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Fido is recommending Fixed Def'd Annuity ...
Old 01-22-2023, 12:23 PM   #1
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Fido is recommending Fixed Def'd Annuity ...

Hello--

I've been sitting on about $193K in cash in my traditional IRA at Fidelity for awhile (out of a total of $520K).

At my recent check-in with Fidelity, it was suggested that I put that money to work now that interest rates are higher.

The suggestion was to put $175K into a 3-year Fixed Deferred Annuity with Mass Mutual. Interest rate would be 4.15%, which is slightly higher than what I'd get in CDs right now. I could withdraw 10% during all 3 years if needed without penalty.

Our total retirement funds right now between DH and me are $1.1M. (We took a big hit last year because we own too much NVDA--so I'm more risk-averse now. ) We'd still have plenty of cash in my husband's IRA, so it's not like we'd be tying everything up by doing this.

I have always been hesitant about annuities, but this one sounds okay. Anybody have thoughts or suggestions on this strategy? Or would you have to hear the rest of our details?

EDITED TO ADD: I decided to take my SS starting this month--$2600/month (age 64.5). My DH is younger and still working, for the next 3 years. So between us, all monthly expenses and a reasonable amount of "fun" money are covered. Thus, our IRAs are mostly "gravy", thankfully.
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Old 01-22-2023, 12:36 PM   #2
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I've been watching videos by these advisors that seem good on tax planning. One wrote a book called "the new 60/40". He doesn't say want the book recommends but I think it is something called a fixed index annuity. I'd be curious how this fits into the mix.

I have had the same knee jerk reaction against annuities, but without a good understanding.
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Old 01-22-2023, 12:41 PM   #3
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I bought the Mass Mutual 3 year Deferred Annuity a few years ago. It's coming up for renewal. I'm not sure if I'll renew it then or not. I've been pleased with the product, but you really should be fairly certain you won't need the money for the 3 year term.

The advantages are that Fidelity will handle the purchase of the annuity and the balance will show up on Fidelity's website along with your other accounts.

You could probably find a higher yielding MYGA if you feel like shopping around.
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Old 01-22-2023, 12:45 PM   #4
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Originally Posted by SoReadyToRetire View Post
Hello--

I've been sitting on about $193K in cash in my traditional IRA at Fidelity for awhile (out of a total of $520K).

At my recent check-in with Fidelity, it was suggested that I put that money to work now that interest rates are higher.

The suggestion was to put $175K into a 3-year Fixed Deferred Annuity with Mass Mutual. Interest rate would be 4.15%, which is slightly higher than what I'd get in CDs right now. I could withdraw 10% during all 3 years if needed without penalty.

Our total retirement funds right now between DH and me are $1.1M. (We took a big hit last year because we own too much NVDA ) We'd still have plenty of cash in my husband's IRA, so it's not like we'd be tying everything up by doing this.

I have always been hesitant about annuities, but this one sounds okay. Anybody have thoughts or suggestions on this strategy? Or would you have to hear the rest of our details?
I personally liked Fixed Deferred Annuities (also often called MultiYear Guaranteed Annuities, or MYGAs) and opened a bunch of them over the past year.

At that yield, you're guaranteed $7,262.50 / yr in dividends. Not sure what your income or cash flow needs are, but that's a nice chunk of income that you can 100% count on for the next 3 years.

I personally prefer 5 year MYGAs. Many of them have yields significantly north of 5% currently, if you venture into B++, A- and A rated carriers. Hard to get 5% with A++ (which is what I personally prefer at the moment). I did manage to snag one with an A++ rated carrier at 5.15 (10% yearly withdrawals) right before rates dropped.

One benefit of MYGAs (unlike CDs) is that YOU choose when to take income, which means you also choose when that income is going to hit your yearly MAGI. You can take scheduled dividends, pull up to 10% (on most but not all - you have to check) a year and basically manage taxable income in whatever way makes sense for you. Really a nice and unique feature.

