daz770 wrote:Fellow BogleHeads, I am a long-time reader of this fabulous forum. I'd like to take this opportunity to thank the moderators and contributors who make this such a unique online community.
I am 55 years old. My wife is 52. After decades of index investing, saving a large chunk of our salaries, and generous bequests from our parents, we have assets of $5M (including primary residence). Liabilities consist only of the monthly credit card statement which is paid in full. We own no other homes. Our last child is finishing college at an in-state public institution. Our two other children are gainfully employed. We will (hopefully!) have a wedding in the future for our daughter, and we anticipate contributing to our two sons' weddings one day.
When my wife left a previous employer in 2009, we fell for an annuity contract. We rolled over her $50K 401(k) plan into a fixed indexed deferred annuity. After 10 years (in 2019), my wife will have the choice to (1) take an income stream based on 7.2% compounded interest or (2) take a lump-sum of the accumulated account balance on the anniversary date (no guaranteed value). No additional appreciation will occur after the tenth anniversary.
If my wife takes the income stream, she will receive 7%/year of the accumulated (7.2% annually compounded over 10 years) account value until the balance runs out. This translates to a dismal sub-3% return on her money over the life of the contract. 7.2% guaranteed growth sounds great -- but it is only for the "growth period" as an ANYA (annuity not yet annuitized). Growth completely ceases during the "pay-out period" with no adjustment even for inflation -- that is 0.0% growth. [Actually, it is negative growth due to inflation...]
We just received the latest anniversary contract statement. After four (4) years, the contract value using "investment strategies" in which premiums are deducted is now $61K. The 7.2% annual compounded value is now $68.5K. (But this value can only be "realized" if held for 10 years and then annuitized into an income stream.)
The cash surrender value is currently $51K -- just $1K more than the principal when she left her employer in 2009.
We are entertaining the idea of surrendering the contract and rolling the $51K into a Traditional IRA. When we retire in a few years, our tax bracket will fall and we plan to slowly convert the tIRA to a Roth prior to the start of the RMD when she turns 70.5 in 2032.
With a balanced asset allocation of low-cost index funds, we feel confident that we can "beat" the sub-3%/year return of the annuity (again, that is the average return of 7.2% for 10 years and 0.0% for approximately a 14 year pay-out period). We are not concerned about outliving our money. Our dividends in taxable brokerage accounts currently yield more than our salaries -- and I plan to continue working for a few more years. In all likelihood, should we succeed in rolling over this asset to a Roth during retirement years (prior to taking SS), we will never touch this money and it will eventually be left to our children.
Given our situation, I am hopeful that the community here can pose additional considerations that we may have overlooked and should well discuss prior to surrendering an annuity contract.
dickenjb wrote:+1 on Mel's advice to look at surrender fee decay schedule. These vary widely among products but 7% initially going to 0% after 7 years is common.
Also you talk about rolling it into a traditional IRA - I believe you will find the annuity is already in a TIRA - I guess you mean rolling it from one TIRA to another...