Retirement/annuity questions

[Tinkmom75]

Please explain the ins and out of an annuity. Is this a good option for a stable/fixed income for a long time?

 

[Chicago526]

I don't know much about them, but I watch Suze Orman every weekend on cable and she hates them. I guess they don't get much of a return and there are other safe places to invest that you can earn more money from.

 

[PinkRhombus]

Someone was on Dave Ramsey's show yesterday (we might be a day behind on the broadcasts here though) asking about this.

Dave said there is not a single instance where he thinks annuities are a good idea.

Said you'd be better off with a CD.

 

[Golf4food]

They are not usually the best option for most normal people (meaning not one of the <5% of the country that are filthy rich). Best bet is to find a local fee-only financial planner and let them handle your retirement planning - they'll be able to get you into the best products for YOU and limit tax liabilities (which is just as important as rate of return!), etc. Fee-only planners don't get commissions on the products, so they are much more likely to only worry about what is truly best for you, not like a major brokerage house (like Meryl-Lynch, for example), where they don't have to take any fiduciary responsibility (meaning they can stick you in a product that isn't as good for you but gives them a giant commission).

 

[Kika]

I agree with Szue, Dave, and everyone else here. I don't like annuities, nor would I ever recommend one to anyone I know or care about.

A lot of "financial advisors" (translation...sales people) will try to push the annuities because this is where they can make the biggest commision.
(There are real financial advisors out there like Gold4food mentioned, but you really have to beware, as it seems a large number of them are salespeople trying to sell annuties and/or whole/universal life insurance policies to maximize their commisions.)

I truly feel that if you have the time to research things, your best financial advisor is always going to be you (since you know best what your goals are and what you are comfortable with).

 

[Cheshire Figment]

I am currently getting several pensions and have a fair amount of money in a retirement fund that I will (by law) have to start drawing on in a few years. Currently I control the investments (at least to an extent).

I have been looking into an "immediate" annuity at the time I have to start drawing down this fund. I am not looking for the annuity as an investment vehicle. You will notice that people as Orman and Ramsey talk about investment annuities as something to avoid.

As far as immediate annuities, there are three types in two classes.

Class one is a straight annuity. This will pay a fixed dollar amount every month for the rest of your life, no matter how long you live.

1st in this class is a life annuity. If you die after the first payment has been made your heirs do not get anything. This will give you the maximum monthly payment.

2nd in this class is "X" Years Certain. Here the monthly payments are a bit smaller than in 1, if you die before the end of the period (usually 5 or 10 years) payments will continue to you heirs until the end of the period.

3rd in this class is the "Return of Premium". The monthly payment is less than in #2. If you die before the complete original depoist has been paid out, payments to your heirs will continue receiving payment until the original deposit amount has been paid out. Usually this means about 14 years of total payments.

The other class is increasing payments. It has the same three categories, Life Annuity, "X" Years Certain, or Return of PRemium. The initial monthly payment is substantially less than straight line. However, if you factor in a 3% (compounded) increase in payment, at about year 10 or 11 the payment amount will be larger than the straight line payment amount, and around year 19 or 20 the total of payments received by this method will be equal to or larger than the sum of the payments received using straight line.

Two factors will affect your decisions. One is a realistic estimation of your life expectancy and the other is what, if anything, you want to leave to others.

 

[ameraumi]

I am currently working with a Financial Planner on this now. While we are diversifying the portfolio, he is looking at place some of the money into an annuity. He ran hypotheticals and the money I place will give me a great income once I hit 60. But then again, I am not a huge risk taker so this is where I am comfortable.

I am in no way looking to get rich, I just want something that is going to give me a decent (safe) return and replace lost income at a later date.

 

[Tinkmom75]

Cheshire Figment:

I would like to thank you for the information you posted. I also want to elaborate on my scenario. I didn't want to post too much personal info, but here goes.

Goals:
Take funds from ESOP and invest in safe option.
DH would have to quit job to get funds.
We would move into jobs we enjoy more.
We would be before retirement age.
Looking to use tax code 72T which allows you to take distributions prior to 59 1/2 and avoid 10% penalty and having all money go toward income.

 

[disney1990]

I am currently working with a Financial Planner on this now. While we are diversifying the portfolio, he is looking at place some of the money into an annuity. He ran hypotheticals and the money I place will give me a great income once I hit 60. But then again, I am not a huge risk taker so this is where I am comfortable.

I am in no way looking to get rich, I just want something that is going to give me a decent (safe) return and replace lost income at a later date.

That's great until you hit 60 -- then what happens? My Mom is currently 87 and my FIL is 89. You need an income far past the age of 60.

 

[ameraumi]

That's great until you hit 60 -- then what happens? My Mom is currently 87 and my FIL is 89. You need an income far past the age of 60.

The income will start at age 60 and continue on taking a % each year (I think my hypothetical was 5% a year). The hypothetical given was paying me $19,000 a year and it would not run out because you are still earning on it. I think it was investing $65k and by age 60 I would have over $320k in it. Again, this is just one of the many different investments I will have.

 

[georgina]

Look very carefully at the fee structure. The biggest reason not to get an annuity I have been told is the high fees that can eat away at your money.

 

[clarabelle]

I have never seen them recommended in any book, podcast or magazine.
I am not and expert -I just have never read that they are a good idea.

 

[silvergoldberry]

It's really best to decide this on a case by case basis.

Don't let anyone tell you that because some celebrity financial person doesn't like annuities that they are all bad.

We have money in one and it's an awesome deal that increases the income base regularly with a bonus if you don't need to touch the money for several years. Of course the terms have been changed since we bought in, but if you have a good financial planner they can keep their ears open for deals that are best for your situation.

 

[dvcgirl]

I have never seen them recommended in any book, podcast or magazine.
I am not and expert -I just have never read that they are a good idea.

Unless you are a very wealthy individual with an income of 400-500K per year, variable annuities aren't a good deal. The commissions on variable annuities are up to 10 times that of other financial products which is why they're pushed so hard by the salespeople....errr....I meant "financial specialists"....selling them.

In most cases, a broker trying to sell a variable annuity is a red flag to run the other way.

Fixed annuities are a different story....and are typically a good idea for a portion of a retiree's portfolio to help them with fixed income distributions.

You really need to speak with a "fee only" certified financial planner. Someone who isn't trying to sell you any products. You're just looking to pay someone a flat fee to assess your financial situation. I'd interview with at least three and then choose one to go with......best of luck!

 

[ameraumi]

Look very carefully at the fee structure. The biggest reason not to get an annuity I have been told is the high fees that can eat away at your money.

That is true. There were 2 different plans that my planner was comparing and one had high fees that basically ate away the bonus savings. So that plan got thrown out right away.