Time to annuitize?

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cognovimus
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Time to annuitize?

Post by cognovimus » Sat Aug 10, 2019 2:18 pm

I'm new here, but I have been impressed with the thoughtful responses to inquiries. Hence, my first question is below. It's about an annuity, something I have no direct experience with.

I have an elderly relative (Phoebe) who was widowed last year at 81. She never paid much attention to the variable annuity that most of her and her husband's assets are invested in and is trying to get up to speed. I'm not privy to all their financial details, but this is what I do know: with the annuity purchase in the early 2000's, they purchased a rider clause which guarantees a "base" of about $1.0 million for annuitizing. This guarantee is exercisable only until the year the annuitant turns 85, which would be 2021. Furthermore, annuitizing, if based on the guarantee amount, can only be elected on a particular date each year. Annuitizing based on the contract amount can be anytime.

Phoebe's now deceased husband had the funds invested very aggressively until he passed away. As this period coincided with the current stock run-up, the contract amount (based on the market) is about 40% higher than the $1.0 million, so about $1.4 million. The couple worked well beyong normal retirement age, but in recent years, began withdrawing the amount of about $6K/month (gross) for their expenses. They have also been able to access the funds for extraordinary expenses (within a certain band like 5% of the contract value annually). Even after these withdrawals, the contract amount is at about $1.4 million, so the "guarantee" amount is not relevant at the moment and is no longer applicable at all if she waits past 2021.

Phoebe, who will turn 83 later this year, made no changes to the investments until this summer and is now invested equally in four different bond funds. At her request, I participated in helping her get illustrations of her options if she were to annuitize. It looks like she is leaning toward the life plus 10 year certain option, which would provide about $10 K/month in gross income for the rest of her life or 10 years, whichever is longer. Of this about 27% is not taxable as it represents a return of principal (though this would change if Phoebe lives longer than the average 82 year old woman). She is currently in excellent health for her age.

Again, Phoebe has not revealed her whole financial picture to me, but I know she has a substantial amount of cash in bank and that she has a good LTC policy. She owns her home and some other property and plans to continue living independently as long as feasible. According to her calculations, her current annual expenses are about $82,000/annum, of which about $20,000 is discretionary. I don't know her effective tax rate and when I asked, the accountant she uses provided her marginal tax rate. I've suggested that she's fortunate to be "up" 40% over the guarantee and that it might be wise to annuitize before the next 40% drop, but she is hesitant about missing out on further gains. I think Phoebe might be better off locking in her $1.4 million and investing the part that is truly dispensable in monthly contributions to funds that she can follow and tap into if she can't tolerate the idea of missing out on any further upside. The other issue is that at 82, there could be a change in her health that might prevent her from executing the annuitzation forms at a later date. She currently has no POA. Honestly, Phoebe is a gambler at heart and kind of paralyzed about what to do, so I'm not sure if she will ever annuitize. But she's almost 83.

What would you advise her in this situation?

JoeRetire
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Re: Time to annuitize?

Post by JoeRetire » Sat Aug 10, 2019 2:32 pm

cognovimus wrote:
Sat Aug 10, 2019 2:18 pm
Hence, my first question is below. It's about an annuity, something I have no direct experience with.

I'm not privy to all their financial details

Again, Phoebe has not revealed her whole financial picture to me

What would you advise her in this situation?
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.

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FiveK
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Re: Time to annuitize?

Post by FiveK » Sat Aug 10, 2019 6:00 pm

JoeRetire wrote:
Sat Aug 10, 2019 2:32 pm
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.
+1

Also, if the annuity is with an insurance company, and the surrender fee is down to 0%, have her strongly consider moving the annuity using a "1035 exchange" to Vanguard or similar.

If she can move $1.4 million to good, low fee brokerage fees now, taking an annuity payment that will return only $1.2 million over the next 10 years is not a good deal.

bsteiner
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Re: Time to annuitize?

Post by bsteiner » Sat Aug 10, 2019 6:29 pm

What would she get if she cashes it in?

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Stinky
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Re: Time to annuitize?

