A question on Indexed and Fixed Annuities

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L1: A question on Indexed and Fixed AnnuitiesI have a traditional IRA account and I would like to invest the balance in an indexed or fixed annuity, a contract that would allow me to begin receiving distributionsstarting in 2008. Does anyone knowsthe reliability of these
annuity contracts? Are there any hidden expenses in this type of investment?
Where can I find information on this kind of investment.

Thank You2005-05-17 16:52, By: Mario Fernandez, IP: [4.250.126.146]

L2: A question on Indexed and Fixed AnnuitiesYou really need to use maximum care and discrimination if you plan on using an annuity any annuity fixed, indexed or variable, deferred or immediate.
Start by doing your homework and remembering that nothing is free starting with the fact that most annuities pay the writing agent a nice commission. There is nothing wrong with a commission provided the agent is doing something of value for you besides signing the application.
You have three years to do your research long enough to learn the subject matter, identify expenses and promises and be in a position to make a decision that will be to your benefit.
Where can you find information, start by using Google or Yahoo and searching for annuities.
2005-05-17 17:10, By: Gfw, IP: [172.16.1.79]

L2: A question on Indexed and Fixed AnnuitiesHi Mario:
Equity Index Annuities (EIA) are in the same category of traditional Fixed Annuities, and these are correctly called “savings vehicles” and not “investments.” Their “safety” is based on the “claims paying ability of the insurance company” that issues them. So check out the Best, Fitch, S&P and Moody”s ratings of the issurer. Then keep your ears open for any significantly negative news on the company. They all have some bad news but look for really bad stuff, especially if they are a conglomerate of insurance companies.
Hidden expenses; oh boy. There are no additional, recurring charges with most fixed / EIA”s. The company figures in their costs of doing business and factor that into their “declared intrest crediting rate” at issue and each year. EIA”s generally have a “cap” on the amount of upward index movement which affects the amount of interest they will credit to your contract each year. The really strong point with this type product is that once credited to your account the value doesn”t go down. So in this sense you “win” by “not losing.” My big complaint is the marketing of EIA”s by some organizations who basically tell half-truths to get people to surrender Variable Annuities, “B” share funds, and other investments with CDSC”s to lock up in an EIA with very long surrender periods.
Here”s my disclaimer: I am not a CPA or attorney, but am a Financial Planner. I”m compensated by a combination of Fee for Service, Fee-based assets under management, and commission products. How I”m compensated depends on the individual situation. No one product is right for everyone. I believe that ALL investment vehicles are “on the table” when building an investment plan for someone. How your advisor is compensated doesn”t matter as long as you are getting your money”s worth in service. If you buy an EIA and nothing else then expect the agent to earn a commission, and don”t expect much else. There”s nothing else to do until you need to get money from the annuity, then a simple form takes care of that. The agent or his / her agency will take care of this, or your can contact the company directly if you desire.
If you need continuous help then expect some form of on-going fees to be paid to the agent / Rep. Some people say “only pay a fee for services” and “never pay a commission.” Does it make sense to pay someone $500 per year to tell you which no-load mutual fund to buy with your $4,000 IRA investment (this method costs you $4,500), or to invest $4,000 in a mutual fund, with $220 @ 5.5% sales charge to buy the fund. Surprise: The Rep doesn”t get the whole $220. Remember, in both of these methods you get some analysis of your investment temperament and risk tolerance in picking which fund(s) to buy. How much do the TV & radio “financial advisors” know about you when they recommend a certain no-load mutual fund? I would say they know nothing about you.
Hope this helps.
Jim2005-05-18 09:35, By: Jim, IP: [70.184.1.35]

L2: A question on Indexed and Fixed AnnuitiesJust a few short lines to say thanks to GFW and Jim for their comprehensive
information on annuties. After reading both of your replies, I am concerned about selecting an annuity as an investment vehicle, it appears to be a complicated matter.I would like to avoid incurring unnecessary expenses as a result of purchasing an annuity contract. As I indicated my plan was to start receiving distributions from this annuity in 2008. I guess I need to do a more extensive research on the subject matter and make a decision.

Thanks again for your help.

