Investing Inside an Annuity

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LetsTalkMoney
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Investing Inside an Annuity

Post by LetsTalkMoney »

My senior mom, 73 recently did a 1035 annuity exchange from Schwab to Fidelity with significant fee reductions. She currently has $X,XXX,510. At Schwab it was all in SCHX Schwab Strategic Trust - Schwab U.S. Large-Cap ETF. The growth has been significant. However, she would like your advice on reallocating the money at Fidelity.

She doesn't need the money nor wants to pull it. She says she wants moderate risk. I suggested 50% FSKAX Fidelity® Total Market Index Fund and 50% FXNAX Fidelity® U.S. Bond Index Fund.

What are your thoughts and suggestions?

Thank you!
Last edited by LetsTalkMoney on Mon Jul 08, 2024 3:33 pm, edited 1 time in total.
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Stinky
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Re: Investing Inside an Annuity

Post by Stinky »

LetsTalkMoney wrote: Mon Jul 08, 2024 2:44 pm My senior mom, 73 recently did a 1035 annuity exchange from Schwab to Fidelity with significant fee reductions. She currently has $1,144,510. At Schwab it was all in SCHX Schwab Strategic Trust - Schwab U.S. Large-Cap ETF. The growth has been significant. However, she would like your advice on reallocating the money at Fidelity.

She doesn't need the money nor wants to pull it. She says she wants moderate risk. I suggested 50% FSKAX Fidelity® Total Market Index Fund and 50% FXNAX Fidelity® U.S. Bond Index Fund.

What are your thoughts and suggestions?

Thank you!
Only certain funds are available within the Fidelity variable annuity. Here’s (hopefully) a link to the funds available. https://fundresearch.fidelity.com/fund- ... duct=FPRAH

You can find a 500 fund and a total bond fund in the list. 50/50 sounds good.

And good for mom for getting out of Schwab!
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
LetsTalkMoney
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Re: Investing Inside an Annuity

Post by LetsTalkMoney »

Stinky wrote: Mon Jul 08, 2024 3:02 pm
LetsTalkMoney wrote: Mon Jul 08, 2024 2:44 pm My senior mom, 73 recently did a 1035 annuity exchange from Schwab to Fidelity with significant fee reductions. She currently has $1,144,510. At Schwab it was all in SCHX Schwab Strategic Trust - Schwab U.S. Large-Cap ETF. The growth has been significant. However, she would like your advice on reallocating the money at Fidelity.

She doesn't need the money nor wants to pull it. She says she wants moderate risk. I suggested 50% FSKAX Fidelity® Total Market Index Fund and 50% FXNAX Fidelity® U.S. Bond Index Fund.

What are your thoughts and suggestions?

Thank you!
Only certain funds are available within the Fidelity variable annuity. Here’s (hopefully) a link to the funds available. https://fundresearch.fidelity.com/fund- ... duct=FPRAH

You can find a 500 fund and a total bond fund in the list. 50/50 sounds good.

And good for mom for getting out of Schwab!
Thank you for your response. Do you think the FTMKC Fidelity VIP Total Market Index (FTMKC, 9467) would be equivalent to FSKAX?
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Stinky
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Re: Investing Inside an Annuity

Post by Stinky »

LetsTalkMoney wrote: Mon Jul 08, 2024 3:10 pm
Thank you for your response. Do you think the FTMKC Fidelity VIP Total Market Index (FTMKC, 9467) would be equivalent to FSKAX?
Should be pretty equivalent.

I’ll let you do the research.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Johninvestor
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Re: Investing Inside an Annuity

Post by Johninvestor »

Stinky wrote: Mon Jul 08, 2024 3:40 pm
LetsTalkMoney wrote: Mon Jul 08, 2024 3:10 pm
Thank you for your response. Do you think the FTMKC Fidelity VIP Total Market Index (FTMKC, 9467) would be equivalent to FSKAX?
Should be pretty equivalent.

