some icing on the cake and will fully retire in about 8 yrs when I turn 65. We travel and have a low key comfortable lifestyle.

The Fidelity Rep is going to mail me the exact investment needed and the deferred income it will provide.
If I take this deferred fixed annuity, it would be to have an extra layer of safety for the retirement income, possibly for the bare essential expenses and will invest about 10% of our portfolio and 90% will continue at 55%/45% and gradually moving the ratio towards 50/50 and then 40/60%.

Thank you in advance for any and all suggestions, what would you do?

 

[MooreBonds]

I believe in diversification in both taxes and investments.

About 7 years ago, as my portfolio was rapidly increasing in value due to large additions from a few good years at work (and some decent investment returns in the 2005-2007 era), I opted to put about $7k, split up among two different fraternal benefit societies that had 'decent' rates on their deferred, fixed rate annuity (similar to a CD, except non-qualified and not insured).

The rate has been ok (minimum of 3%, but had a 4% yield for a while), and it obviously isn't the main reason I can hope to retire early one day ....but, as a small way to diversify, it was ok, in a sense.

Depending on what your cash needs are, and what rate they're offering, it could make sense. Just make sure you fully understand what the interest rate forecast is, and if it's just a "forecast", or if that rate is exactly what you'll be getting. Also, understand that while it's not as risky as a junk bond, there are some limitations to the protection that an annuity offers in terms of "insurance". And, make sure you aren't agreeing to automatically turn it into an immediate annuity at some point down the road, instead of having the ability to withdraw from it penalty-free after 59 1/2.

10% of your entire portfolio sounds like a large amount - would it be split among different insurers? What is the max limit for the state insurance associations' coverage for your state of residence?

Personally, I'd be uncomfortable with that large of an amount with a single insurer - it would have to be high enough for me to consider it. Also, consider the insurer's financial ratings and outlook.

 

[pb4uski]

If it is the products I am thinking of, as MooreBonds says, it is not much more than a tax-deferred interest bearing instrument like a CD but issued by an insurance company. Usually the insurer declares the interest crediting rate each policy anniversary so all you really know when you pony up your premium is the minimum rate, what you will earn for the first year and what the surrender charges would be if you want to leave early. Many policy designs allow a withdrawal of 10% of the account value each year and at maturity you can roll the proceeds into a new contract or take and annuity (or take the cash and pay the taxes).

Since you are presumably dealing with reputable companies I would be less concerned about credit risk as there hasn't been a significant insolvency since regulatory improvements were put in place in the mid 1990s and the industry weathered the recent recession quite well (particularly compared to the banks). That said, I would still look to keep the amount with any single carrier under the state guaranty limit.

I don't own any myself because the yields are usually quite low. The days of 3% guaranteed are probably long gone.