Author Topic: What would you do? Annuity Regret!  (Read 4594 times)

forestbound

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What would you do? Annuity Regret!
« on: July 02, 2014, 03:53:45 PM »
I have two black eyes from face punching myself over this. It seriously makes me sick to my stomach. A few years ago on the advice of a financial advisor (in pre-MMM days, I was clueless and thought the paid professional would give me the best advice) I rolled over an IRA from my old work into an annuity. It is now at $138,110.00, and the penalty for rolling it into a Vanguard IRA would be about 5K. The penalty date expires December 5, 2017.

Would you roll it over anyway and pay the penalty or wait? I am about 6-10 years from FIRE.

Okay, if that weren't enough. This same "PROFESSIONAL" financial advisor had me roll over another annuity into her annuity program. It is $68,000. This one is on a surrender schedule, 7% to surrender now, which goes down a percentage every year, so 0% is in 2021!

WHAT SHOULD I DO? I really just want these to roll into Vanguard IRAs but I don't want to pay penalties. I don't think they are making what they could be making, so I am paying opportunity costs. These are not my total savings. I have approximately 500,000 in Vanguard and other investments. These annuities just fill me with regret though.

warfreak2

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Re: What would you do? Annuity Regret!
« Reply #1 on: July 02, 2014, 04:12:39 PM »
I have two black eyes from face punching myself over this. It seriously makes me sick to my stomach. A few years ago on the advice of a financial advisor (in pre-MMM days, I was clueless and thought the paid professional would give me the best advice) I rolled over an IRA from my old work into an annuity. It is now at $138,110.00, and the penalty for rolling it into a Vanguard IRA would be about 5K. The penalty date expires December 5, 2017.
Disclaimer: I'm not a financial advisor, you should think of me more as an internet clown who likes numbers. This post is not a substitute for expert financial advice yada yada yada I like numbers please don't sue me under any circumstances.

You have $133,110 but if you leave it in the underperforming annuity for ~3.5 years, then you get an extra $5k (or rather, you get $5k and ~3.5 years of interest on it). That's an additional return of 3.75% over the entire period, or about 1%/year. So, if your annuity will underperform (relative to the alternative) by an average of more than 1%, it is better to cash out. Check what you're paying in fees; that could well be 1% right there.

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Okay, if that weren't enough. This same "PROFESSIONAL" financial advisor had me roll over another annuity into her annuity program. It is $68,000. This one is on a surrender schedule, 7% to surrender now, which goes down a percentage every year, so 0% is in 2021!
Same deal here, you lose about 1% growth per year by leaving the money in the annuity, so it makes sense to cash out if the annuity will underperform (relative to the alternative) by more than 1%.

mustachianteacher

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Re: What would you do? Annuity Regret!
« Reply #2 on: July 02, 2014, 04:13:19 PM »
Don't feel badly. We all make mistakes.

For the annuity that is currently at $138K, yes, I would absolutely pay the penalty and get it out. Here are the numbers: If you subtract $5K from the current balance, you have $133K. Even if you only make 5% on that for 6 years, you should end up with around $178K. I'm not sure what rate of return the annuity offers, but you can run the numbers on that and see where you stand. More than anything, though, it sounds like it's bugging you and you don't trust the company, and that right there would be enough to make me feel like I needed to get the money out and roll it into the Vanguard IRA.

I'm not so sure about the other situation, but I think you'd have to run some numbers and see at what point it makes the most sense to roll it over. Or, for the sake of peace of mind, you could just bite the bullet and do it now, regardless of what the numbers show. (That's probably what I would do, but I place a huge value on trusting the companies that hold my money.)

Zamboni

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Re: What would you do? Annuity Regret!
« Reply #3 on: July 02, 2014, 04:32:19 PM »
Well, you stashed it somewhere and didn't fritter it on wine, women, and song.  So, I say pat yourself on the back no matter where the money ends up for the next few years.

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Disclaimer: I'm not a financial advisor, you should think of me more as an internet clown who likes numbers.

This disclaimer adds credibility in my book.

Threshkin

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Re: What would you do? Annuity Regret!
« Reply #4 on: July 02, 2014, 04:44:26 PM »
Is there a guaranteed minimum return on your annuity?  What is the real return?  It they have a guaranteed minimum return you might look at them as effectively a bond fund.  I am not a big fan of bonds but believe that they have a place in most portfolios.

I am not a financial adviser, just another schmo trying to figure this all out.

I also was talked into some annuities years ago.  They came with a 5% guaranteed minimum return so they looked pretty darn good when the housing bubble burst.  I have no idea how they are doing now, I gave them all to my ex-wife in the divorce.

KBecks2

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Re: What would you do? Annuity Regret!
« Reply #5 on: July 02, 2014, 05:18:48 PM »
Vanguard has an annuity, and you may be able to roll your annuity over into their plan. That way, you won't have to worry about tax consequences, and you will have more choices for your investments. For the one with the surrender charge, that is really tough. Do you want to eat the 7% or not? But I would look at putting both of those into the  Vanguard variable annuity either now, or later.

Google Vanguard variable annuity, or give them a call and they can send you all the information about it. It has some good investment choices including an equity index fund that I believe tracks the S&P 500.
« Last Edit: July 02, 2014, 05:22:32 PM by KBecks2 »

data.Damnation

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Re: What would you do? Annuity Regret!
« Reply #6 on: July 02, 2014, 05:27:19 PM »
Need more information. What kind of an annuity is it? What are the yearly fees? What are the benefit riders? What funds are available (if the annuity is a variable annuity)?

forestbound

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Re: What would you do? Annuity Regret!
« Reply #7 on: July 03, 2014, 12:07:29 PM »
Thank you all so much for the advice. At this point I trust "internet clown who like numbers" but aren't looking for commissions, WAY more than the "professionals".

Some answers to questions... Yes this is "Qualified Funds", it is a variable annuity, with no yearly fee, and there is a benefit rider which provides lifetime imcome.

data.Damnation

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Re: What would you do? Annuity Regret!
« Reply #8 on: July 03, 2014, 09:15:37 PM »
Since it's variable with no fees, you're probably better off leaving it in there. You didn't mention funds, but unless the funds are all terrible (1.5+% expense ratios), it doesn't make sense to pay the huge surrender fee. Once it comes out of the surrender period, you can surrender it and roll it back into your IRA.

MDM

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Re: What would you do? Annuity Regret!
« Reply #9 on: July 03, 2014, 11:49:35 PM »
One oh-by-the-way: you will have to pay tax on all the interest that has accumulated in the annuity if you withdraw it.

Unless you do a "1035 exchange" (google that if needed) - I suspect Vanguard could help you there.  But that's only if you want to keep the money in an annuity.

Even very bad indexed annuities may allow you to withdraw 10%/yr without penalty.  That's "without penalty", but not "without tax" - you will pay tax at ordinary income rates on any interest withdrawn.  And, by law, all the interest must be withdrawn before your original investment can be withdrawn.

A small spreadsheet might be helpful for you to examine "what if?" scenarios.  At other posters have noted, the devil is in the details of how your annuity is performing, what options you have, and what you would do with the money once you extract it from the current location.

warfreak2

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Re: What would you do? Annuity Regret!
« Reply #10 on: July 04, 2014, 04:54:22 AM »
One oh-by-the-way: you will have to pay tax on all the interest that has accumulated in the annuity if you withdraw it.
This is why I'm only an internet clown who likes numbers; yes, work out the tax consequences, that has a big effect!