I’ll let you do the research.
I have had that annuity at Fidelity for a number of years, and it has been my experience that FTMKC is equivalent to FSKAX. This is the only "index" type fund of the list of equity funds, and it has the absolute lowest expense ratio of any of the equity funds offered for this annuity. So, it is the most "boglehead-like" of the equity funds offered for this product.
On a different point, my view is that if this is being held as an investment for "the long run" with no expected withdrawals for the next 10 years, a bond fund would not normally make sense here--- However, an argument can be made that if you are holding bond funds in a taxable account otherwise, it is better to "move" them inside this annuity, because withdrawals from the annuity will ultimately be taxed as ordinary income. (See Bogleheads Wiki on fund placement.). For my purposes, 100% equities was the right call here, and I hold my bonds in a different type of account.
Rex66
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Re: Investing Inside an Annuity

Post by Rex66 »

What is the purpose of this money? None was listed.

No step up in basis at death so might be best to get out and pay your taxes now on gains.
snic
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Re: Investing Inside an Annuity

Post by snic »

Rex66 wrote: Mon Jul 08, 2024 7:14 pm What is the purpose of this money? None was listed.
This is critical. She doesn't need the money now, but will she eventually need it? Is it being held for long-term care expenses, or for kids' inheritance? If the former, including more conservative investments (like bond funds) makes sense. If the latter, why not just invest it all in equities? And would it make sense for her to start liquidating the annuity now and paying the taxes, to minimize tax consequences for heirs?
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Stinky
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Re: Investing Inside an Annuity

Post by Stinky »

If mom’s taxable income is low, it might make sense to start winding down the annuity now.

As Rex66 notes, there is no basis step up on an annuity at death. So if the heirs will be in a higher tax bracket than mom, it would make more sense for her to withdraw, maybe up to the top of her current tax bracket, rather than leaving to her heirs and have them pay taxes at a higher rate.

If she does start withdrawals, she will want to look at other tax impacts, like IRMAA and taxation of her social security benefits, in addition to income tax effects.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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CyclingDuo
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Re: Investing Inside an Annuity

Post by CyclingDuo »

LetsTalkMoney wrote: Mon Jul 08, 2024 2:44 pm My senior mom, 73 recently did a 1035 annuity exchange from Schwab to Fidelity with significant fee reductions. She currently has $X,XXX,510. At Schwab it was all in SCHX Schwab Strategic Trust - Schwab U.S. Large-Cap ETF. The growth has been significant. However, she would like your advice on reallocating the money at Fidelity.

She doesn't need the money nor wants to pull it. She says she wants moderate risk. I suggested 50% FSKAX Fidelity® Total Market Index Fund and 50% FXNAX Fidelity® U.S. Bond Index Fund.

What are your thoughts and suggestions?

Thank you!
Which annuity product at Fidelity (of the 7 they offer) is the money going to be invested in?

Certainly, the Fidelity Personal Retirement Annuity is a low cost one that would have an administrative wrap fee of 0.1% for the amount you mention that she has + the underlying fund ER fees, and has the much loved Boglehead low cost funds available as options:

Total US Stock Market: 0.12% ER
S&P 500: 0.1% ER
Extended Market: 0.13% ER
Total International: 0.17% ER
Total US Bond Market: 0.14% ER
Money Market Fund: 0.3% ER

You could easily build a two fund portfolio as you mention, a three fund portfolio, or more using the low cost funds above. No RMDs for your mother with the Fidelity Personal Retirement Annuity. Sounds like the annuity would be used to build for legacy/heirs, so choosing an appropriate asset allocation that meets those needs would be appropriate.

CyclingDuo
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Harmanic
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Re: Investing Inside an Annuity

Post by Harmanic »

Why does nobody recommend annuitizing in these threads? If she is in good health, that is the exact purpose of an annuity. At age 73, it might be a good age to do so.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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Stinky
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Re: Investing Inside an Annuity

Post by Stinky »

Harmanic wrote: Tue Jul 09, 2024 4:25 pm Why does nobody recommend annuitizing in these threads? If she is in good health, that is the exact purpose of an annuity. At age 73, it might be a good age to do so.
In this case, because OP said this in the first post:
LetsTalkMoney wrote: Mon Jul 08, 2024 2:44 pm
She doesn't need the money nor wants to pull it.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Rex66
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Re: Investing Inside an Annuity

Post by Rex66 »

EXACTLY

It appears she doesnt want or need the money.

You must be very selective with the threads you read bc it is commonly discussed to annuitize especially older ones with good tables vs 1035 to a spia if rates arent good or accessing the income rider if one was chosen or whatever.
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