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Old 01-11-2015, 04:44 PM
 
Location: Florida -
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Among other investments, I put about $460K into a Variable Annuity 3-4-years ago.
Not thrilled with the investment, but, it is what it is.

Right now, I’m looking at options. ONE is to start a lifetime income stream: $37K/2015(68), $40K/2016(69), $49K/2018(70).

ANOTHER is to Surrender and cash-out the Annuity for $460K/2015 and do an IRA rollover to re-invest it elsewhere.

We’ve got ‘enough’ income without the Annuity and will likely Save, Re-invest or “gift” it. IRA RMD’s of about $45K per year will start in 2018 whether I turn-on the annuity or do something else.

My question is WHEN is the best time to start the Income Stream (and Why?) OR Should I take my loses and invest elsewhere (and Where?)
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Old 01-11-2015, 08:17 PM
 
Location: Florida
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This is very complicated.
Take your life expectancy and divide into the 460. The answer might surprise you.
Be sure you understand termination fees. These could run as long as 10 years.
Consider making the max withdrawal you can each year with out any penalties. In short do not start the lifetime withdrawal. If you die the balance should go to your estate but make sure I am correct.
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Old 01-12-2015, 08:39 AM
 
Location: Florida -
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Quote:
Originally Posted by rjm1cc View Post
This is very complicated.
Take your life expectancy and divide into the 460. The answer might surprise you.
Be sure you understand termination fees. These could run as long as 10 years.
Consider making the max withdrawal you can each year with out any penalties. In short do not start the lifetime withdrawal. If you die the balance should go to your estate but make sure I am correct.
Not sure I understand about dividing life expectancy into 460? What does that provide?
As far as I can tell (spoke with company), the $460 is a net, cash-out after termination/surrender fees.

You advise, "Do not start the lifetime withdrawal," but, "make the max withdrawal each year without penalties." How does this work? Is a max withdrawal without penalties typically an option to turning-on the income stream? I'll have to double check the 'balance to the estate clause' ...
Thanks for your input.
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Old 01-12-2015, 12:10 PM
 
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Hi Jghorton,

I have an annuity too, and they are complicated and confusing and it doesn't help that the insurance companies like to keep us confused. For years I've taken the maximum withdrawal without starting the lifetime withdrawal. I've spoken to the insurance company a million times and this is what I think all of it means: The annuity is earning income because the premium is invested. That investment income can be distributed without penalty on a periodic annual basis. The insurance company holding the annuity will figure out how much it can give you each year without penalty. This is different than starting the lifetime distribution which would include a portion of your original premium payment. Starting the maximum withdrawal may create a taxable event (meaning you may be paying taxes on the total amount of money distributed to you during the year). Be aware that taking the maximum withdrawal each year without penalty is NOT Annuitizing. Be very careful not to say that word.
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Old 01-12-2015, 02:05 PM
 
Location: Florida -
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Quote:
Originally Posted by LookingatFL View Post
Hi Jghorton,

I have an annuity too, and they are complicated and confusing and it doesn't help that the insurance companies like to keep us confused. For years I've taken the maximum withdrawal without starting the lifetime withdrawal. I've spoken to the insurance company a million times and this is what I think all of it means: The annuity is earning income because the premium is invested. That investment income can be distributed without penalty on a periodic annual basis. The insurance company holding the annuity will figure out how much it can give you each year without penalty. This is different than starting the lifetime distribution which would include a portion of your original premium payment. Starting the maximum withdrawal may create a taxable event (meaning you may be paying taxes on the total amount of money distributed to you during the year). Be aware that taking the maximum withdrawal each year without penalty is NOT Annuitizing. Be very careful not to say that word.
Thanks, I'll look into that. Does taking the 'maximum withdrawal' automatically reduce the underlying value ... and also the future available 'Income Stream'? If that is the case, what do you feel is the advantage of taking the 'maximum withdrawal?'

Also, how has your 'maximum withdrawal' amount compared with the amount of your 'Lifetime Income Stream' if you were to turn that on? -- Your input is appreciated.
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Old 01-12-2015, 04:36 PM
 
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It's difficult to answer your questions because there are different types of annuities (i.e. fixed, variable, indexed), and each insurance company has their own plans and rules. It makes it nearly impossible to compare them.

But, I think we have to review the basics so that there is a foundation to analyze the answers that you will eventually receive and so that you will know what matters and what doesn't matter when you get your answers.

Stocks, bonds, and things like these are investments. The purpose of an investment is to "increase". They don't always increase, but that is what we want them to do.

Health Insurance, Life Insurance, Homeowners Insurance, Car Insurance, Annuities, these are insurance. The purpose of insurance is to provide "economic protection". If our house burns down we don't want to lose money having to rebuild it. If our health deteriorates, we don't want to go broke paying for medications. It is buying a sense of safety for ourselves by exchanging a possible unknown large economic risk for a known smaller cost. For example, if Jane's house burns down it may cost her $300K to replace it. Instead she opts to spend $1K per year to insure it. She is replacing a possible $300K risk with a $1K expense.

Annuities are insurance. They are promising economic protection from ever running out of money. The insurance company promised you that in exchange for giving them $460K premium for an annuity they will give you $37K for life starting at age 68. They are saying that even if some bad guy stole all of your money, you would still have $37K deposited into your bank account every year until your death. This is the very same type of promise that Social Security made to you when social security taxes were being withheld from your pay while you worked. You can spend the $37K. You can invest the $37K. You can do whatever you want with that money but next year you are going to get it again. It is a well that will never run dry while you are alive (unless you picked an end date).