Best Regards,
Mario Fernandez2005-05-18 17:08, By: Mario Fernandez, IP: [4.250.33.44]

L2: A question on Indexed and Fixed AnnuitiesPlease note that if you plan on annuitizing the account balance in 2008 you will be transferring the ownership interestof the account balance to the insurer in return for a lifetime income that consists of interest and a partial return of the principal (account balance).2005-05-18 19:49, By: Joel, IP: [68.197.111.95]

L2: A question on Indexed and Fixed AnnuitiesGood morning Mario:
You are correct that you need to do a lot of homework. Learn the pros & cons of the different investments you are considering. Know the costs but don’t get hung-up on finding the cheapest. When you buy an annuity you are looking for specific benefits it will provide.
Joel is correct that if you “annuitize” an annuity, you give up control of the assets in the contract in exchange for an income you cannot outlive. The problem with annuitization is that if you die too soon the balance of the contract generally goes to the insurance company, and this could be a substantial cost. This problem drives advisors to use “systematic withdrawals” so you don’t lose control of your money. On the upside of annuitization, part of your payments is taxable earnings and part is “return of premium” which is not taxed. Under systematic withdrawal, all payments are taxable until you get down to your “basis” and then it’s not taxed since it is now “return of premium.” This is just one of the “choices” you have to make.
Because of the negatives associated with annuitization, most Variable Annuity companies have developed riders to guarantee income for a period of time, even if the market tanks. If the market goes up you get that benefit also. Yes, there is a small charge for this rider, but you should evaluate whether this is right for you.
You have many options available to build a good financial plan, just don’t eliminate anything until you are sure it is not appropriate for your situation. And situations change over time so don’t put in a plan and then go to sleep. Monitor things.
Jim2005-05-19 08:54, By: Jim, IP: [70.184.1.35]

L2: A question on Indexed and Fixed AnnuitiesAnnuitizing also means that you are disinheriting your heirs. Assume you are annuitizing $100,000. $100,000 is no longer part of your estate. This fact must be fully understood and pondered prior to making the decision to annuitize. The decision to annuitize is irrevocable…this is why I strongly recommend withdrawals based on one’s life expectancy where you get a similar income stream while keeping the title to the money in your name. Remember if you annuitize you may not invade the principal amount beyond the guaranteed monthly payment of principal and interest.
Peace and hope,
Joel2005-05-19 14:43, By: Joel, IP: [68.197.111.95]

L2: A question on Indexed and Fixed AnnuitiesGood points. A really god comparion would be to the current Social Security system – you own the benefit while you or your spouse are alive – yor heirs receive nothing even though you may have paid into the system for 30 or 40 years.. 2005-05-19 14:57, By: Gfw, IP: [172.16.1.78]

L2: A question on Indexed and Fixed AnnuitiesTO: GFW, Jim and Joel
Thank you very much for all of the information. Well done.
Mario Fernandez2005-05-19 16:14, By: Mario Fernandez, IP: [4.250.33.5]

L2: A question on Indexed and Fixed AnnuitiesGreat explanations, but there are a couple other points to consider.
First, you don’t have to either 1) annuitize or 2) take systematic withdrawals. It actually could make sense from a risk management perspective to do both. In other words, if a stream of income is required, consider using part of the money as an annuitization (immediate annuity)that satisifies some or all of the income requirements, guaranteed for life (subject to claims paying ability of the company). This then “frees up” the remainder toinvest more aggressively.
Next, if you do annuitize, you can elect a term certain or joint annuitant. This solves at least some of the risk of dieing too early. A joint annuitant means the payments will continue over two lives (the longest to live) and a term certain means the payments will continue over your life or XX years, whichever is longer. If you die early,payments will continue to a named beneficiary. Each of these elections will decrease your periodic payment vs electing payments strictly over your life.
Fixed annuities are usually the most straight-forward. They pay a stated rate for a stated period of time with a stated minimum guaranteed interest rate. Some guarantee the rate for the term of the annuity, some for just one year. EIA’s require a lot of homework. They have many “moving parts”. Be particularly careful about how they calculate the annual gains. Some are “point to point” meaning they simply credit the returns of the index, up to a cap. Some average the monthly returns, with or without a cap. Some add up eachmonthly “capped” return along with usually “uncapped” monthly losses.Ask for analysis of each in terms of how they would have performed and then double check.
I’m not a big fan of variable annuities. I’ve yet to find guarantees that were worth their salt, and the fees can be very high. If you’re considering a variable annuity I’d suggest seriously considering a well diversified portfolio instead; possibly in concert with an immediate annuity if that makes sense for income.
Good luck.2005-05-31 06:53, By: Mobey, IP: [63.187.192.241]

