Author Topic: All-annuity 457b?  (Read 9873 times)

Rural

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All-annuity 457b?
« on: June 02, 2013, 10:36:39 AM »
I posted this at the tail end of an older thread, and I don't think it was widely seen. I'm interested in Mustachian opinions on an all-annuity 457b plan.

I've just had a meeting with the plan representative at my employer, and the 457 here is all in annuities. Is that true of all 457b plans, or just my employer? There are a couple of relatively low-fee Vanguard annuities available, and the employer is a government entity (state university system).

Should I invest in an annuity-only 457, do you think? I also have a 403b available, but I could do both pretax, effectively doubling the pretax contribution limits. I don't understand the disadvantages to annuities well enough to know if they outweigh the tax advantages.

Another Reader

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Re: All-annuity 457b?
« Reply #1 on: June 02, 2013, 11:04:57 AM »
Whar I would do in your shoes is to ask your employer politely to add non-annuity options to the 457 plan.  Vanguard resells other companies' annuity products, but they take a smaller piece of the commission so you get a better deal.  A better deal is not a good deal.  There is NO annuity I would buy, even from Vanguard.  Buying an annuity subjects you to high fees and in today's interest rate environment. low payouts. 

Honest Abe

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Re: All-annuity 457b?
« Reply #2 on: June 02, 2013, 01:14:01 PM »
My 457 has low-cost Vanguard market funds... your employer needs to hook you guys up with some real 457 options. I would stay with your 403b until it's maxed out then reassess.

Rural

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Re: All-annuity 457b?
« Reply #3 on: June 02, 2013, 06:08:55 PM »
Thanks for the replies, both of you!

I just don't know how much effect I can have on the options offered. The 403b turns out to be better than I thought; there are some Vanguard funds hidden in there. But to change the 457, I would basically have to convince the whole state system to change, and I don't think that's likely.

I definitely will prefer the 403b over the 457, but I plan to max that out. What are your thoughts on the all-annuity 457 vs taxable investing? Are there other disadvantages to an annuity I should be aware of besides the fees?


aj_yooper

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Re: All-annuity 457b?
« Reply #4 on: June 02, 2013, 06:13:59 PM »
When it is time to retire, you can configure your own way to receive income.  Run from the annuity sales person/plan representative.  Annuities have upfront costs that you really don't need, IMO!

Honest Abe

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Re: All-annuity 457b?
« Reply #5 on: June 03, 2013, 03:44:05 AM »
Thanks for the replies, both of you!

I just don't know how much effect I can have on the options offered. The 403b turns out to be better than I thought; there are some Vanguard funds hidden in there. But to change the 457, I would basically have to convince the whole state system to change, and I don't think that's likely.

I definitely will prefer the 403b over the 457, but I plan to max that out. What are your thoughts on the all-annuity 457 vs taxable investing? Are there other disadvantages to an annuity I should be aware of besides the fees?

Are you eligible for a Roth IRA? If so I would max that out next.

An Annuity basically holds your money hostage in perpetuity and they charge you a hefty fee for the privilege. Then when you retire they give you an allowance in a very measured bet that you will die before you get all of your money back. I'd rather have my money in taxable, personally.

Do you have a pension?

Rural

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Re: All-annuity 457b?
« Reply #6 on: June 03, 2013, 03:55:51 AM »
I will have a defined-benefit pension, assuming I can stay the seven more years I need to be vested. I actually want to stay, and my reviews are good, so it seems likely. The pension fund seems to be in decent shape.

I don't think I'll stay long enough to max the pension out. I'm figuring I will get something along the lines of $1,000 a month starting at age 55 from that. I don't know if there a COLA on that, actually. I should find out.