Some experts (Wade Pfau being one) advocate Fixed Annuities as a tool in establishing an "income floor". That's exactly what I've done. MYGAs and CDs to generate enough income to pay the bills. Rest of portfolio is in stock and bond funds for future growth.

Other experts (notably Rick Ferri) say Annuities are "never" (recent tweet) a good idea. Rick doesn't appear to like the single company risk and lack of participation in potential market upside. That said, if you (like I do) believe the market returns are largely going to suck for the next 5 years quite easily, guaranteed 4-5% returns are very attractive. And State Guarantee programs generally will protect your investment up to $250K per "life" (person), although a major failure of a big insurer has never fully tested just how strong that program really will be if & when the stuff hits the fan..

Many others will point out the obvious - that your return is less than inflation. I'd counter that by saying a big market drop (which is likely this year..probably will see 3,000 - 3,500 before we see 4,500 again) is far more damaging to your portfolio and that guaranteed returns are attractive.

Lastly, it may be worth thinking about this: many of us put together portfolios with a lot of risk in the "hope" of being able to pull 3-4% yearly. With a MYGA, you're GUARANTEED (unless the carrier goes out of business) that return with zero risk. So, MYGAs as part of an OVERALL portfolio strategy have a very good place IMHO..

PS: I'd advise shopping around. I've had good experiences with Stan the Annuity Man and to a lesser extent Blueprint income. Both publish current rates and insurer ratings on their websites. My least favorite purchase experience was through Fidelity, but I did buy 2 through them also.
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Old 01-22-2023, 12:49 PM   #5
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PS: one big downside in my experience to MYGAs is that the insurance company websites are usually like something out of 1985. If you're used to seeing things like a brokerage account would show - you know, basic things like a transaction line showing dividends for a particular month..you can basically forget about that. Most of the MYGAs we have (all through A++ carriers) for the most part just show an amount, surrender value and maturity date. That's it. Pretty much makes me crazy, as we pull dividends monthly and aside from a couple carriers that send paper confirmations of dividend pulls via snail mail, it can be pretty challenging to forecast and track. I can get "close" but even my best efforts at forecasting in Excel miss by pennies and/or dollars pretty much every time. It's small enough that I don't spend time chasing it, but still not what I'm used to seeing in brokerage account detail..
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Old 01-22-2023, 01:00 PM   #6
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Fidelity’s website is currently showing a new 3 year CD @4.6%. Why lockup your money in an annuity? I don’t know if this a callable CD or not - you need to log into Fidelity for the details.
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Old 01-22-2023, 01:01 PM   #7
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A 4.15% interest rate is low considering other non callable alternatives. It doesn’t sound like a good deal to me. Sounds like a big commission for the rep.
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Old 01-22-2023, 01:35 PM   #8
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Hello--

I've been sitting on about $193K in cash in my traditional IRA at Fidelity for awhile (out of a total of $520K).
...
I think the huge advantage of MYGA's is to defer taxes, so absolutely not something to do with IRA money. You could put this money in Fidelity's oft mentioned money market FZDXX which is currently paying 4.27%, and is very liquid while you ponder (do it Monday!).
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Old 01-22-2023, 01:40 PM   #9
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IRA assets are already tax deferred - I don’t see any advantage of an annuity
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Old 01-22-2023, 01:50 PM   #10
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I have bought MYGA's for my mom's after tax trust account through Fidelity.
Very happy with the product, as I am seeking more preservation of capital as opposed to more growth.
Fidelity does only deal with triple A insurance firms, so you can more yield with some more credit risk.
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Old 01-22-2023, 01:53 PM   #11
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Navy Federal credit union has a 5% 15 month cd
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Old 01-22-2023, 01:57 PM   #12
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PS: one big downside in my experience to MYGAs is that the insurance company websites are usually like something out of 1985. If you're used to seeing things like a brokerage account would show - you know, basic things like a transaction line showing dividends for a particular month..you can basically forget about that.
Boy, ain't that the truth!

