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Would it be a good financial strategy for us to roll over all our 401k IRAs to an annuity? Please see details below.

Please ellaborate with pros & cons....give alternatives! We want to retire when I reach 62 and earn the maximum guaranteed income from our investments to supplement SS. I will be 62 in April of 2014 & my wife is already 62. We have over $300k in 4 different 401k IRA's with one of them being a Roth IRA. Our total SS benefits are $3000 per month. We own our home.

Nov 15, 2013 by Larry from Wentzville, MO in  |  Flag
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4 votes

A general rule of thumb is that it is typically not a good idea to put all of you money in one investment or investment product. Particularly with annuities that you are receiving an income from, you will want to be certain that you have a substantial emergency fund in the event that you need liquidity to deal with an unexpected expense in retirement.

Comment   |  Flag   |  Nov 15, 2013 from St. Louis, MO

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Rich Winer Level 20

Larry, I agree with DC in that it's typically not a good idea to put all of your money in one investment. Also, without additional information and an in-depth conversation, it would be inappropriate for any of the advisors on this website, including me, to make specific recommendations that will affect your financial security and standard of living at such an important time in your life. We simply don't know enough about you, your financial situation, your risk tolerance, your lifestyle, etc.

While I believe that annuities (and insurance as well) can have a place in a retiree's investment portfolio, I believe that annuities are most often recommended by salespeople who don't know how to effectively manage money, and often are not licensed or qualified to do so. In most cases, they will lock up your money for anywhere from three to ten years (depending on the product) or more, with high surrender fees if you change your mind or find a more effective investment opportunity. I prefer investments that are fully liquid, especially in light of the amount of your stated investment portfolio. Candidly, $300K is not going to spin off substantial retirement income without your dipping into principal, and most likely not meet your retirement income needs unless you live a very modest lifestyle. So, like most retirees, you will need growth and income from your retirement portfolio. For you and most retirees who will possibly live into your 90s, the biggest threat to your retirement is not losing money in the stock market, it's outliving your retirement savings. You will want and need to employ and investment strategy that will provide you growth and income. My recommendation is to find a good financial advisor who can help you do that and effectively manage your investment risk, as we do at our firm. If you would like to have a more in-depth conversation, feel free to contact me through this website. Good luck.

Comment   |  Flag   |  Nov 15, 2013 from Woodland Hills, CA

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Hi Larry! One thing I always stress about annuities is that they are not investments - they are contracts. Contracts have guarantees, while investments don't. That means there are substantial pros and cons to this apples and oranges comparison that need to be evaluated for your individual situation. Investments can be left to your beneficiaries, but some annuities terminate on your death with no benefits to your heirs, so be careful of that. Depending on your spending, you could outlive your investments, but an annuity may be thought of as "longevity insurance" so your personal health and family history come into play. It's a lot to consider, so I recommend discussing your situation with a financial planner. You will find that their knowledge is worth the cost.

Comment   |  Flag   |  Nov 15, 2013 from River Hills, SC

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Congrats on planning your retirement needs ahead of your retirement! I think the major variables I need to fully understand your situation are the following: What is your monthly living expenses? What is your monthly shortfall of cash? What is your comfort level or risk tolerance when it comes to investing?

I understand your interest in using annuities and guaranteed income in your retirement plan. My macro concern based on the current marketplace is simple. I believe locking in a guaranteed interest payment when the interest rate markets are at all time low is NOT a good idea. Also I believe when inflation accelerates you will lose your real purchasing power during the years of your life. I also believe the services and needs you may incur during your retirement may accelerate faster then inflation!

When it comes to annuities, I think you need to be very careful because the annuities pay high sales commissions (ask him what he will earn!), have higher internal expenses, are not as flexible in investment options and have penalties for early surrender. The tax deferred annuities originally were created to defer annual income for high net worth and high income wage earners. They have evolved, and are now being used in retirement accounts (IRA's) which themselves are tax deferred accounts. That's like putting your pants on and then adding a pair of suspenders! You don't need duplication of tax deferred benefits.

I would rather utilize the tax deferred benefits of your IRA account and create a multi-dimensional portfolio using global equities, global income and risk managed asset allocations. I would also allocate 12-24 months of cash in an IRA for your monthly shortfalls and slowly distribute to use so you can maximize your lower incremental income tax rates. I would also recommend you contact a fee-based adviser and not an annuity salesmen!

I hope you found my comments useful and more importantly enjoy your retirement years, you earned it!

Comment   |  Flag   |  Nov 15, 2013 from Milwaukee, WI

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2 votes

Larry the answer to your question, is no, it would not be a good financial strategy.

