Fixed Annuity Accounts

[bank5]

How do people feel about these? I'm a ways off from retirement but am thinking about putting 5% in a fixed annuity account to decrease my portfolios volatility.

 

[mickeyd]

You will always be able to purchase an annuity whenever you need it. Why tie up your cash now in an investment that you will have no control over? Why are you thinking of placing your money in an annuity at such an early age, other than volatility?

 

[ziggy29]

What most of the people think of annuities I won't post because then I'd have to report my post to myself.

For the vast majority of people who are "a ways off from retirement," annuities are NOT a good idea. There are a small number of situations where they can make some sense. Such as:

* If you have maxed out all other available tax-deferred retirement accounts and you want more tax deferred growth (if you have not, go NO further -- an annuity is not right for you)
* If you are in a high marginal tax bracket
* For asset protection -- in some states more than others, if you have a high net worth and you want to shield some of it from potential lawsuits and creditors, annuity balances may be protected from judgments
* You don't have any non-mortgage debt and you have sufficient emergency savings and taxable investments
* If you know you won't need the money beyond the point at which surrender charges apply.

If these points apply to an individual's particular situation, an annuity can possibly make sense if it's not one loaded with sales charges and high fees. I'd also note that the vast majority of people do not meet enough of these criteria to make an annuity an attractive choice.

 

[LOL!]

I think that even for younger folks there is room in a retirement portfolio for a guaranteed annuity such as the TIAA traditional annuity or the "G fund" of the Federal TSP. Both of these are a kind of fixed annuity that is much like a bond fund, but there is a minimum pay out or floor each year. That makes these unlike a bond fund because you cannot lose money.

Now since there is no free lunch, you are losing something to get the guarantee of not losing value. So these guaranteed annuities will not be barn-burners as far as return goes, but they will be steady-eddies.

The other responders may be writing about SPIAs or other types of annuities.

Full disclosure: About 8% of our portfolio is in the TIAA traditional annuity that my 403(b) offers.

 

[mickeyd]

The other responders may be writing about SPIAs or other types of annuities.

I assumed that OP was refering to a deferred annuity in this case as it's unlikely that someone that was not contemplating retirement soon would be looking for a SPIA. But, I could be wrong.

 

[bank5]

The other responders may be writing about SPIAs or other types of annuities.

Full disclosure: About 8% of our portfolio is in the TIAA traditional annuity that my 403(b) offers.

I just heard about annuities today so I don't know anything about them. I was talking to someone who said that Fidelity offers a "principle fixed account" that's in my 403(b) plan. I'm thinking about putting 15% towards bonds and cash. Is it a good idea to split it up between the two or should I put it all in bonds?

 

[ziggy29]

I just heard about annuities today so I don't know anything about them. I was talking to someone who said that Fidelity offers a "principle fixed account" that's in my 403(b) plan. I'm thinking about putting 15% towards bonds and cash. Is it a good idea to split it up between the two or should I put it all in bonds?

I think what we're talking about in this sense isn't an "annuity" in the strictest sense as we usually think of them here, but more like a GIC within a tax-deferred retirement account.

 

[mickeyd]

I just heard about annuities today so I don't know anything about them. I was talking to someone who said that Fidelity offers a "principle fixed account"

Was that "someone" a salesman trying to convince you to start a 403b?

 

[LOL!]

I agree that a SPIA is not for younger folks unless you are a professional athlete AND a spendthrift.

I cannot comment on the Fidelity account you mentioned. You might try to see how similar or dissimilar it is from the 2 investments I mentioned. Some things to look for is how easy would it be to cash it out or exchange it for another investment in your 403(b) if you happen to change your mind.

But you might try to read some books if you don't mind me gently nudging you in that direction. I don't think an internet forum can provide you with enough information to make a good decision. It can be helpful, but should not be your sole source of info. You might go read some books by Larry Swedroe and Rick Ferri.

 

[bank5]

Thanks for the replies. I'm convinced to stay away.

I'll probably put all 15% in a bond index like VBMFX. I'm just starting out so I'm not dealing with a lot of money. The thing I'm confused most about is figuring out my asset allocation. I'm 28 and don't plan on retiring for 20+ years. I'm thinking:

Large: 30%
Mid: 20%
Small: 15%
International: 20%
Bond: 15%

 

[ats5g]

I'm 28 and don't plan on retiring for 20+ years.

Then fixed income instruments like 1-5 yr CDs and deferred fixed annuities [usually with 5 yr rate guarantees] are not riskless for you. 20-30 year TIPS would be safer.

 

[jdw_fire]

I think that even for younger folks there is room in a retirement portfolio for a guaranteed annuity such as the TIAA traditional annuity or the "G fund" of the Federal TSP. Both of these are a kind of fixed annuity that is much like a bond fund

the TSP's G fund is not an annuity, it is closer to a FDIC insured savings account inside an ira. when the person owning the TSP retires s/he can buy an annuity if they want.

 

[Amethyst]

I would also wonder/ask who is underwriting the "annuity," GIC, or what have you. Many are underwritten by life insurance companies. These instruments looked super-safe up to a few months ago. Now even the biggest life insurers are struggling, while others have gone under.

 

[ziggy29]

Just to add to my previous comment, I'm not completely against annuity products for people fairly far from retirement.

I own one -- and bought it pretty recently. (Put down the pitchforks, folks.)