Honest Abe

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Re: All-annuity 457b?
« Reply #7 on: June 03, 2013, 08:50:51 AM »
Well pension is not much different than an annuity, so consider that base covered... You'll have a guaranteed payout for life starting at 55 if you can hang in another 7, so I would max the Roth next (if possible) or put the money into taxable this way you can buy property or invest as you please without restrictions.

aj_yooper

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Re: All-annuity 457b?
« Reply #8 on: June 03, 2013, 12:15:05 PM »
A defined benefit pension is golden.  The 403b lets you save with before tax income, but you may take it out only if you are retired or disabled; it grows tax free too.  A Roth IRA is paid for with after tax money; the money grows tax free and you may take out the principal only under certain conditions.  I believe you can put $17,500 in a 403b, if you are under 50, so that should be able to soak up a lot of cash.  Personally, I would fill that first, but others like to put money in the Roth IRAs.  They are both good; I just like to reduce taxes whenever possible.  Hopefully, you have or are building a cash reserve of at least 2 months expenses; more is good too. 
Also, run fast from the annuity salesperson!  Don't make eye contact or smile.

Rural

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Re: All-annuity 457b?
« Reply #9 on: June 03, 2013, 07:43:03 PM »
We have a decent cash reserve (a few months; we paid the mortgage off with a good chunk of it the week before last -- don't yell at me! it was at 7.5%). I am maxing out the 403b, so I'm looking for the next step. I can't do a Roth, unfortunately (because of married filing separately, not because the income is that high!) I'll run the numbers and compare the outcome if we file jointly for next year, but it's done for this year.

Actually, there is one other investment option at work; I'll go through the papers again and see if the other company has any non-annuity 457. They don't have any decent options for the 403b, I know. I wonder if I can 'split' and do the 457 with one company and the 403b with the other? I'll see if I can find out. That could possibly give me the ideal solution.

Honest Abe

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Re: All-annuity 457b?
« Reply #10 on: June 03, 2013, 07:47:28 PM »
Let us know! :)

aj_yooper

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Re: All-annuity 457b?
« Reply #11 on: June 03, 2013, 08:04:21 PM »
Do you have a Health Savings Account?  Sometimes you can stash $ there tax free; check and see what the rules are.

I won't criticize a paid off house.  That is great!  Where I grew up, almost nobody had a mortgage and everyone's standard of living was improved. 

A taxable account is not bad if you fill it with the proper stuff; many people use a total market index.  Read the Bogle blog and they have it scoped out.  You get capital appreciation, very low taxes if you let it sit.  You pay capital gains tax of 15% on withdrawals. 

I'm assuming you are  OK on other debt, like student loans or SCARY CREDIT CARDS? 

Are you an entrepreneur?  You could do a self-employed pension (SEP) and tuck some more money away.

Rural

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Re: All-annuity 457b?
« Reply #12 on: June 03, 2013, 08:20:30 PM »
I do have an HSA and have already been maxing that out; the 403b is the new addition, and the paid-off house and land are making it possible to do one more thing.

Mortgages are not that common here, either. Most land has been in families for generations. Everyone's expenses are lower, though frankly the standard of living here is generally pretty low, too, lots of substandard and unsafe housing. Not ours now.

Other debt is okay, though I could be happier with it. We use one card for the rewards and pay it off monthly. I have significant outstanding students loans, but I'm on the public service forgiveness program, and the seven-year mark is when those are forgiven, just when I vest in the pension. We've paid off my husband's small student loan. In some ways, I'd rather pay mine off, too, but when they offer a program, I assume they think they're getting value for their money. At any rate, I feel a bit guilty, but on the other hand I'd feel foolish if I didn't take advantage of what they're offering.

Another option for us is to see if my husband has a 457 available. I don't know if he does or not. I need to go through some paperwork tomorrow.

Thanks for all the advice, guys. I'll report back.

aj_yooper

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Re: All-annuity 457b?
« Reply #13 on: June 04, 2013, 05:34:57 AM »
I like your student loan plan.  They are getting a very smart person to work for them so they are getting great value, not just you!

Think about whether you want to do a side business because you could shelter a lot more money there too.  Also, if children are in the picture or could be in sight, use any accounts your employer may have set up for that. 

