Put 401K into an Annuity?

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
Reply to
Steve
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:
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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.
Reply to
Elle
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.
Reply to
rick++
"rick++" wrote
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.
Reply to
Elle
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
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I think it's titled "The good, bad and ugly of auunities".
Mike, CFP
Reply to
Mike Morgan

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
Reply to
joe.weinstein

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.
Reply to
rick++
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
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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
Reply to
Tad Borek

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
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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
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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
Reply to
joetaxpayer

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
Reply to
Steve

Both those companies would freely advise you about where
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
Reply to
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
Reply to
joetaxpayer

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
Reply to
joe.weinstein
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
Reply to
Douglas Johnson

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.
Reply to
Don

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
Reply to
Elizabeth Richardson
We do not want any unnessary risk at this stage
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
Reply to
Steve
"Steve" wrote
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
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. 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
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. 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.
Reply to
Elle
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
Reply to
Steve

Thanks for the information!
Another couple of questions that come to my simple mind is with the stock market at it's current all time high, would it be prudent to wait for some type of correction to put a bunch of money into it? Does it matter what level the market is at to go into the bond funds? Also noting that I am not really in a hurry to make changes, I'm sure there's going to be some type of correction in the next year or two???
I have heard it said that you can't time the markets but to put a bunch of money at one time into even mutual funds is not wise to me.
Steve
Reply to
Steve

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