L2: A question on Indexed and Fixed AnnuitiesHello Mario. Hope you and everyone on this board had a good and safe holiday break.
So far the posts have been rather general to give you some information and guidance for additional research on your part. But you have not commented on very important elements of your situation. How old are you now? How old will you be in 2008 when you plan to start taking distributions? Will you be facing a SEPP situation during any of your distributions? Is all of your money that youintend to use in this plan qualified (IRA, 401k, etc) or is some non-qualified?
A cople of months ago we had a rather lengthy discussion, both on the board and some of us off board, about SEPP and annuitization. GFW and TheBadger can weigh in, but I recall the result was the following:
If you need to use SEPP / 72(t) or 72(q) for early distributions, and you want to annuitize, then you need to buy an “Immediate Annuity” instead of buying a “Deferred Annuity” now and planning to annuitize in a few years. As I recall our final conclusions, The IRS only recognizes either an immediate annuity or a deferred annuity that is annuitized within the first 12 months of issue to avoid the 10% penalty. The general problem with getting the deferred annuity now and annuitizing later is most if not all companies require annuitizing after the first 12 months or longer from the issue date. So this pretty much limits you to an immediate annuity IF you have a SEPP situation. If you don’t have a SEPP situation then forget this item.
When you decide how to invest your assets, simply decide whether the additional benefits afforded you by using an annuity justify the added expenses for the M&E and any riders you want. If the answer is “NO” then don’t use annuities. If, however, you see something you like and you feel will make your life more comfortable, then give serious consideration to using annuities, whether it’s variable, fixed, or EIA, or some combinations thereof. And definitely consider how non-annuity investments may fit into your situation.
No one investment or combination of investments is right for everyone. Everyone is different and you should consider everything to formulate a good plan. And once the plan is formulated and implimented, monitor and make changes where necessary.
Good luck.
Jim2005-05-31 09:07, By: Jim, IP: [70.184.1.35]

L2: A question on Indexed and Fixed AnnuitiesThank you for all of your comments, they are very much appreciated. In response to Jim’s question, Iam currently 62 and will be 66 in 2008. I have a qualified plan that only allowslump sum distributions, or a series of payments based on a mortality table, the money can also be directly transferred (rollovered) into an existing IRA with the same company.
I am leaning towards a direct rollover where I can take what I need as I go forward but the idea of having an annuity for life sounds to me like a good investment, if it is true that one can get payments for life. Fixed annuities would be my preference because of the difficultyand complexity found invariable type annuities.
Best Regards
Mario
2005-05-31 17:45, By: Msrio Fernandez, IP: [4.250.33.193]

L2: A question on Indexed and Fixed AnnuitiesThanks for the additional information. Sounds like you are on your way to having this thing work good for you. At your age both now and later, SEPP isn’t a concern. Also, since all of your funds are qualified, you will be paying ordinary tax rates on everything you take out regardless of when that occurs. So your focus should be how to structure everything for you and your family’s maximum benefit, whichwill probablyinclude estate planning considerations.
I would definitely go for the IRA Rollover to give you more options. When you say “the money can also be directly transferred (rollovered) into an existing IRA with the same company” that would be true to probably avoid any potential sales charges. However, you may need to use more than one IRA custodian to accomplish all you desire, and you have this option. You are not locked into only using the current custodian. Use the “custodian to custodian transfer” method so you won’t have to deal with the mandatory withholding and funds make-up issues to avoidan earlier than desireddistribution of funds.
When you say “I am leaning towards a direct rollover” I agree completely. You will have more options available to you, especially in the beneficiary arena. Widen you homework to include all of the different combinations of beneficiary settlement options for an IRA, paying particular attention to dying before RBD and dying after RBD. This has an impact of beneficiary options. You may be able to successfully use annuitized annuities in your plan, but keep open the option for systematic withdrawals. I believe you said that you planned to use a financial planner, and that will be a good place to discuss all of these subjects. You should be able to get some hypotheticals run to give you some good ideas how to put all of this together.
Good luck.
Jim2005-06-01 10:15, By: Jim, IP: [70.184.1.35]