On the annuity, if you really need more tax sheltered, talk with some people who participate and review the documents with a knowledgeable expert.  I don't like annuities personally, but maybe they have a good product.  Insurance companies do them so if they fail, so do you.  And, the insurance companies like to be paid very well.   Ask to see their customers' yachts.  :D  Is the annuity tax free to your state and do you plan to stay there for retirement?  That could help too.

Rural

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Re: All-annuity 457b?
« Reply #14 on: June 04, 2013, 03:36:06 PM »
I like your student loan plan.  They are getting a very smart person to work for them so they are getting great value, not just you!

Think about whether you want to do a side business because you could shelter a lot more money there too.  Also, if children are in the picture or could be in sight, use any accounts your employer may have set up for that. 

On the annuity, if you really need more tax sheltered, talk with some people who participate and review the documents with a knowledgeable expert.  I don't like annuities personally, but maybe they have a good product.  Insurance companies do them so if they fail, so do you.  And, the insurance companies like to be paid very well.   Ask to see their customers' yachts.  :D  Is the annuity tax free to your state and do you plan to stay there for retirement?  That could help too.

Thanks for the kind words on the loans. It does help to keep folks in positions making a lot less than they could get on the open market (in my case a whole lot less, though I wouldn't move for my own reasons).

No kids, and won't be any, but I do have a business. I'll have to think about how it could shelter anything.

Anyway, I didn't have time to check further into the offerings at work today, but I'll follow up this week. Thanks for the suggestions to see if it's state tax free. It might be, and we will be staying right where we are. Of course, our state taxes are low, anyway.

I'll report back when I have something to report.

Rural

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Re: All-annuity 457b?
« Reply #15 on: June 07, 2013, 05:59:11 AM »
Reporting back with good news! The other company at work (TIAA-CREF) has some good index funds and some low-fee bond funds in their 457. Also, I can split my plans to get the good 403b from one company and the good 457 from the other.

I'm a ten-month employee, working the summer on a supplemental contract which doesn't have benefits witholdings taken out aside from taxes and the mandatory state retirement (unfair, that last, since the pension is based on base salary only). That means nothing will be withheld until my next regular check at the end of August. So we'll have time to get my husband's paperwork from his new job and look over all our options without losing anything.

I forgot to find out about state tax on the 457. I'll have to look at that, but overall it just got a lot more attractive.

aj_yooper

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Re: All-annuity 457b?
« Reply #16 on: June 07, 2013, 06:37:47 AM »
Nice.  Vanguard has a link that can help you decide if you want to shelter some money from your side gig:
https://personal.vanguard.com/us/whatweoffer/smallbusiness/retirementplantool




Rural

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Re: All-annuity 457b?
« Reply #17 on: June 07, 2013, 03:51:36 PM »
Thanks. It suggests an individual 401k.

Honest Abe

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Re: All-annuity 457b?
« Reply #18 on: June 07, 2013, 07:24:21 PM »
Woo-hoo! Glad to hear about the TIAA-CREF option.  Between your 403b and 457 you'll be able to shelter up to $35k/year and even more if you're over 50. I guess now you just have to decide how much of your stash you want in retirement accounts, vs. a more liquid option such as a taxable brokerage account.

Also remember when stashing that the earliest withdrawal without penalty is 59 1/2 years old on a 403b, while you can withdraw from a 457 without penalty whenever you stop working for that employer, without penalty. This is a big deal for some ER/FI folks.