If you live 12 years ($37000 x 12) you will have received $444K even though you paid in $460K. If you live 17 years, you will have received $629K. But for however long you live, you will always receive $37K no matter how much you have been paid. If your account balance is $460K you will receive $37K every year. If your account balance is $500K you will receive $37K every year. If your account balance is $90K you will receive $37K every year. So, what I'm trying to point out is that your account value doesn't matter. It doesn't matter because this was not an investment and it's purpose is not to increase. This is an insurance product and it's purpose is to provide economic security.

As for my annuity... some years depending upon the market it is worth more. Some years it is worth less. I always receive the same amount every month. At this moment, because the market has been kind, my account is worth more than when it was started even though money has been withdrawn and sent to me monthly for years.

I hope this helps to take the need for a certain ROI away from the equation.
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Old 01-12-2015, 07:20 PM
 
Location: Florida
4,379 posts, read 3,718,272 times
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Quote:
Originally Posted by jghorton View Post
Not sure I understand about dividing life expectancy into 460? What does that provide?
As far as I can tell (spoke with company), the $460 is a net, cash-out after termination/surrender fees.

You advise, "Do not start the lifetime withdrawal," but, "make the max withdrawal each year without penalties." How does this work? Is a max withdrawal without penalties typically an option to turning-on the income stream? I'll have to double check the 'balance to the estate clause' ...
Thanks for your input.
In a lot of cases you will see that the lifetime payments of an annuity is basically a return of your principal if you die at your life expectancy. If you only plan on living a few years past the AVERAGE life expectancy annuities are not too good.

Yes most annuities let you take out 5 to 10% each year without a penalty. You will have to read the contract to see what yours lets you do. The idea is you will come out with more dollars if you do not annuitize and live to the average life expectancy.
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Old 01-14-2015, 11:04 AM
 
Location: Florida -
8,770 posts, read 10,867,395 times
Reputation: 16658
Quote:
Originally Posted by rjm1cc View Post
In a lot of cases you will see that the lifetime payments of an annuity is basically a return of your principal if you die at your life expectancy. If you only plan on living a few years past the AVERAGE life expectancy annuities are not too good.

Yes most annuities let you take out 5 to 10% each year without a penalty. You will have to read the contract to see what yours lets you do. The idea is you will come out with more dollars if you do not annuitize and live to the average life expectancy.
If one could 'plan' their life expectancy with any degree of certainty, we would all have a much better idea of what to plan for financially.

Nevertheless, it's looking more to me like this annuity is not that great a deal, whether I turn on the income stream now, later or not at all. That's why I am wondering if I might be better off simply cashing-out the annuity ('Surrender') and invest in something else.

Thanks, I'm looking into the 5-10% 'take-out' for further details.


Good to know - I'm investigating.
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Old 01-14-2015, 11:18 AM
 
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the best way to get maximum success is a single premium immediate annuity and your own investing.


right now for a 65 year old couple an spia shows a 5.47% payout or on 100k 5470.00 a year.


so lets see how it works in a simple rough example :

lets take a 200k portfolio of 50% cash and bonds and 50% stock. that is 100k in each.

right now interest rates are negative on cash in real return and bonds are 0% real return.

usually when rates rise inflation is rising to so if we assume we will at least keep even with inflation when rates rise a bit ,real return will at least be a wash instead of a loss now.

so 4% is 8k a year inflation adjusted we need .

that means in 12- to 15 years depending on rates all cash and bonds will be depleted and gone so stocks will have to be sold to raise money to live on.


that is important to remember , the 100k in cash and bonds and the interest is gone in 12-15 years.

pulling from all pieces of the pie yield similiar results as opposed to just from cash and bonds. the cash and bonds would last longer but you would be selling off stocks early on to live on cutting their growth .


lets look at the spia and stocks , same 50/50 8k a year inflation adjusted .

so you have 100k in the spia and 100k in stocks.

the spia gives you 5470.00 a year so you need to add a bit from stocks for a while to make up the 8k and inflation adjusting but lets see what happens around that 15th year.

with the stocks and bonds your spent 100k and now have zero income from it since it is gone . so we have to refill all inflation adjusted 8k going forward from stocks.

the spia still has a base income of 5470.00 that goes on forever , both your life and your spouses. that is 5470 less selling a year you need to pull from stocks for as long as you BOTH live. that could be as much as 20 years if you have longevity.


that 5470 difference you do not have to pull each year is growing and compounding each year while your own investing without the spia is spending the full amount down. .

that is where the magic happens and the spia/ stocks pull ahead.

with a couple in particular you have two horses in the race with one bet. great chance one of you is going well beyond average life expectancy.

investing on your own you will deplete all cash and bonds first while all stocks are left growing until 15 years or so.

the spia you will have the income from the spia and have to spend some stock money early on to make up the difference to 8k and inflation adjust.

but the spia draws on stocks only a bit for the first 15 years in comparison.

you own investing hits stocks hard after 15 years and the time frame is open ended until you both die.


there is not a major difference but the odds of outliving your money have worked out to be better.

the spia as you see needs very little roi to do what it has to .
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Old 01-14-2015, 07:13 PM
 
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You've gotten a really good education on Single Premium Immediate Annuities and also on Deferred Annuities. Here is an article by Wade Pfau Why Retirees Should Choose DIAs over SPIAs. Mr. Pfau is someone that Mathjak swears by. In this article Mr. Pfau discusses why the deferred annuity is better than the immediate annuity. I am giving you this article so that you don't feel badly for choosing the DIA. It is actually a very intelligent choice. It costs less than the SPIA because it has time for the premium to grow. People should not worry so much about the fees charged in any annuity. The sole object of the annuity is to make sure you don't run out of money. It is going to happen through investment of your premium and it will either cost more up front because there was no time to accrue or it will cost more in fees because someone spent the time managing it.
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