Using a (Vanguard) Variable Annuity to Increase Your Retirement Income

[Arnie]

I know most think of three words when they hear variable annuity ... run, run, run ... myself included.

I just read "Using a Variable Annuity to Increase Your Retirement Income".

Excerpt:

But variable immediate annuities suffer a bad reputation, and for good reasons. Many have high expense loads and mediocre returns. There are, however, currently a few products that stand out from the crowd. For example, The Vanguard Group offers a variable immediate annuity through an arrangement with American General Life Insurance Company. The arrangement uses low expense Vanguard funds and has relatively favorable pricing. And you can choose among a variety of Vanguard funds, with various mixes between stocks, bonds and cash investments.
...
The bottom line: I encourage you to look beyond the bad press on variable annuities, do your shopping, and consider variable immediate annuities as a viable part of your retirement income portfolio.
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Any thoughts on the Vanguard offerings overcoming the negatives relative to a SPIA (which I know has it's own issues), or is it still run, run, run?

 

[REWahoo]

When it comes to anything other than SPIAs my opinion is you should add on a couple more "runs"...

 

[ziggy29]

IMO there's nothing wrong with something like a Vanguard VA if someone really understands what they are buying, and under what situations it might make sense, AND they fit that situation. Note that I'm speaking specifically to a low cost self-directed product with good, low-fee investment options; for anything else I'd "run" and run fast in the other direction.

Having said that, we're talking about a fairly small minority of investors, those who (a) want maximum tax deferral, (b) can leave the capital alone long enough to make surrender charges a non-issue and (c) have exhausted all their other tax-preferred investment options. Bonus points to those who have high net worth and/or engage in activities or occupations that put them at high risk of being sued *and* they live in a state where annuities have asset protection laws in place to protect these assets from seizure in legal judgments.

These aren't bad products for the right people, but it's important to do all the due diligence to make sure it really is the right fit for your situation. For *most* people it's probably not -- especially if they aren't already maxing out their other tax-deferred retirement vehicles such as their 401K/403B/TSP, IRAs and the like. The problem is that most annuity salespeople make it sound like everyone is the ideal candidate for this product when few are. And the harder they sell it, the worse a deal it's going to be.

 

[LOL!]

How would a Vanguard VA increase my retirement income over owning the exact same funds in a taxable account? I know in the taxable account, I will save on the annuity fees.

I can see how a Vanguard VA would increase retirement income for someone who is paying 1% expense ratios on actively-managed funds already in their taxable account. But if someone is already invested tax-efficiently with passively-managed low-expense-ratio funds from Vanguard in the first place, I remain unconvinced that a VA makes any sense at all. The linked blog did not even try to make a case for a VA against such a low-cost investing method nor did it consider the taxes one would pay on withdrawal from a VA (gains taxed as ordinary income) versus long-term capital gains (taxed as low as 0%). Yes, I know that bond dividends are taxed as ordinary income which is why I hold my bonds in tax-advantaged accounts.

 

[ziggy29]

How would a Vanguard VA increase my retirement income over owning the exact same funds in a taxable account? I know in the taxable account, I will save on the annuity fees.

Hence the comment about asset protection laws in various states. If you have a high net worth and are in an occupation (say, many medial specialties such as obstetrics or anesthesiology) which is prone to being sued, money in the VA may be protected from seizure (and most likely would be here in Texas assuming no criminal activity or fraudulent conveyance) -- whereas the funds in the taxable account can easily be seized by judgments and creditors.

Again, this is why these products aren't for MOST people. But for the right situation they can make some sense, provided you go with the low-cost providers (in terms of the account itself and the fees on the funds they invest in) and you understand your own situation well enough to benefit from it (and if there's ANY doubt, don't do it - especially if you're getting a hard sell, in which case you should ALWAYS run).

 

[chinaco]

What are you hoping to accomplish? What do you think it is going to do for you?

How do you think it will help you?

Are intending to use it to accumulate retirement funds or generate annuity income?

 

[Arnie]

I wasn't asking for me ... this was for a friend.

Seriously, I just noticed the article and wondered how folks would respond to the "look beyond the bad press on variable annuities" in light of the respected Vanguard being involved.

Not saying I n/ever would, but I am not considering annuities now. If I ever was shopping it would be for the income stream, not for accumulation.

 

[friar1610]

I have a Vanguard Variable Annuity story...

A number of years ago I was persuaded by a Fidelity Annuity rep to redeem a Fidelity fund I had and put the money into a Fido VA. Dumb move because I paid some CG tax on the redeemed fund. Then turned around and bought an annuity! What a dummy! But I was still on active duty and there were no tax-advantaged retirement investments available to me and I thought by getting the tax deferral on the gains it would equivalent to a 401K. (There was no TSP for the military way back then.) I didn't fully understand the tax implications of either doing straight withdrawals from the annuity or annuitizing it. I will say that the Fido annuity was not a rip-off: it had relatively low fees, no penalties, etc.

After I decided Vanguard could serve me better than Fidelity, I did a 1035 transfer to a VG VA. For several years I schemed about how I could get the money out of the annuity with the least hit on taxes. One year I made my annual contribution to my alma mater by redeeming some of the VA and donating those funds - a wash tax-wise.

I don't really need the income that annuitizing it would provide and don't expect to during my lifetime. So, I have decided I can make it work the best as follows:
- if I predecease my wife, she will become the owner and can annuitize it at that point to provide her with guaranteed income. (I bought into a small portion of the military SBP, but her income will be significantly lower if I go first since I will take a very nice pension with me to the grave.)
- if she predeceases me, I will use the gain portion of the VA to fund several charitable things I want to do. I'll basically give away any of the gain but leave the basis to my kids. Therefore, there won't be any tax on the gains (since the estate would give them to charity) and there never was going to be any tax on the basis since that was already taxed.

That's my story and I'm stickin' to it.