Rural

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Re: All-annuity 457b?
« Reply #19 on: June 07, 2013, 09:17:05 PM »
Yeah, the ability to make early withdrawals is the reason I want the 457. What I'm trying to figure out now is whether I need any taxable accounts at all. Maxing both the 457 and the 403b out would put me saving over 75% of my base salary, gross. I don't think I'm likely to get to more than that, especially considering I carry our health insurance and HSA. So either I don't max both out or I don't do taxable at all (and most likely still can't max both out).

aj_yooper

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Re: All-annuity 457b?
« Reply #20 on: June 08, 2013, 01:40:44 AM »
Is your health insurance paid with pre-tax dollars?  I assume you are maxing the HSA too.   Since you will be getting some SL modifications through the job too, this job could turbo charge your finances.
« Last Edit: June 08, 2013, 01:54:52 AM by aj_yooper »

Rural

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Re: All-annuity 457b?
« Reply #21 on: June 08, 2013, 03:28:41 AM »
I am on track to max the HSA this year, and the insurance is pretax. I've set up the 403b, but turns out nothing will be withheld until August.

SL modification? What's that?

SnackDog

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Re: All-annuity 457b?
« Reply #22 on: June 08, 2013, 04:17:53 AM »
Some poor advice on annuities here based on outdated ideas about them. You should read Barron's Top 50 Annuities in last weeks edition.  There are all kinds offered under all guises including those which overcome some of the historic shortcomings like early withdrawals or fixed rates. An annuity can be just like an IRA from a tax perspective, only with unlimited contributions and withdrawals at any age with no minimum. There is a price to pay vs a normal brokerage account but they offer safety in return. They should be a part of every retirement plan and I predict you will see them rising in popularity going forward.

aj_yooper

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Re: All-annuity 457b?
« Reply #23 on: June 08, 2013, 08:03:23 AM »

Other debt is okay, though I could be happier with it. We use one card for the rewards and pay it off monthly. I have significant outstanding students loans, but I'm on the public service forgiveness program, and the seven-year mark is when those are forgiven, just when I vest in the pension. We've paid off my husband's small student loan. In some ways, I'd rather pay mine off, too, but when they offer a program, I assume they think they're getting value for their money. At any rate, I feel a bit guilty, but on the other hand I'd feel foolish if I didn't take advantage of what they're offering.

Your student loan forgiveness by working in public service.

Your job is a good vehicle for *edit* paying off your SL, saving taxes and investing.
« Last Edit: June 08, 2013, 09:31:05 AM by aj_yooper »

aj_yooper

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Re: All-annuity 457b?
« Reply #24 on: June 08, 2013, 09:47:27 AM »
Some poor advice on annuities here based on outdated ideas about them. You should read Barron's Top 50 Annuities in last weeks edition.  There are all kinds offered under all guises including those which overcome some of the historic shortcomings like early withdrawals or fixed rates. An annuity can be just like an IRA from a tax perspective, only with unlimited contributions and withdrawals at any age with no minimum. There is a price to pay vs a normal brokerage account but they offer safety in return. They should be a part of every retirement plan and I predict you will see them rising in popularity going forward.


Barron’s/WSJ are part of the talking heads subset of the financial industry.  They promote market/sector timing and the Great Investor’s strategy of sector or stock picking and imminent Armageddon.  WSJ has been predicting high interest rates for 4 years now.  IMO, when Barron's writes about annuities, it is like a conversation between the coyote and the hawk on the health and cultivation of chickens. 

There is no guarantee about the integrity of the product.  Theoretically, annuities have a place.  Most Americans have one already.

OP,  do check out and see how your annuity is rated and talk to others about the plan.  Honest Abe's comments are also very positive.

Rural

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Re: All-annuity 457b?
« Reply #25 on: June 08, 2013, 03:34:27 PM »
I don't know. I looked at the fee ratio in that annuity, and I'm not sure I need to know anything else.

Edit: Thanks for the clarification on SL. That is a major plus to the job (and to be fair to myself, if I were working elsewhere at market rate, or near it, I could just pay it off in less than the ten years).
« Last Edit: June 08, 2013, 03:36:41 PM by Rural »

aj_yooper

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Re: All-annuity 457b?
« Reply #26 on: June 09, 2013, 06:04:58 AM »
So, does the annuity make sense to you or not?

