Author Topic: Mom's money in Variable Annuity paying 4.15% do I leave it alone?  (Read 5447 times)

Allen

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My Mom has dementia and I'm managing her money for her.  One account is with Principal with crappy fund choices.  I'm rolling that over to Vanguard on her behalf. ($145k)

The other is a $137k retirement account in a "variable annuity" paying 4.15% fixed.  It is tax sheltered / 401k like.  Administrative fee is $17.35/month.  There is no surrender fee, so she could pull the full amount out in a rollover without penalty. 

4.15% fixed interest rate is pretty good in this environment.  Should I just leave this alone?  Or, should I also put it in with the other account into the Vanguard rollover?  She needs income of about $15,000/yr out of these assets:

$137k in the variable annuity
$145k in the 401k moving to Vanguard
$105k in cash from the proceeds of her house (closes in 3 weeks)

That seems to fit nicely in the 4% rule.  Her Social Security and Pension take care of the rest of her current housing costs ($4k/month in adult family home).  Not sure if leaving the variable annuity alone screws up the 4% rule.

Any other advice would be appreciated, I'll also answer any questions for information I may have left out.


MDM

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #1 on: October 21, 2014, 04:22:52 PM »
4% (almost exactly after subtracting the monthly fee) isn't bad.  So, despite a kneejerk aversion to variable annuities, and if there really is no surrender fee and the 4% is guaranteed...then leaving it there does seem defensible.

Have you done a cash flow projection?  E.g., assuming some inflation (3%?), how long will the SS (goes up with inflation) plus fixed(?) pension plus annuity income cover her living expenses?  How you invest the $145K plus $105K could depend on the answer to the cash flow projection.


Allen

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #2 on: October 22, 2014, 02:18:12 PM »
The sad part of the annuity is that when she opened it, in 1999, she put in $126,000.

So in FIFTEEN YEARS it has gone from 126k to 145k.  /cry


So it was a terrible, terrible, terrible, decision.  But, now that it is what it is, pulling $450/month forever for living expenses without touching the principal, 100% risk free, might not be a bad plan.

MDM

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #3 on: October 22, 2014, 08:13:05 PM »
So in FIFTEEN YEARS it has gone from 126k to 145k.  /cry

So it was a terrible, terrible, terrible, decision.  But, now that it is what it is, pulling $450/month forever for living expenses without touching the principal, 100% risk free, might not be a bad plan.
Given the abysmal 126K to 145K, having the annuity provider now give her 4.15% seems...too good to be true.  If she dies, do her heirs get the remaining principal?  In other words, which of the options described in http://www.investopedia.com/articles/retirement/05/071105.asp has she chosen?

Allen

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #4 on: October 22, 2014, 10:29:07 PM »
The full value goes to her heirs upon her death.  145k. Also, the current 'surrender value' is 145k so if she preferred she could cash it out right now (and pay taxes) or POSSIBLY roll it into an IRA? (I'm not 100% sure on the IRA rollover)

It doesn't seem to match up to any of the options in the link you posted.

Allen

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #5 on: October 22, 2014, 10:33:04 PM »
Digging further, I see she took out $21k in 2009, and paid taxes on it.  That means the value of the annuity of $126 to $145 should have been 21k + some $interest higher.  $126k to $148k or so is still awful for 14 years.  But I did confirm the 'death benefit' is the full current balance, and up until that point, it will keep paying 4% on the balance forever. 

I wonder if that 4% is on the ORIGINAL balance ($126k) instead of compounding on the newer balances?  I'm not sure about that.

Rob Costello

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #6 on: October 24, 2014, 03:44:26 PM »
Allen,

I am sorry to hear about your mother's condition and I am happy to hear you are taking care of her financial affairs.

I would consider rolling over your mother's IRA into another IRA without an annuity, unless you like the guarantee aspect and plan to start the payout phase (annuitize).

Below is a brief breakdown of how variable annuities work. 

A variable annuity has two accounts.
1. The cash surrender value/Account Value
According to my calculation, the actual account value made less than 1%. 126k initial investment over 15 years and now at 145k. 

2. The benefit base = fictitious account
If your mother was guaranteed 4% over the last 15 years, the benefit base would equate to $226,918.

Since she took out 21k in 2009. Adjust values accordingly.

