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Variable annuity firing squad or slowly strangle.
Old 01-25-2018, 10:51 AM   #1
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Variable annuity firing squad or slowly strangle.

Married widow who came with variable annuity. We are both over 70 with no medical issues or requirement to leave an inheritance. Desire is to spend the money - judiciously with our ER mindset. Has a 6% rider ie annual return will never below.

So what research do I read and how do I set up the various calculations to compare:

a. 1035 b. Take out various amounts and annuitize the residual c. Cash out and take the after tax. and d. ?

heh heh heh - This one is new stuff for me.
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Old 01-25-2018, 11:59 AM   #2
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Hard to believe that the annual return will never be below 6%.
I am guessing that the annuities are still in the accumulation phase - no payouts yet. If so, has she been in them long enough that there is no longer a back end commission?
Variable typically means that you pick the investment. But this can't be if the return will never be below 6% so I would find out how it grows.
Finding out the above would lead me to determine what to do next. You could find out the above be reading the policy (or whatever they call the document).
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Old 01-25-2018, 12:10 PM   #3
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Hard to believe that the annual return will never be below 6%. ....
But doesn't that 6% include "return of capital"? For example, an annuity could afford to pay out 5% for a group with a 20 year expected lifespan, and wouldn't need any investment return at all.

-ERD50
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Old 01-25-2018, 01:39 PM   #4
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I guess one data point would be how much money you'd get if you 1035'd out, including lost bonuses, commissions, etc. Another data point is the current fees for the one you have versus the one you'd go into.

Seems like there's not quite enough information in the OP to speculate very far.
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Old 01-25-2018, 03:16 PM   #5
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Variable Annuities have an insane amount of hidden expenses..

call your advisor and ask him what the Annual fees are which include sub account fees, M&E expenses, any riders. Also ask if there are surrender penalties.

My mom had one of these and a year ago I discovered the fees were over 4% PER YEAR .....just criminal....
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Old 01-25-2018, 03:36 PM   #6
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While I agree OP needs to find out more, not all variable annuities are as terrible as made out by some. I have one that guarantees a minimum of 4.5% (AFTER annuity annual fees) and has no surrender fee. It's easy to verify that I've been getting that rate for years because my cash surrender value is reported quarterly.

In my mind it's a super safe high-yield bond. I won't surrender it until the market crashes or inflation really picks up.
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Old 01-25-2018, 05:26 PM   #7
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Variable Annuities have an insane amount of hidden expenses..

call your advisor and ask him what the Annual fees are which include sub account fees, M&E expenses, any riders. Also ask if there are surrender penalties.
+1

As stated, you'll find fees on the sub accounts (aka mutual funds), and at the policy level, and for the riders. Your new wife (congratulations) probably saved the policy in her important paper drawer. You can compare the language there to what the agent tells you. There's probably an 800 number you can call to get someone in the home office customer service and ask the same questions.

They should be able to produce an "in force illustration" that starts today and goes forward if you leave the money in the policy. They can also give you a quote for a fixed guaranteed lifetime payout, and for a variable lifetime payout.

You'll probably find a table of guaranteed annuitization factors in the policy, you can compare them to your quote.
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Old 01-26-2018, 09:02 AM   #8
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I have a love hate relationship with variable annuities. I am extremely fee conscious but the fact is they do make sense for some, particularly if you want to maximize your withdrawal rate.

You have to look at it from the insurance companies' perspective, if a 5 or 6% distribution is successful more than 50% of the time in the marketplace, they win. Plus they keep the fees.

There are also annuities with living benefits where you can take 5-6% annually guaranteed for life without having to annuitize the contract. These so called living benefit riders are expensive but if you are looking for maximum cash flow, they are hard to beat. Okay, I'm done and that was painful.
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Old 01-26-2018, 09:08 AM   #9
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But doesn't that 6% include "return of capital"? For example, an annuity could afford to pay out 5% for a group with a 20 year expected lifespan, and wouldn't need any investment return at all.

-ERD50
This is my guess. The agent said "guaranteed return" of 6%.

The policy actually has a Guaranteed Minimum Lifetime Withdrawal Benefit rider (or some similar words) that says you an annuitize for a 6% payout.

"Return" and "payout" are grossly different.
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Old 01-26-2018, 10:41 AM   #10
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This is my guess. The agent said "guaranteed return" of 6%.

The policy actually has a Guaranteed Minimum Lifetime Withdrawal Benefit rider (or some similar words) that says you an annuitize for a 6% payout.

"Return" and "payout" are grossly different.
Guaranteed minimum withdrawal benefit riders are actually not annuitizations- so this is inaccurate. Also, living benefit riders are different than guaranteed withdrawal benefit riders. Each contract is different, but this is consistent.
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Old 01-26-2018, 03:20 PM   #11
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Guaranteed minimum withdrawal benefit riders are actually not annuitizations- so this is inaccurate. Also, living benefit riders are different than guaranteed withdrawal benefit riders. Each contract is different, but this is consistent.
I don't want to get hung up on words.

All VAs I know about allow any policyowner to make periodic withdrawals. Eventually, if the withdrawals are too big relative to the money in the contract, investment returns, and fees, the policy will terminate because the surrender value is exhausted.

Some policies have riders that say if you meet certain conditions on the amount of your withdrawals (e.g. monthly withdrawals that are each 0.5% of some amount when you started this withdrawal program), the company will continue the withdrawals as long as you live, even if you exhaust the account.

The underlined part sure acts like a life annuity. The policy may not use the "annuity" word.

I was referring to that type of rider - one that guarantees a lifetime income.
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Old 01-26-2018, 11:24 PM   #12
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Looks like a slow strangle. Wife doesn't want to Annuitize yet. Vanguard calculator for a 1035 show 8k ballpark annual expense savings without reading the fine print down in the weeds for the individual fund expenses and rider/s fee/s. I could ruin my weekend or wait and call during business hours next week. I'm sure they will be straight forward as to fees and expenses.

Turnover is always a guesstimate.

heh heh heh - The lean right now is 1035 to Vanguard and not take the annuity option yet. Just withdraw judiciously.

P.S. About 20k short Market vs 6% rider exercise option after 14 years. 4% difference.
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Old 01-27-2018, 06:46 AM   #13
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I have a policy that guarantees a 7% return. The return is on the annuity value (the # that the payout is computed on) but the investment amount grows at the growth of the underlying investments. When I annuitize the policy, I will get a 5% payout on the annuity value. If I cash out the policy, I will get the investment value. The company dropped the guarantee on new policies to 6% then to 5% then stopped issuing the policy altogether as they were losing $$$ on the bond portfolios.
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