Rural

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Re: All-annuity 457b?
« Reply #27 on: June 09, 2013, 06:05:58 AM »
So, does the annuity make sense to you or not?

Not, definitely not.

pbkmaine

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Re: All-annuity 457b?
« Reply #28 on: June 09, 2013, 06:59:02 AM »
There are a million different kinds of annuities. Not all of them are evil. (And no, I don't sell annuities for a living.) Like any other investment, you need to look at the fees. In addition to the kind of fees mutual funds have, variable annuities have another layer, called "mortality and expense". M&E fees vary widely, from 5 basis points (TIAA-CREF) to as high as 250 basis points (which is 2.5% if you do not speak Wall Street). Your TIAA CREF plan, if it has been changed at all in the past 10 years, may have a mix of VAs and mutual funds in it. Funds that are called just "TIAA" or "CREF" (TIAA Real Estate, CREF Stock) are VAs. Funds with the name "TIAA-CREF" (TIAA-CREF S&P 500 index) or an outside fund name like "T.Rowe Price Growth Stock" are mutual funds. The important thing is to look at the total fund expenses. And do not necessarily avoid the TIAA-CREF VAs. TIAA Real Estate is a unique fund. It's not a REIT, owning real estate development companies. It holds buildings, by which I mean top-tier commercial real estate. The return on the fund is a combination of the appreciation of the properties and the rents they collect. This fund has very low correlation to other asset categories, which is the holy grail of portfolio building. I would own it if TIAA-CREF were my plan provider.
« Last Edit: June 09, 2013, 07:11:10 AM by pbkmaine »

briandougherty

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Re: All-annuity 457b?
« Reply #29 on: September 04, 2014, 06:48:58 PM »
There are a million different kinds of annuities. Not all of them are evil. (And no, I don't sell annuities for a living.) Like any other investment, you need to look at the fees. In addition to the kind of fees mutual funds have, variable annuities have another layer, called "mortality and expense". M&E fees vary widely, from 5 basis points (TIAA-CREF) to as high as 250 basis points (which is 2.5% if you do not speak Wall Street). Your TIAA CREF plan, if it has been changed at all in the past 10 years, may have a mix of VAs and mutual funds in it. Funds that are called just "TIAA" or "CREF" (TIAA Real Estate, CREF Stock) are VAs. Funds with the name "TIAA-CREF" (TIAA-CREF S&P 500 index) or an outside fund name like "T.Rowe Price Growth Stock" are mutual funds. The important thing is to look at the total fund expenses. And do not necessarily avoid the TIAA-CREF VAs. TIAA Real Estate is a unique fund. It's not a REIT, owning real estate development companies. It holds buildings, by which I mean top-tier commercial real estate. The return on the fund is a combination of the appreciation of the properties and the rents they collect. This fund has very low correlation to other asset categories, which is the holy grail of portfolio building. I would own it if TIAA-CREF were my plan provider.

We are in a similar situation to Rural.  Having maxed out our 4039(b) we want to put more in a 457.  We only have a 457 with variable annuities.  What I find interesting is that these annuities seem to basically be (almost) index funds.  They have similar mediocre ERs to our 403(b) mutual funds (0.3% to 0.5%) and they seem to be a bit more managed than a real index fund but I can't see any real reason not to invest after I've maxed out Roth IRA and 403(b).

Am I missing something?  It seems like it will basically be a crappy mutual fund option if I don't annuitize.

Sdsailing

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Re: All-annuity 457b?
« Reply #30 on: September 04, 2014, 11:18:01 PM »

If you go the tiaa cref route in the 457, be sure to get some of the real estate account (not the reit).  It is unique and holds properties directly (hence the high ER).

TomTX

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Re: All-annuity 457b?
« Reply #31 on: September 05, 2014, 05:30:40 AM »
Thanks. It suggests an individual 401k.

You can do an individual 401(k) - However, it's less hassle to set up a SIMPLE IRA. Limits are somewhat lower than 401(k) but higher than (and in addition to) the personal IRA.