Here is the really important part. If you do not plan on annuitizing the variable annuity, you do not get any value in the 4% guarantee income rider. When she passes away, the beneficiary will only get the cash surrender value, not the benefit base.

Things you need to know and consider before making a smart decision:
1. Understand the Income Riders

 a. Does your mom have a Guaranteed Lifetime Withdrawal Benefit (GLWB)?
   i. If she has a GLWB, she can take x% a year each year for life. The annual amount will reduce the cash surrender value.
   ii. If she takes more than x% a year, the withdrawal will reduce the cash surrender value and a proportionate % of the benefit base.

b. Does you mom have a Guaranteed Minimum Income Benefit (GMIB)? 
   i. If she has GMIB, she can take x% a year.
   ii. After you annuitize, you do not have any access to the account value.

2. Find out how much the benefit base is.

3. Since there are income riders (the 4% guarantee), you are paying for that benefit. It is hidden. How much is the question. This may be another reason why the account value is so low. When you strip down annuities and really find all the expenses, I have seen them as high as 4-5%.

4. A variable annuity in an IRA makes no sense, unless she did it for the guaranteed income. There are no tax advantages.

After you determine this information, you can run the numbers if it makes sense to hold onto it or roll it over into another IRA. 

Annuities in general are sold because they offer guarantees, tax deferral, and prey on people's emotions. There are a places where annuities make a lot of sense, but I find too often annuities are sold to the individual for the wrong reasons. They usually provide the insurance agent with the biggest upfront commission. 

When you are not comfortable or do not fully understand the details, I always recommend working with a fee-only financial planner. They have a fiduciary responsibility to their clients and never sell products. There is a big difference.

On a side note, I would double check her estate plan and beneficiary designations to make sure everything is aligned and your siblings can take advantage of stretch out provisions.
 
I hope this helps you and your family. I wish you the best of success! 


 


 


Allen

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #7 on: October 26, 2014, 08:27:56 PM »
Thank you very much for this reply.  I'm going to dig into further.

I'll sit down with the agent and walk through scenarios. i.e. "At the end of the year, the interest will be X based on this and that".  "The next year it will be on the increased basis?".  "What happens if she dies?"

Frankies Girl

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #8 on: October 26, 2014, 08:36:25 PM »
Replying to follow (will be dealing with an annuity situation soon for my mother).

Allen - so sorry about your mom.

Allen

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #9 on: October 30, 2014, 03:48:58 PM »
Replying to follow (will be dealing with an annuity situation soon for my mother).

Allen - so sorry about your mom.

Thank you.  It sucks.  Dementia is an awful fate.

Mighty-Dollar

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #10 on: November 20, 2014, 02:24:22 AM »
The other is a $137k retirement account in a "variable annuity" paying 4.15% fixed.  It is tax sheltered / 401k like.  Administrative fee is $17.35/month.  There is no surrender fee, so she could pull the full amount out in a rollover without penalty. 
Just to let you know that the costs of owning a retail annuity are not $17.35 a month. This is how insurance companies lie!
There's separate account fees that include mortality and expense charges. You have to read through and decipher the prospectus that probably only gets sent to her once per year. If she has a few more years to live then I'd at least consider gradually pulling money out of that expensive annuity (over a few years) or doing a 1035 tax free exchange to Vanguard. https://personal.vanguard.com/us/whatweoffer/annuities/costcalculator
I was duped into dumping money into a retail annuity (Sun America) a long time ago so I know ALL ABOUT variable annuities. One of THE worst places you can put your money. I'm now with Vanguard until I turn 59 1/2 at which time I will slowly pull that money out over several years so as to minimize my taxes.

4.15% fixed seems like a lot until you study how a bond heavy portfolio did from 2000 - 2012. A 75/25 portfolio returned 6.2% when compounded and rebalanced annually. Don't expect any insurance salesman to tell you that fact!
« Last Edit: November 20, 2014, 02:27:22 AM by Mighty-Dollar »

Clyde

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Re: Mom's money in Variable Annuity paying 4.15% do I leave it alone?
« Reply #11 on: February 26, 2015, 10:03:30 PM »
4% of return rate is not that bad but you should also consider inflation and if what your mother will get throughout her life will be enough for all of her expenses. However, if you wish to get the money out from her annuity, there would be charges and penalties.