Post by Stinky » Sun Aug 11, 2019 8:19 am

FiveK wrote:
Sat Aug 10, 2019 6:00 pm
JoeRetire wrote:
Sat Aug 10, 2019 2:32 pm
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.
+1

Also, if the annuity is with an insurance company, and the surrender fee is down to 0%, have her strongly consider moving the annuity using a "1035 exchange" to Vanguard or similar.

If she can move $1.4 million to good, low fee brokerage fees now, taking an annuity payment that will return only $1.2 million over the next 10 years is not a good deal.
This is good advice.

If she decides to annuitize it (the 10 year and life option), I'd at least check to see if the annuitization rates offered by the insurance company are competitive with other insurers. Go to immediateannuities.com or a broker to start the process.

If she decides to keep it in the annuity without taking periodic payments, or if she decides to surrender the policy, I'd definitely look at a transfer to Vanguard.

Welcome to the Board! And let us know how this turns out.
It's a GREAT day to be alive - Travis Tritt

Topic Author
cognovimus
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Re: Time to annuitize?

Post by cognovimus » Tue Aug 13, 2019 6:53 am

FiveK wrote:
Sat Aug 10, 2019 6:00 pm
JoeRetire wrote:
Sat Aug 10, 2019 2:32 pm
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.
+1

Also, if the annuity is with an insurance company, and the surrender fee is down to 0%, have her strongly consider moving the annuity using a "1035 exchange" to Vanguard or similar.

If she can move $1.4 million to good, low fee brokerage fees now, taking an annuity payment that will return only $1.2 million over the next 10 years is not a good deal.
Thanks for your suggestion. If the annuitant lives beyond 10 years, she'll continue to get the monthly distribution for her life, so it could be more than $1.2 million. I see your point about the math, though, I suppose time will tell.

I've only heard about 1035 exchanges...not something I know much about. You're saying that if the contract has been held long enough so there is no surrender fee, she could get control of the whole $1.4 million and invest in/park it in the bank? What are the time implications of that, if any?

At this point, Phoebe rightly feels like her accountants, attorney, et al have all been rather incompetent and expensive, so I'm not sure if she will be able to stomach the idea of a financial planner. She tried to use the stockbroker who is the rep for an IRA she inherited as her financial "advisor" --raved about how good he was for a few months-- and then found out he wasn't an"advisor" at all.

Topic Author
cognovimus
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Re: Time to annuitize?

Post by cognovimus » Tue Aug 13, 2019 7:05 am

FiveK wrote:
Sat Aug 10, 2019 6:00 pm
JoeRetire wrote:
Sat Aug 10, 2019 2:32 pm
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.
+1

Also, if the annuity is with an insurance company, and the surrender fee is down to 0%, have her strongly consider moving the annuity using a "1035 exchange" to Vanguard or similar.

If she can move $1.4 million to good, low fee brokerage fees now, taking an annuity payment that will return only $1.2 million over the next 10 years is not a good deal.
Thanks for your suggestion. If the annuitant lives beyond 10 years, she'll continue to get the monthly distribution for her life, so it could be more than $1.2 million. I see your point about the math, though, I suppose time will tell.

I've only heard about 1035 exchanges...not something I know much about. You're saying that if the contract has been held long enough so there is no surrender fee, she could get control of the whole $1.4 million and invest in/park it in the bank? What are the potential tax implications of that, if any? It is with an insurer, and their reps vary a lot, some are rather hard to communicate with, but none of them volunteer anything that would be helpful if you don't ask.

At this point, Phoebe rightly feels like her accountants, attorney, et al have all been rather incompetent and expensive, so I'm not sure if she will be able to stomach the idea of a financial planner. She tried to use the stockbroker who is the rep for an investment she inherited as her financial "advisor" --raved about how good he was for a few months-- and then found out he wasn't an "advisor" at all. I don't want to get beyond my pay grade either because this isn't my area of expertise and who knows what Phoebe herself hasn't shared with me. She might be better off with the steady income --even if it isn't optimizing-- because she has a son who has some personal and financial problems.

NotWhoYouThink
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Re: Time to annuitize?

Post by NotWhoYouThink » Tue Aug 13, 2019 7:33 am

People need to be more careful about terminology.

"Fee only" sounds good but doesn't mean what people think it means. What you want is advice from someone who charges by the hour for advice only, and does not manage the funds on an ongoing basis. Not a unicorn, but not easy to find, either. And good ones won't be cheap.

