Put 401K into an Annuity?


S

Steve

I have a financial advisor (investment representative) who is trying to
get me to take my 401K out of my former company plan. It is now in a
relatively safe stable fund earning a steady but meager 4.5% - 5%
interest. I am now semi-retired. He thinks a guaranteed variable
annuity would be right for us in that we do not need to access the
funds for at least another 4 - 5 years. He figures it could return
over time a safe but 2-3+% better return. It could be invested into
various bond funds or other funds. If we invest over a certain amount
with him the fee would be around 2%. My wife and I can't seem to
decide or agree on what to do? We have no children. My wife is 5
years younge than I. We do not want any unnessary risk at this stage
of the game. Any thoughts or suggestions? Thanks!
Steve
 
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E

Elle

Pre-retirement variable annuities are highly controversial.
For years in my estimation their salesmen have tended to
prey upon unsuspecting consumers. Many financial gurus are
very critical of them. Clark Howard, Suze Orman, and Scott
Burns, to name three, are nearly 100% dead-set against them.
In addition, the federal government's Securities and
Exchange Commission has been warning consumers about them
for the last few years. For one, in your case a 2% fee is
not competitive with the variable annuities which Fidelity
and Vanguard offers. I suspect nor are the annual expenses
of the VA your salesperson is recommending competitive. Here
is a discussion on the subject I wrote, based on all I'd
read, that might assist you:
http://home.earthlink.net/~elle_navorski/id11.html

Because of the typically high expenses associated with an
annuity, I expect you would be better off with a CD ladder
or a bond fund, straight up. Depending on how informed you
are on the subject of "unnecessary risk," other alternatives
certainly may be worth considering.

I recommend lurking at this newsgroup for awhile as well, to
assist your understanding of the financial planning process.
How to handle IRAs, retirement investing, 401(k)'s, etc.
comes up here a lot.
 
R

rick++

Note there are several different kinds of annuities with
different characteristics. An annuitity is mix of insurance
and financial investment.

It sounds like yours is called an Equity Index Annuity
with a guaranteed return floor and ceiling. They are the "rage"
for two reasons: Financial advisors promote them because
they make a good commission off them, 5-10% of what you
pay. Second, they fared well during the 2000-2003 stock
crash with little or no loss. However with their ceilings,
many have fallen behind the bull market of 2003-2006.
If you compare 1995 to 2005 which had two booms and
a deep bust, many EIAs are comparable to the market,
but held a more level value.

Another point is that one doesn't really need to put retirement
savings into a risk-adverse product until you within five years
of retirement. Because the market usually goes up over
periods longer than that. When you get closer or after retirement
then some people recommend 25-50% in a risk-adverse product.

One concern is that the discount brokers like Vanguard and
Fidelity havent offered this type of annuity yet.
Their other annuities have lower costs and penalties than
what insurance agents salesmen sell because
they make their money off the contents of the annuity and not
sales comissions.
 
E

Elle

rick++ said:
One concern is that the discount brokers like Vanguard and
Fidelity havent offered this type of annuity yet.
You note that these "equity index annuities" offer a
"guaranteed return floor and ceiling." Such annuity plans do
charge money for these guarantees, else their companies
could not afford to assume the risk implied in these
ceilings. There is no free ride. ISTM all Vanguard and
Fidelity are doing is eliminating such guarantees /along
with their added costs to customers./ I think V & F know
that consumers are smart enough to realize that the risks of
their offerings are exactly the same as these "guaranteed"
annuities. I imagine V & F feel their approach offers a
competitive advantage that will bring them a greater market
share, and ISTM they are likely correct. IMO, there is no
such concern as you describe, "rick++."

Back to the OP's original query: Something that should leap
out at him is how his salesman is recommending placing an
already tax-deferred vehicle (the 401(k)) into another
tax-deferred vehicle. One cannot get 'double tax deferred
benefits' in this fashion. This point is much covered by the
media. Run from this salesman.
 
M

Mike Morgan

Variable annuities have the unfortunate feature of converting capital gains
into ordinary income.

For a full explanation of the pros and cons, see one of the articles at
www.peterkatt.com. I think it's titled "The good, bad and ugly of
auunities".