I have a flexible deferred annuity with USAA. I opened it in November, and here are the factors that went into my thinking:

1. I already max out my 401K and two Roth IRAs for my wife and me.

2. I wanted a little more tax-deferred growth because it's likely, despite upward pressure on tax rates, that if I no longer have my current job our tax bracket will drop.

3. We have no debt and a sufficient emergency fund. I'm quite sure there is no chance I'll need this money before age 59 1/2. In short, this is money we know we can set aside for a while.

4. The asset protection laws in the state of Texas are very favorable to retirement and insurance products, including annuities, where lawsuits and delinquencies are concerned. I wanted to shield more of our net worth from litigation and potential creditors.

5. The annuity has a currently attractive rate (4.55% for even small balances) AND I get a 4% bonus match for anything I put into it in the first year. That translates to an 8.73% return on the first year's contributions and seems a good return for the fixed income part of my AA.

6. I worry about credit risk of insurers, but USAA is about as solid as they come and if they busted (and if the state backup failed), we'd be so screwed that the small percentage of my assets in it would be the least of my considerations given that probably no more than 2-3% of my net worth will wind up there. I can accept that risk.

7. There was no front-end sales charges, and if I don't need more than 10% of it per year after the first year, there's no surrender charges at all.

[Edit to add #8: I have a guaranteed minimum 2.25% return for the length of the contract (through 2060). If you drink the longer-term deflation Kool-Aid, that's not bad.]

I don't see this as being a big part of my retirement plans. But in my situation, given the points above, I have no problem plowing a fair amount of my excess cash flow into this annuity, particularly for the first year when I get a 4% match on anything I put in.

But we're talking about a totally different animal here. I'm not a big fan of annuity-type investments within an IRA or 401K. I still believe that deferred annuities are wrong for most people who ask about them, but when I looked at my situation closely, I decided I was a pretty good candidate for one.

 

[REWahoo]

I own one -- and bought it pretty recently. (Put down the pitchforks, folks.)

If this doesn't bring 2B back to the forum, nothing will...

 

[Dawg52]

Just to add to my previous comment, I'm not completely against annuity products for people fairly far from retirement.

I own one -- and bought it pretty recently. (Put down the pitchforks, folks.)

Yeah, what happened to 2B?

 

[unclemick]

Thanks for the replies. I'm convinced to stay away.

I'll probably put all 15% in a bond index like VBMFX. I'm just starting out so I'm not dealing with a lot of money. The thing I'm confused most about is figuring out my asset allocation. I'm 28 and don't plan on retiring for 20+ years. I'm thinking:

Large: 30%
Mid: 20%
Small: 15%
International: 20%
Bond: 15%

In the first place why are you wasting your time thinking? And I certainly hope you are not doing anything silly like reading books!

If investing is not your career - like your 24/7 day job:

Why not just buy the lifecycle fund matching your age? I'm a Vanguard Boglehead but Fidelity and others have them.

Then when your twenty years are up and you tire of your day job - retire.

Successful investing is time in the market and faith.

I achieved this brilliant insight by screwing around for forty years(1966-2006) and making almost every investment mistake in the book.

Hindsight is a wonderful thing.

heh heh heh - Of course most people can't believe successful investing is so stone simple - it's the hormones..

Since 2006 - full auto Target Retirement/ except for a few good stocks - to keep the hormones happy.

 

[freebird5825]

the TSP's G fund is not an annuity, it is closer to a FDIC insured savings account inside an ira. when the person owning the TSP retires s/he can buy an annuity if they want.

Absolutely correct. For FERS employees who do not stay until their minimum retirement age (MRA), it is a nice option. It is designed for special situations.
For instance people who already have health benefits elsewhere, and want to exit to private industry part-time or just say
"I'm outta here!" like me.
Say what you want about fixed annuities, but the TSP annuity option made the difference in me having to stay another 1 yr 10 mos for an early out that I doubt they would have "granted" me, plus staying would have destroyed my hands and sanity.
I went for the "See yaaaaaaaaa" option.
I knew about insurance carrier risk, but the risk of going crazy and losing complete use of my hands was higher. No regrets.

 

[bank5]

Why not just buy the lifecycle fund matching your age? I'm a Vanguard Boglehead but Fidelity and others have them.

That's what I did for the majority of our assets. (my Roth IRA, my wife's Roth IRA, and my wife's 401(k)). However, I think it would be fun to select a few indexed mutual funds for my 403(b). I don't think I'll mess it up that bad if I pick a decent asset allocation AND stick to it The other factor is that my 403(b) is through Fidelity and they have high expense ratios for their Freedom funds (0.78%).

 

[mathjak107]

i happen to like some of the no fee fixed annuity deals... they pay about a point more than a 1 year cd... all the expenses are already in the quoted interest rate...it grows tax defered ..... you have a choice of locking the rate for 5 years or re-negotiating the rate every year... a 5 year cd works great when rates are falling.... a 5 year fixed annuity with a re-set every year is good when rates are rising....the 2 together is a win win no matter what....

no point in paying taxes today on money i wont use to eat for 5 to 7 years out

 

[travelover]

That's what I did for the majority of our assets. (my Roth IRA, my wife's Roth IRA, and my wife's 401(k)). However, I think it would be fun to select a few indexed mutual funds for my 403(b). I don't think I'll mess it up that bad if I pick a decent asset allocation AND stick to it The other factor is that my 403(b) is through Fidelity and they have high expense ratios for their Freedom funds (0.78%).

Maybe I already mentioned this in response to one of your other posts, but Fidelity has super low cost Spartan index funds that may fill out your AA plan if they are offered within your 403(b)