Dad had an MYGA that I managed. The web sites were terrible, but I could at least glean just enough information to know what the basis was and what the deferred earnings were.

Another downside is that any deferred income will go to the heirs. This may not be optimal. Or it may be good. Depends. Also, the heirs will have to wade through possibly 4 or 5 choices on redeeming the MYGA. The choices were thick enough to possibly need a CPA or CFP.

When my dad passed, I knew I had 4 years until ER. I was able to take 5 more years on the MYGA (not a bad deal during near 0% interest years) and drop the deferred income into my first year of retirement. So for me, it worked perfectly.
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Old 01-22-2023, 01:58 PM   #13
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A 4.15% interest rate is low considering other non callable alternatives. It doesn’t sound like a good deal to me. Sounds like a big commission for the rep.
+1. A CD/UST/GSE bond ladder should get better yield, be safer and more liquid. Or just a 3-year agency issue.
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Old 01-22-2023, 02:13 PM   #14
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Navy Federal credit union has a 5% 15 month cd
I wonder if the fact my husband's father was in the Navy makes us eligible. He's deceased.

But then I'd have to pull the money out of the IRA, so ... not smart taxwise.
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Old 01-22-2023, 02:29 PM   #15
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I wonder if the fact my husband's father was in the Navy makes us eligible. He's deceased.

But then I'd have to pull the money out of the IRA, so ... not smart taxwise.
Reasonably sure deceased family members count in terms of Navy FCU membership. At least they did at one time.
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Old 01-22-2023, 02:39 PM   #16
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Reasonably sure deceased family members count in terms of Navy FCU membership. At least they did at one time.
Yes, I became a member based on my deceased father's service.
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Old 01-22-2023, 02:53 PM   #17
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FZDXX currently at 4.36% effective and is tracking Fed funds higher. If you think that Fed is going to continue to keep raising rates for a while (and maybe even keep them up) it seems a better option than locking in annuity. I currently have all my cash position (10% of my assets) in FZDXX and am pleased that it is actually earning (tax free in rollover IRA) monthly income.
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Old 01-22-2023, 03:01 PM   #18
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FZDXX currently at 4.36% effective and is tracking Fed funds higher. If you think that Fed is going to continue to keep raising rates for a while (and maybe even keep them up) it seems a better option than locking in annuity. I currently have all my cash position (10% of my assets) in FZDXX and am pleased that it is actually earning (tax free in rollover IRA) monthly income.
Great short term option (another is VMFXX @ Vanguard), but what happens when the Fed cuts rates? Which they're almost certain to do by end of 2023 if not early 2024.

That's why I personally like longer duration (5 year) CDs and/or MYGAs..it's a nice feeling to KNOW that you have a certain level of guaranteed income coming in for the next 60 months, vs the next 6-12. (Recognizing, of course, that OP does not appear to "need" the income. But a guaranteed return is still nice..especially with a still over-valued stock market and all the risk of further downside that entails. Personally, I wouldn't be surprised to see 3,000-3,500 before we see 4,500 again..)
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Old 01-22-2023, 08:23 PM   #19
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+1. A CD/UST/GSE bond ladder should get better yield, be safer and more liquid. Or just a 3-year agency issue.

I'm not sure what you mean by "agency issue" here, pb4uski?
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Old 01-22-2023, 08:28 PM   #20
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FZDXX currently at 4.36% effective and is tracking Fed funds higher. If you think that Fed is going to continue to keep raising rates for a while (and maybe even keep them up) it seems a better option than locking in annuity. I currently have all my cash position (10% of my assets) in FZDXX and am pleased that it is actually earning (tax free in rollover IRA) monthly income.
I was confused somewhat by that page on Fidelity, the FZDXX. There are a lot of different types of returns described--7 day, monthly, etc, but most of those are 1.x% or less. It's a money market fund, right? Does the interest compound daily or something? How else does yield get to over 4%?

I'm losing some of my smarts as I get older ...
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