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Author: rpalisson0 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76384  
Subject: Fixed Annuity Date: 7/27/2001 4:52 AM
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I've been reading a lot of negative posts about annuities and I was concerned about my 64 year old mother who just purchased a fixed annuity (non-qualified) for $100K. She is past the 59-1/2 y/o so she will avoid any federal tax penalties. This money is money she doesn't need now except in case of crisis. In her contract there is a section that states that in case of medical illnesses, all or a portion of the annuity purchase value can be withdrawn without surrender charges (usual surrender charges for 7 years). Right now, she can withdraw 10% annually without penalty or charges.

She is still employed (just to keep her busy) and previously, her money was in a CD earning about 4% and she was paying a lot of taxes every year. She is very very extremely conservative and is adamant about not investing in stocks or mutual funds. She is maximized on 401K and also contributes to traditional IRA. So on the advice of her financial advisor, she put her money into the fixed annuity. Her annuity commencement date is at age 95. She is healthy and will likely live past that age (my grandmother is now a healthy 94 year old)!!! Any thoughts? Did she make a mistake? What should she do now? I was thinking of having her withdraw her 10% every year and put it someplace else...


rosie
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Author: TMFKGOMalley Big gold star, 5000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31026 of 76384
Subject: Re: Fixed Annuity Date: 7/27/2001 10:02 AM
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I've been reading a lot of negative posts about annuities and I was concerned about my 64 year old mother who just purchased a fixed annuity (non-qualified) for $100K. She is past the 59-1/2 y/o so she will avoid any federal tax penalties. This money is money she doesn't need now except in case of crisis. In her contract there is a section that states that in case of medical illnesses, all or a portion of the annuity purchase value can be withdrawn without surrender charges (usual surrender charges for 7 years). Right now, she can withdraw 10% annually without penalty or charges.

She is still employed (just to keep her busy) and previously, her money was in a CD earning about 4% and she was paying a lot of taxes every year. She is very very extremely conservative and is adamant about not investing in stocks or mutual funds. She is maximized on 401K and also contributes to traditional IRA. So on the advice of her financial advisor, she put her money into the fixed annuity. Her annuity commencement date is at age 95. She is healthy and will likely live past that age (my grandmother is now a healthy 94 year old)!!! Any thoughts? Did she make a mistake? What should she do now? I was thinking of having her withdraw her 10% every year and put it someplace else...



Hi Rosie,

I'm sure others will reply too, but my 2¢.

On the one hand, it is unfortunate that financial advisors sometimes have conflicting interests when they make recommendations.

On the other hand, your brief description of your mother's situation makes me think that she has done an excellent job up to now setting up her nest egg.

My suggestion would be to do a through analysis of the annuity (make the financial advisor work for his money). It sounds like you have a handle on the exit fees and methods to avoid them. Were there upfront charges, what kind of return can you expect, what kind of annual charges are there...

After you go through that exercise it may be apparent that your mother is doing better than she was with the CD.

Just my thoughts.

Keith O'Malley
TMF KGOMalley

The Motley Fool Money Guide
In this friendly and helpful guide, you'll find simple answers to 500 frequently asked questions about personal finance and investing. You will learn about a wide range of topics including budgeting, buying a home or car, insurance needs, paying for college, investing in mutual funds or stocks, and managing your investment portfolio.
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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31042 of 76384
Subject: Re: Fixed Annuity Date: 7/28/2001 12:28 PM
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rosie (a.k.a. rpalisson0) you asked:

<< I've been reading a lot of negative posts about annuities and I was concerned about my 64 year old mother who just purchased a fixed annuity (non-qualified) for $100K. She is past the 59-1/2 y/o so she will avoid any federal tax penalties. This money is money she doesn't need now except in case of crisis. In her contract there is a section that states that in case of medical illnesses, all or a portion of the annuity purchase value can be withdrawn without surrender charges (usual surrender charges for 7 years). Right now, she can withdraw 10% annually without penalty or charges.

