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Fixed rate annuities for those in retirement. Good idea?

My wife has moved her old 401k into a retirement IRA at an investment firm. We'd like to move about one third into a fixed rate annuity for safety. Good idea? How do they work? What about fees and survivor benefits?

Nov 18, 2013 by Tom from Dunellen, NJ in  |  Flag
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Rich Winer Level 20

I would be VERY careful with any type of fixed annuity. As others have said, they are contracts. If you buy a fixed immediate annuity, you are committing yourself to a fixed income stream for a specific period of time. Once you sign the contract, there is no turning back. If interest rates rise six months or a year from now and you could have obtained a greater income stream by waiting, you are out of luck. The same goes for fixed rate deferred annuities, except that you are not committed indefinitely. In general, the higher the interest rate, the longer you must commit. I am not a fan of these investments because of the commitment required. If things change in the economy or with your financial situation or goals, you have no flexibility to make changes. You are stuck with whatever you are getting under the terms of your annuity contract. If you decide to go with any type of annuity, only invest a small portion of your assets.

Most retirees are attracted to annuities because they want guarantees. However, in general, the greater the guarantees, the higher the fees and/or lower the return. It's also important to remember that your biggest retirement risk is probably not losing your money in the stock market, but more likely the risk of outliving your retirement savings. Rather than buy annuities from salesmen (many of whom don't know how to manage money or are not licensed to do so), find a good financial advisor who can help you obtain the income or cash flow you need from your portfolio and substantially greater growth while managing your risk. Good luck.

3 Comments   |  Flag   |  Nov 18, 2013 from Woodland Hills, CA
Tom

Thank you for your help!

Flag |  Nov 18, 2013 near Dunellen, NJ
Rich Winer

Anytime, Tom.

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Flag |  Nov 18, 2013 near Woodland Hills, CA
Rich Winer

And by the way, Tom, there are lots of great conservative investments that don't lock up your money for 5-10 years or commit you to a guaranteed rate of interest. With an individual bond, you get a guaranteed rate of interest, but you can sell and take advantage of other investment opportunities at any time, should doing so be beneficial. There are also some great conservative mutual funds that provide growth while effectively managing downside risk.

Flag |  Nov 18, 2013 near Woodland Hills, CA

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Hi Tom, To start there are two basic types of fixed annuities, Single Premium Deferred Annuity (SPDA) and Single Premium Immediate Annuity (SPIA). As the names imply these annuities either start making fixed payments right away or at some later date. The need for this stream of income will help determine which type will suit your needs the best.

For conservative investors this is a good substitute to CD's or money market accounts. Higher guaranteed rates of return and tax-deferred growth are additional benefits.

Comment   |  Flag   |  Nov 18, 2013 from Bloomington, IL

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Good afternoon thank you for your question. If you are referring to a fixed annuity, sometimes called SPDA (Single Premium Deferred Annuity) those products are actually could be beneficial. The way they work, is you typically commit a dollar amount, for a certain time frame, during which you compound interest daily, you usually have access to about 10% of your account per year without penalties and once the contract matures you have access to the entire principle and interest. This products can be a great alternative to a CD or a bond fund in today's low interest rate environment. If you pass away while the contract is active your beneficiaries would have full access to the policy without any issues. Fixed annuity usually carry no fees. Couple of things to be aware off: with Fixed Annuities you know exactly what you will have when it matures, there is NO MARKET Adjustment, a lot of companies would play on words and use fixed annuity to in fact sell you something else if you contract can go up with the market it is no longer Fixed Annuity and now you have fees and other things to worry about. Also Fixed annuity's come in two formats Principle Guaranteed meaning if you have to surrender your policy before it matures you will always get your principle back even if it's before maturity, or MVA (Market Value Adjustment). MVA only comes in to play if you decide to surrender your policy before maturity you actually might lose your principle, however if you hold it till maturity your principle is safe. I would not go more then 3-5 years at the most on a Fixed Annuity, because once rates start to move up, and they have this year, even though officially they are still at 0, Fixed annuity rates would move as well. We use fixed annuity quite often as they usually have a better rate then CD's however not always. I would suggest sitting down with a fee based completely independent planner and have him take a look at annuity that is being proposed to you and make sure it is Fixed. Let me know if you need any help with evaluating the contract we have very extensive experience dealing with Fixed Annuities would be happy to look it over for you. Best Of luck, Sincerely Michael www.VisionaryWealthMgmt.com

Comment   |  Flag   |  Nov 18, 2013 from Farmington, CT

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I like fixed annuities and fixed indexed annuities, but you want to make sure that you put your money in an annuity that has a high rate when compared to competitors and also that the rating of the insurance company is strong.

Personally, we have been using fixed and fixed indexed annuities as an alternative to fixed income investments because right now the bond market is in danger of seeing an extended period of overall decline due to interest rates rising.

Comment   |  Flag   |  Nov 18, 2013 from St. Louis, MO

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Tom, I have 2 concerns. You mentioned that 'we'd like to put 1/3 into an annuity'. does 'we' mean that you and your wife, or does it mean that someone is trying to sell it to you? Let me point out just because someone is trying to sell it to you, doesn't mean it is or is not a suitable choice.

The second concern is that interest rates are historically low, and if you got an annuity today, as interest rates rise, you would be locked into a presumably relatively low interest rate.

I read a comment I liked by another advisor on this website, I think her name is Pam Horvath, something along the lines of thinking of an annuity as a contract and not an investment. While I think overall, it is still a part of an investment strategy, I thought that comment was astute and insightful. I hope that she will respond to your question with some of her sound advice.

As a contract, there is a lot of fine print. Be sure you understand what you are getting into. There is value in the guarantees offered, but you need to understand the true cost.

Fixed annuities pay a guaranteed interest rate. If you are very risk averse, or have genuine real concerns about having a guaranteed income stream at some future point in time, then you might be suitable candidate for an annuity. If you get a fixed annuity, you would get a guaranteed interest rate. Again, I think the guarantees at this moment in time are relatively very low.

Indexed annuities are typically tied into an index, such as DJIA or NASDAQ or Russell 2000. They typically have fees, but most commonly today, caps. So, if the DJIA is up 26%, you may be tied in to a cap of no more than 6%, and there could be an additional monthly cap, so you cannot earn more than x% per month. This low cap, too, is tied into the current interest rate environment, but other than paying a surrender charge for early withdrawal, you account value should not go down.

A variable annuity's value is based on the value of the underlying investments. There is no cap, but fees can approach 4% when you add an income rider. The income rider can be complex, but they guarantee you income will step up every year you do not take withdrawals.

I have a concern that I think you may have a financial advisor that offered you a fixed annuity but perhaps did not explain it very well. I would advise you seek another opinion. Speak to trusted fiends, neighbors, relatives, co-workers for a referral to a financial advisor, preferably a CFP®. Get a second opinion. Ask lots of questions

2 Comments   |  Flag   |  Nov 18, 2013 from Delray Beach, FL
Tom

Thank you for a terrific answer! Tom

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Flag |  Nov 18, 2013 near Dunellen, NJ
Michael Steven Greenberg, CFP®

As for survivor benefits, ultimately it is still an IRA; you select beneficiaries subject to IRA rules

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Flag |  Nov 18, 2013 near Delray Beach, FL

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