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Stinky
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Re: Time to annuitize?

Post by Stinky » Tue Aug 13, 2019 7:35 am

cognovimus wrote:
Tue Aug 13, 2019 7:05 am

I've only heard about 1035 exchanges...not something I know much about. You're saying that if the contract has been held long enough so there is no surrender fee, she could get control of the whole $1.4 million and invest in/park it in the bank? What are the potential tax implications of that, if any? It is with an insurer, and their reps vary a lot, some are rather hard to communicate with, but none of them volunteer anything that would be helpful if you don't ask.
A 1035 exchange is one insurance policy being exchanged for another. That's why the suggestion was to consider a 1035 exchange to a Vanguard variable annuity - the fees will be well lower with that product than with just about any other annuity product. There are no taxes paid at the time of 1035 exchange. You can't do a 1035 exchange from an insurance product to a bank.
It's a GREAT day to be alive - Travis Tritt

Topic Author
cognovimus
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Re: Time to annuitize?

Post by cognovimus » Tue Aug 13, 2019 8:24 am

Stinky wrote:
Tue Aug 13, 2019 7:35 am
cognovimus wrote:
Tue Aug 13, 2019 7:05 am

I've only heard about 1035 exchanges...not something I know much about. You're saying that if the contract has been held long enough so there is no surrender fee, she could get control of the whole $1.4 million and invest in/park it in the bank? What are the potential tax implications of that, if any? It is with an insurer, and their reps vary a lot, some are rather hard to communicate with, but none of them volunteer anything that would be helpful if you don't ask.
A 1035 exchange is one insurance policy being exchanged for another. That's why the suggestion was to consider a 1035 exchange to a Vanguard variable annuity - the fees will be well lower with that product than with just about any other annuity product. There are no taxes paid at the time of 1035 exchange. You can't do a 1035 exchange from an insurance product to a bank.
In this situation, wouldn't she would still be at riskin the new variable annuity and have to determine how to invest the funds? How do the commission work in the exchange.

Everything she has done in the past year has been based on what she thinks she remembers her late husband telling her about the annuity. She's 82 --not senile by any means--but not up for learning how to manage her investments at this stage of life. She also lives in a rural area where a competent "fee only" adviser might be hard to come by.

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Watty
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Re: Time to annuitize?

Post by Watty » Tue Aug 13, 2019 8:43 am

FiveK wrote:
Sat Aug 10, 2019 6:00 pm
JoeRetire wrote:
Sat Aug 10, 2019 2:32 pm
I'd advise her to purchase a few hours of time with a fee-only fiduciary financial planner. And then perhaps a few hours with a good estate attorney to get her POA and other documents in order.
+1

Also, if the annuity is with an insurance company, and the surrender fee is down to 0%, have her strongly consider moving the annuity using a "1035 exchange" to Vanguard or similar.

If she can move $1.4 million to good, low fee brokerage fees now, taking an annuity payment that will return only $1.2 million over the next 10 years is not a good deal.
Another +1 on this.

She should also have a good physical and ask her doctor if there are any additional tests that are not normally given in a physical that would be good to have to find out about her health prospects. The Medicare annual "Wellness" check is not really a physical and she will likely need to pay for the physical herself. That would be well worth the cost since if she finds out that she is above or below average health for someone her age that could make her decision to annuitize or not easier.

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Stinky
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Re: Time to annuitize?

Post by Stinky » Tue Aug 13, 2019 8:58 am

cognovimus wrote:
Tue Aug 13, 2019 8:24 am
Stinky wrote:
Tue Aug 13, 2019 7:35 am

A 1035 exchange is one insurance policy being exchanged for another. That's why the suggestion was to consider a 1035 exchange to a Vanguard variable annuity - the fees will be well lower with that product than with just about any other annuity product. There are no taxes paid at the time of 1035 exchange. You can't do a 1035 exchange from an insurance product to a bank.
In this situation, wouldn't she would still be at riskin the new variable annuity and have to determine how to invest the funds? How do the commission work in the exchange.