She is still employed (just to keep her busy) and previously, her money was in a CD earning about 4% and she was paying a lot of taxes every year. She is very very extremely conservative and is adamant about not investing in stocks or mutual funds. She is maximized on 401K and also contributes to traditional IRA. So on the advice of her financial advisor, she put her money into the fixed annuity. Her annuity commencement date is at age 95. She is healthy and will likely live past that age (my grandmother is now a healthy 94 year old)!!! Any thoughts? Did she make a mistake? What should she do now? I was thinking of having her withdraw her 10% every year and put it someplace else...
>>

I agree with the previous poster in that is sounds like your mother is doing quite well and making good decisions (perhaps some credit due to her financial advisor?). Though the information you've provided is somewhat limited, there's enough key information that it sounds like an annuity meets the key issues she is trying to deal with. The main drawback of the annuity is that if she never uses it before she dies, it doesn't get the step up in basis that CD's would (the same goes for the other tax deferred positions).



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Author: rpalisson0 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31049 of 76384
Subject: Re: Fixed Annuity Date: 7/28/2001 9:37 PM
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Thanks so much for the replies. I'm a new Fool, started investing through BuyAndHold a few months back. Nice to know that annuities are good for some people, especially given her investing style (absolutely does not want to take risks). Her annuity account has zero upfront costs and annual charges. Her returns are minimum 4% and this year it's 6%.

TTRoberts, what did you mean when you said:
"The main drawback of the annuity is that if she never uses it before she dies, it doesn't get the step up in basis that CD's would (the same goes for the other tax deferred positions)."

And do you think she should take her 10% every year and invest it some place else or dump it back in a CD? Or just leave it in there in the annuity account to earn the minimum of 4%?

Rosie



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31051 of 76384
Subject: Re: Fixed Annuity Date: 7/29/2001 1:40 AM
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Rosie (a.k.a. rpalisson0) you asked:

<< Thanks so much for the replies. I'm a new Fool, started investing through BuyAndHold a few months back. Nice to know that annuities are good for some people, especially given her investing style (absolutely does not want to take risks). Her annuity account has zero upfront costs and annual charges. Her returns are minimum 4% and this year it's 6%.

TTRoberts, what did you mean when you said:
"The main drawback of the annuity is that if she never uses it before she dies, it doesn't get the step up in basis that CD's would (the same goes for the other tax deferred positions)."
>>

Investment in CD's would get a "step up in basis" meaning that if YOU were to inherit the CD's the income tax basis of those CD's would be the value at the time of her death. With annuities, YOU wouldn't get that step up and you, the beneficiary, would pay income taxes at YOUR marginal tax rate on the earnings part of a distribution of that annuity whenever you do take a distributions. This could be a very large tax hit if you as the beneficiary were to take a lump sum distribution of a very large annuity that's been accumulating for a long time.

<< And do you think she should take her 10% every year and invest it some place else or dump it back in a CD? Or just leave it in there in the annuity account to earn the minimum of 4%? >>

I really DEPENDS on how she plans on using or not using the annuity. It will certainly help save her some current taxes and give here the benefit of tax deferred growth on a part of her portfolio that's earning a low rate of return. If the plan is to annuitized this annuity at some future point, then I don't see any reason not to leave it where it is. If she really doesn't plan to every use it, and hold onto it for a sense of security sake, it may not be the better place to do what she wants as previously outlined by you.

Dare I say it in THIS forum???? <grin> ;-) If she doesn't plan on using it but wants to keep ownership of it while she's alive and achieve those issues you mentioned, she might consider the advantages of a single pay life insurance contract. She could annuitize the annuity and pay for such a policy over a short period of time. You might suggest that she discuss the details of this with her financial advisor. With this approach, she will still have access to cash if she really needs to; she can realizes the same kind of conservative return (though not federally insured as the banks are); she will get the tax deferred growth and reduce her current tax liability; and the growing Death Benefit will go the beneficiaries income tax free. I'm not saying this is something she should do. I'm only saying that it's something to consider and review with the details as to how she plans to use her assets during retirement.

I hope this is helpful Rosie.

K, ok, ok you Fools, you can take a breath now! ;-)





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