By putting all your stated assets into an annuity, you are making it basically illiquid. I cannot think of a circumstance, other than creditor protection, where I feel it would be suitable to do so. In case of an emergency, you could blow up your income benefit by making a withdrawal.

Perhaps, if you were really risk averse, and really wanted a guaranteed income, you would invest a portion, never more than 50% into an annuity. But I would not recommend you do it now. Why? Because interest rates are historically low right now, and the consensus is that interest rates will be rising in the coming years. If you buy an annuity now, you would be locking yourself into what I believe will be low interest rate or step-up guarantees. You should make a decision if an annuity is right for you, and if so I really think you should hold off a few years until interest rates rise.

The good thing about annuities is they are about the only investment that can offer an actual guarantee. The bad thing is the illiquidity and the fees, or in the case of an index annuity, the very low caps.

I am not impressed at all by the person that suggested you put everything into an annuity. Seek referrals to a good qualified financial advisor in your area. Ask trusted friends, neighbors, relatives for a good advisor, preferably a CFP®.

Comment   |  Flag   |  Nov 15, 2013 from Delray Beach, FL

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Andy Tilp, CFP® Level 16

When you look at financial plan, it is important to look at the whole picture, not just one product or investment. In that light, the item that caught my attention was your statement saying you are starting your SS benefits at age 62.

If you are unfamiliar with how SS works, you will receive your full benefit at your full retirement age, or FRA, which is 66 for you. If you start your SS benefit before your FRA, then you will receive a permanent reduction of up to 25% in your monthly benefit. Conversely, for every year you wait to start benefits, up to age 70, the benefit payment will increase by 8%. This means, rather than collecting $3000/month at age 62, by waiting to age 70, the payment would be ~$4950/month. That is a difference of almost $24,000/year.

You can see the actual amounts of your benefits starting at age 62, FRA and 70 on your SS statement, which you can find at http://www.ssa.gov/myaccount/.

A quick calculation using your $3000/month benefit and starting at age 62 shows that if you and your wife live to age 90, by waiting to start your SS benefits to age 70 will mean an additional $250,000 in lifetime income (in today's dollars). And this is not including the annual cost of living adjustment associated with SS.

Of course the key to receiving the larger cumulative benefit is your life expectancy. The crossover points of receiving more lifetime income is age 76, if you wait to start at age 66, or 81, if you delay to age 70. After those ages, you the benefit is in your favor.

Of course, there may be circumstances that require starting SS benefits early. It might be worth your time to sit down with a fee-only advisor who charges by the hour to run a few scenarios to determine what is best for your unique situation. You can find hourly advisors at Garrett Planning Network. (Full disclosure, I am a member of the network.)

I hope this gives you another aspect to think about in your retirement planning.

(Disclaimer: The figures above are estimates only based on the limited information provided and should not be acted upon until you have verified them with a qualified advisor.)

View all 7 Comments   |  Flag   |  Nov 16, 2013 from Sherwood, OR

One additional piece to the puzzle I should have mentioned is that I have over $25k disposable cash in 3 checking accounts, too.

Flag |  Nov 16, 2013 near Wentzville, MO
Rich Winer

That would certainly cover the 3-6 month emergency fund. I would consider investing anything above and beyond the 3-6 months worth of living expenses.

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Flag |  Nov 16, 2013 near Woodland Hills, CA

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0 votes

Don't get too excited about the "guarantees" until you really understand them. And when you do understand them, you are probably ready to take the CFP exam for yourself! Most of these contracts are loaded with fine print that benefits the insurance company, not the annuitant. For instance, many contracts allow the insurance company to increase fees unilaterally (even though they are astronomical to start with). Some have clauses that automatically trigger fee increases if you take advantage of certain contract features (such as locking in gains at a "high water mark")

Given the opportunity to sell these products over the years, I have almost never recommended one to a client, as I believe the guarantees are not what they seem, and the fees are unconscionable. In essence, you pay too much for far too little. Keep in mind too that the "guaranteed income" never increases - even though your cost of living most certainly will.

I agree with those who recommend getting a disinterested CFP to offer a second opinion analysis, and make sure you really understand the terms of what you are buying. Here is a blog post that helps explain. http://financialpathways.net/variable-annuity-guaranteed-income-seems/

1 Comment   |  Flag   |  Nov 15, 2013 from Bridgewater, NJ
James D. Kinney, CFP®

BTW, smart move raising the question in this forum where most of us are not even located in your state, and really don't have a vested interest in the outcome. Great advice from almost all the responses here.

Flag |  Nov 15, 2013 near Bridgewater, NJ

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