Mike, CFP
 
G

Guest

I have a financial advisor (investment representative) who is trying to
get me to take my 401K out of my former company plan. It is now in a
relatively safe stable fund earning a steady but meager 4.5% - 5%
interest. I am now semi-retired. He thinks a guaranteed variable
annuity would be right for us in that we do not need to access the
funds for at least another 4 - 5 years. He figures it could return
over time a safe but 2-3+% better return. It could be invested into
various bond funds or other funds. If we invest over a certain amount
with him the fee would be around 2%. My wife and I can't seem to
decide or agree on what to do? We have no children. My wife is 5
years younge than I. We do not want any unnessary risk at this stage
of the game. Any thoughts or suggestions? Thanks!
Steve
Hi. I concur with Elle. Run from this shark. The primary benefit of
annuities is that your money can grow tax-deferred, but your money
is in a 401k, so it already has that benefit. This guy cares nothing
about you and just wants 5% of your money. If your 401k investment
options are few and perform poorly you can call Vanguard or Fidelity
and have them roll it over into an IRA. Those companies offer *many*
good no-load fund choices for investment, and charge low fees.
Simple money market funds are essentially riskless and are making
5% now. Both those companies would freely advise you about where
to put the money for your personal low tolerance for risk, and your
time horizon. How much is this? I understand that you aren't going
to touch it for 5 years, but then what? Are you going to spend it all
then, or are you expecting to tap it for the following 30 years?
I ask because if it's all needed in 5 years, you have to be much more
conservative, but if there's enough to plan for 35 years, you almost
have to be more open to the market so it can grow.
Joe Weinstein
 
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R

rick++

Back to the OP's original query: Something that should leap
out at him is how his salesman is recommending placing an
already tax-deferred vehicle (the 401(k)) into another
tax-deferred vehicle. One cannot get 'double tax deferred
benefits' in this fashion. This point is much covered by the
media. Run from this salesman.
No. No. No. Yes. Yes. Yes.

The recommendation was not tax-deferral, but risk reduction.
That is legitimate for an insurance product inside a retirement
account.

I do agree about being very skeptical about insurance salemen who
will be making large commissions on what they hawk.
 
T

Tad Borek

Steve said:
I have a financial advisor (investment representative) who is trying to
get me to take my 401K out of my former company plan. It is now in a
relatively safe stable fund earning a steady but meager 4.5% - 5%
interest. I am now semi-retired. He thinks a guaranteed variable
annuity would be right for us in that we do not need to access the
funds for at least another 4 - 5 years. He figures it could return
over time a safe but 2-3+% better return. It could be invested into
various bond funds or other funds. If we invest over a certain amount
with him the fee would be around 2%.

Steve,
Throw back this question: "why shouldn't I just rollover my 401k to an
IRA at Vanguard, and purchase a mix of no-load bond funds?"

As others posted there's a lot of criticism about the use of variable
annuities for retirement dollars -- justifiably so. Your 401k is already
tax-deferred, so too would be a rollover IRA. So strike out one
advantage of the variable annuity.

Another selling point is that the annuities can come with guarantees (at
a cost), so if the market turns against you, your downside is protected.
But it's questionable whether the cost of that protection is worth the
benefit and that's your decision to make. I find that once people learn
a bit about risks in investing, it's unusual to pay for that kind of
guarantee. It's kind of like travel insurance, or maybe more
appropriately, a pre-paid warranty on a new car. Costly coverage that
benefits a minority of people who buy it, but people might buy anyway
for "peace of mind".

These types of guarantees are pitched as addressing people "who wouldn't
invest in stocks without the guarantees." I have yet to meet this
individual but perhaps that is something you're looking for. Though if
you're investing in bond funds, and the money will sit at least 4-5
years, your principal risk may be zero...meaning the benefit has
literally no value.

Also you should clarify what the costs are...do you mean 2% per year? Is
he saying that you'll get the possibility of 2-3% higher returns but pay
him a guaranteed 2% per year? And what does the cost cover?

-Tad
 
E

Elle

rick++ said:
The recommendation was not tax-deferral, but risk
reduction.
That is legitimate for an insurance product inside a
retirement
account.
Given that the costs of these floors and ceilings must
necessarily compete against the benefits of any reduced
risk, its legitimacy is doubtful. Just my opinion, but what
the OP is seeing is the usual attempt to sell bells and
whistles in a financial product, to an unsuspecting
consumer, except the bells and whistles neither ring nor
toot. The customer gets nothing but higher expenses.