Everything she has done in the past year has been based on what she thinks she remembers her late husband telling her about the annuity. She's 82 --not senile by any means--but not up for learning how to manage her investments at this stage of life. She also lives in a rural area where a competent "fee only" adviser might be hard to come by.
She would have generally the same risks in a new variable annuity as in the current one. She would have a choice of bond funds available to her, and she could choose to utilize those in the new policy.

If there was a commission with the new policy, she would have no responsibility for that. Paid by the insurer. And if the new annuity is through Vanguard, the commission would likely be negligible or zero.

The big difference is in the expenses - both the explicit expenses for running the variable annuity ("mortality and expense charges", aka "M&E charges") plus rider fees if any, and the implicit expense loads on the underlying mutual funds. I don't know the specifics of either her current annuity or the Vanguard annuity, but I would guess that the minimum savings would be 1% per year, and more likely 2% or more. If it's a 1% savings on a $1.4 million balance, that's a savings of $14,000 per year. I'm guessing that it's well more than that.
It's a GREAT day to be alive - Travis Tritt

Dinosaur Dad
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Re: Time to annuitize?

Post by Dinosaur Dad » Tue Aug 13, 2019 9:08 am

Jane Bryant Quinn, in her book "how to make your money last," recommends a service called Annuity Review. Not sure what the fee is, but this team analyzes variable annuities and advise you on the best steps to take. Might be worth a look.

Link is

https://www.annuityreview.com/
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Eagle33
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Re: Time to annuitize?

Post by Eagle33 » Tue Aug 13, 2019 7:02 pm

Dinosaur Dad wrote:
Tue Aug 13, 2019 9:08 am
Jane Bryant Quinn, in her book "how to make your money last," recommends a service called Annuity Review. Not sure what the fee is, but this team analyzes variable annuities and advise you on the best steps to take. Might be worth a look.

Link is

https://www.annuityreview.com/
I was curious what they charged and found this on the website.
Contact MACRO Consulting Group for an Annuity Review today including detailed information on the benefits/features of your variable annuity contracts. There is a fee of $299 for an analysis of up to 2 contracts. Each additional contract is $49.
I have done no business with this firm. Therefore I have to opinion of their services.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

1rl9DS5gl2
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Re: Time to annuitize?

Post by 1rl9DS5gl2 » Wed Aug 14, 2019 7:51 am

These vintage variable annuity contracts are all unique and extremely complex. For about a $250 fee she can get a professional written analysis and phone consultation from Macro Consulting (macroconsultinggroup.com) (973-998-9845). Their service has been highly rated on other Bogelhead threads. I believe you can search variable annuity review to find those threads.

bsteiner
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Re: Time to annuitize?

Post by bsteiner » Wed Aug 14, 2019 8:05 am

Eagle33 wrote:
Tue Aug 13, 2019 7:02 pm
Dinosaur Dad wrote:
Tue Aug 13, 2019 9:08 am
Jane Bryant Quinn, in her book "how to make your money last," recommends a service called Annuity Review. Not sure what the fee is, but this team analyzes variable annuities and advise you on the best steps to take. Might be worth a look.

Link is

https://www.annuityreview.com/
I was curious what they charged and found this on the website.
Contact MACRO Consulting Group for an Annuity Review today including detailed information on the benefits/features of your variable annuity contracts. There is a fee of $299 for an analysis of up to 2 contracts. Each additional contract is $49.
I have done no business with this firm. Therefore I have to opinion of their services.
1rl9DS5gl2 wrote:
Wed Aug 14, 2019 7:51 am
These vintage variable annuity contracts are all unique and extremely complex. For about a $250 fee she can get a professional written analysis and phone consultation from Macro Consulting (macroconsultinggroup.com) (973-998-9845). Their service has been highly rated on other Bogelhead threads. I believe you can search variable annuity review to find those threads.
Macro is Mark Cortazzo. I know him well. He's very knowledgeable. He was on a continuing legal education seminar panel for a program that I chaired for the New York City Bar Association.

Note that the tradeoff for keeping or annuitizing the annuity is that the future income will all be ordinary income, with no basis step-up.

Also note that $1.4 million will buy more than $10,000 a month for life with 10 years certain at immediateannuities.com. (Why would she want the 10-years certain? It goes against the concept of the annuity.)

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