Would you please disclose whether you are in the business of
selling or arranging the sale of annuity products? Or what
exactly is your experience with annuities?

My own disclosure: I am not in the financial advising
business. I never had an annuity. I considered one a few
years ago (documented here). I have read about them, per the
many citations I have provided on the subject here. I am an
ordinary consumer who likes having more income than I spend,
etc., to help enable a life that is prosperous in all ways.
 
J

joetaxpayer

Steve said:
I have a financial advisor (investment representative) who is trying to
get me to take my 401K out of my former company plan. It is now in a
relatively safe stable fund earning a steady but meager 4.5% - 5%
interest. I am now semi-retired. He thinks a guaranteed variable
annuity would be right for us in that we do not need to access the
funds for at least another 4 - 5 years. He figures it could return
over time a safe but 2-3+% better return. It could be invested into
various bond funds or other funds. If we invest over a certain amount
with him the fee would be around 2%. My wife and I can't seem to
decide or agree on what to do? We have no children. My wife is 5
years younge than I. We do not want any unnessary risk at this stage
of the game. Any thoughts or suggestions? Thanks!
Steve
You can see from the fast, multiple, responses you got that the issue is
one that brings strong feelings.

To add fuel to the fire, let me ask you this; what exactly is the VA
he's trying to sell you? As I posted on my site
http://www.joetaxpayer.com/annuity.html
this month, VAs are always sold, never bought, and they usually carry a
'hard' sell routine. There's a lot of money for the salesman in this
product. There also is so much in the way of expenses that you can
actually have a market run up as it did in the 90s and the VA still may
not beat bonds during that time. It depends on the 'participation rate'.

A safe 2-3% more than the 4.5-5%? But then his fee is 2%? I'd think long
and hard about how this could be in your favor.

The only annuity I like, and the only one that may sensibly be purchased
within a 401 or IRA is an immediate annuity. See the site
http://www.immediateannuities.com/ and you'll understand why. It can
guarantee the rate you want (depends on your age) and takes away the
risk. You do give up the sum you are investing, trading the lump sum for
a fixed cash stream. With no kids, an annuity that would pay the
survivor can cover you both. Think about that.

The other option is to stay in the 401 ot convert to an IRA, and just
keep most of the funds in bonds. Any money you'd need within say, 10
years, stays out of the market.

JOE
 
S

Steve

Tad Borek wrote:

These types of guarantees are pitched as addressing people "who wouldn't
invest in stocks without the guarantees." I have yet to meet this
individual but perhaps that is something you're looking for. Though if
you're investing in bond funds, and the money will sit at least 4-5
years, your principal risk may be zero...meaning the benefit has
literally no value.

Also you should clarify what the costs are...do you mean 2% per year? Is
he saying that you'll get the possibility of 2-3% higher returns but pay
him a guaranteed 2% per year? And what does the cost cover?

-Tad
Hi Tad, my risk tolerance at this time in my life is getting lower all
the time and I do not want to have the stress of worrying about what's
happening to my money. I could possibly be comfortable with maybe
highly rated bond funds but there are so many of them how to decide
which one(s)?

For the initial investment purchace of this particular guaranteed
variable annuity, the cost would be 2.5% for an amount that I would be
thinking of doing. Plus an annual mortality and expense risk charge of
0.85% deducted daily. In addition, total portfolio expenses (including
management fees, 12b-1 fees, and other expenses) range from 0.52% to
2.03% depending on the variable portfolios selected.

I think he is trying to tell me that the fees will "pay for themselves
in a short time." ????

The guarantee is for a guaranteed withdrawal amount for a set number of
years. It's supposed to "lock in market gains - automatically."

Thanks for the reply and would appreciate any other ideas, thoughts,
opinions, or questions.

Steve
 
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S

Steve

(e-mail address removed) wrote:

Both those companies would freely advise you about where
to put the money for your personal low tolerance for risk, and your
time horizon. How much is this? I understand that you aren't going
to touch it for 5 years, but then what? Are you going to spend it all
then, or are you expecting to tap it for the following 30 years?
I ask because if it's all needed in 5 years, you have to be much more
conservative, but if there's enough to plan for 35 years, you almost
have to be more open to the market so it can grow.
Joe Weinstein
Hi. I'll be 59 1/2 in about 4 1/2 years and at that time I am now
planning to begin drawing interest off that amount for my retirement
which will hopefully last up to 30 years or so. The main kicker is
that my wife is 5 years younger so she will need the money to last at
least 30+ years. We do not have an expensive lifestyle and we have no
debt. I just hate to do anything even remotely risky with my "nest
egg." Thanks for your reply!
Steve
 
J

joetaxpayer

Steve said:
Hi. I'll be 59 1/2 in about 4 1/2 years and at that time I am now
planning to begin drawing interest off that amount for my retirement
which will hopefully last up to 30 years or so. The main kicker is
that my wife is 5 years younger so she will need the money to last at
least 30+ years. We do not have an expensive lifestyle and we have no
debt. I just hate to do anything even remotely risky with my "nest
egg." Thanks for your reply!
Steve
You need to get a spreadsheet and run some numbers.
The total you have in retirement funds, and the annual number (%) you
plan to spend. A 4% spend rate at retirement is accepted as the 90%
confidence number to use to ensure you don't outlive your money. It
includes an inflation increase each year. But it also presumes the year
to year risk the stock market brings. The 100% safety one seeks points
to being in bonds, but stocks beat bonds over the long term.

In the end, whatever you choose, the fees will matter. If your goal is a
4% annual withdrawal, how can you afford to pay such high expenses
(2-3%) and still produce the returns you seek?

JOE
 
G

Guest

Hi. I'll be 59 1/2 in about 4 1/2 years and at that time I am now
planning to begin drawing interest off that amount for my retirement
which will hopefully last up to 30 years or so. The main kicker is
that my wife is 5 years younger so she will need the money to last at
least 30+ years. We do not have an expensive lifestyle and we have no
debt. I just hate to do anything even remotely risky with my "nest
egg." Thanks for your reply!
Steve
Sure. Ok. Here's a *simple* plan that will give you complete
balance and full diversification and absolutely minimum fees.
You should be able to draw 4% from it every year forever:

Call Vanguard and get them to get your money directly from
your 401k to a rollover IRA (never get the money to you. It
would cause a huge taxable event).
Tell them to put 50% into their Total Stock Mkt Index fund
and 50% into their Total Bond Mkt Index fund. That's it!

Have them reinvest all dividends and interest until you want
to start withdrawing. Then when you want to start taking
money have them keep all dividends as cash, and withdraw
that. Most years that should cover 4% or more. Then if there
is any money left over, tell Vanguard to invest it in more of
whichever of the two funds you have less of at that time, to
help your allocations stay balanced 50/50). If interest and
dividends do not cover 4% in a particular year, sell enough
of the funds to make it up, choosing the fund with the most
value at the moment, also to help keep your 50/50 balance.

Now note that this is safe over the long term, but in order
to get the typical growth over the long term, you will see
some up-and-down particularly in the stock market fund,
just like it does today. See the graph of the SP500 etc.
If you can watch these changes day-to-day and month-to-
month without panicking, then you should be OK. If your
personal makeup is not tolerant of any up-and-down at
all, let us know, and we'll have safer, less promising
suggestions.

Joe Weinstein
 
D

Douglas Johnson

Steve said:
I just hate to do anything even remotely risky with my "nest
egg." Thanks for your reply!
Don't forget there are many kinds of risk. If you are going to be retired for
30 years or so, inflation is a risk as well. 30 years of 3% inflation will
reduce the value of your nest egg by more than half. Some stock market exposure
(25-75% depending on how well you can sleep at night) will reduce this risk.

But don't just focus the on risk of a short term loss.

-- Doug
 
D

Don

You can see from the fast, multiple, responses you got that the issue is
one that brings strong feelings.
When strong feelings come to the surface in what first appears to be a
technical financial issue that one would expect to be settled quietly and
rationally, it usually means that significant money is involved and some
people are worried that their money might be taken away or their plans to
get more might be threatened by the discussion.
 
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E

Elizabeth Richardson

Steve said:
I have a financial advisor (investment representative) who is trying to
get me to take my 401K out of my former company plan. It is now in a
relatively safe stable fund earning a steady but meager 4.5% - 5%
interest. I am now semi-retired.
What about the way your funds are currently invested makes you think you
should make a change? Have you researched any alternatives to the Annuity
that would achieve the same goal?

Responses here tell you that, with the annuity, you must willingly give up a
portion of your money for no real advantage to you. The people here have no
self-interest in telling you this, and you should give their responses
careful consideration.

You might want to take a look at Vanguard's LifeStrategy Funds. They have
both a Conservative Growth Fund and an Income Fund which may well serve your
conservative outlook. Fidelity may have something similar. Both are Vanguard
and Fidelity are good companies.

Elizabeth Richardson
 
S

Steve

Steve wrote:
We do not want any unnessary risk at this stage
of the game. Any thoughts or suggestions? Thanks!
Steve
Wow! I would never have thought I would be generating this much
attention! Thank you everyone for your input. I can see there are
alot of good people here who are alot smarter than I am on these
matters! I think we will NOT be going the guarranteed annuity route
for one thing. The guaranteed part sounds good but the initial cost
and annual fees would begin to eat at me. The idea of the Vanguard
Total Stock Mkt Index and Total Bond Mkt Index Funds at a 50-50 mix
look attractive and is "simple." That is the way I am. But with my
low risk tolerance would a 60-40 Bond to Stock mix be better for me
and accepting a probable overall lower return? We are now ok with our
4.5%-5% current stable return but as we can all expect that somewhere
down the road those kind of returns will not be sufficient to cover
everything. I will be keeping my eyes and mind open for any more
discussion on this issue! It means alot to me.
Steve
 
E

Elle

Steve said:
But with my
low risk tolerance would a 60-40 Bond to Stock mix be
better for me
and accepting a probable overall lower return?
Absolutely. It's a matter of personal comfort. Also,
simplicity is a perfectly valid approach to financial
planning. Fact is, some people get so wrapped up in short
term returns and thinking complexity will gain them more
money that they lose money big time. A so-called "simple"
plan of investing some in the overall stock market, and some
in investment grade bonds, is very sound (meaning returns
have been very good, historically, from such an approach).

In your case, I recommend studying these matters for another
six months before making any major changes. A 5% return
right now is perfectly good; do not knock it for the short
term. Study by reading financial planning web sites designed
for education purposes; asking questions here and at similar
fora about what you read. Maybe try skimming some of the
books Joetaxpayer lists (and which I also happen to like) at
www.joetaxpayer.com . For fun, and as an introduction to
notions on asset allocation, you might want to spend a day
or so experimenting with the free online asset allocation
tools linked at
http://home.earthlink.net/~elle_navorski/id8.html . They try
to factor in a person's risk tolerance and timeframe. Also,
the Retirement Withdrawal Rates page at the site above may
help you in your decision-making as well. The articles it
links reinforce some of the ideas Joetaxpayer and Joe W.
mentioned, for one.
 
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S

Steve

Elizabeth said:
What about the way your funds are currently invested makes you think you
should make a change? Have you researched any alternatives to the Annuity
that would achieve the same goal?

Responses here tell you that, with the annuity, you must willingly give up a
portion of your money for no real advantage to you. The people here have no
self-interest in telling you this, and you should give their responses
careful consideration.

You might want to take a look at Vanguard's LifeStrategy Funds. They have
both a Conservative Growth Fund and an Income Fund which may well serve your
conservative outlook. Fidelity may have something similar. Both are Vanguard
and Fidelity are good companies.

Elizabeth Richardson
Elizabeth,
Currently I don't think there is an immediate need to make a change.
Besides my 401K, I have my "bridge to using the 401K" invested with
this certain financial company who is trying to get the whole boatload
into their vault. I wouldn't really say I'm being pressured but more
of a continual almost monthly reminder that they can do better for me.
I don't know if it is safe or allowed here to say which company this
is? If someone would like to know they would be welcome to e-mail to
me.

That is another great suggestion on looking at the Vanguard
LifeStrategy Funds.

Like I said in another post on this topic, that there seem to clearly
be alot of good friendly and caring people on this group and who are
alot smarter on financial matters than I could ever hope to be. My
wife told me to see if there was a newsgroup for investing so I owe all
this gained knowledge to her! Thanks again!
Steve
 

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