I've heard that Annuities are a bad idea for retirement . Do variable annuities share the problems with annuities? I'm trying to figure out how mutual funds and variable annuities will affect me differently. Currently, a little more than half of my retirement is going into CREF variable annuities (most of the rest is going into large cap index mutual funds) and I want to be sure I am making the right choice while I am young.
The good news for you is that if you are going into annuities, Vnaguard and TIAA CREF are the bes place to do it. These are the lowest cost annuities on the market. When people state that annuities are bad, its often because of the high costs and surrender fees associated with them. Since you are with CREF, you are better off than most. There are 2 types of annuities, variable, and fixed. A fixed annuity will payout the same amount each month for the rest of your life. These annuities are invested in the Insurance company's general account and are often made up of conservative investments. Variable annuities allow you to chance for a higher payout and you achieve this by investing in more riskier investments. These are invested in the insurance company's separate account and often go into mutual fund "type" investments. You're probably better off investing the money in no-load mutual funds & Index funds, but you could be in alot worse shape than CREF.Bill
FreeMarket, you asked:<< I've heard that Annuities are a bad idea for retirement . Do variable annuities share the problems with annuities? >>Which "problems" would that be?Essentially, the only difference between Variable Annuities and Fixed Annuities is that you get to choose just how the money is invested. In effect you have the costs of an insurance product (an annuity) tied in with the cost of mutual fund investing. A life time income from an annuity can be a very strong point if you feel you're quite likely to live a long time. If you have a family history of not living a long time, them an annuity may not be something to give much priority to.<< I'm trying to figure out how mutual funds and variable annuities will affect me differently. Currently, a little more than half of my retirement is going into CREF variable annuities (most of the rest is going into large cap index mutual funds) and I want to be sure I am making the right choice while I am young >>If tax deferral is of paramount importance to YOU, then variable annuities can make very good sense. But as you plan for your retirement, if you want to be sure that your heirs will receive the most from you estate, you'll want to be sure that you use income from the annuity(s), and any other tax deferred account, FIRST. Annuities can be very effective in one's retirement planning. But one needs to fully understand the issues as they apply to one's own personal plans and objectives so that inadvertent land minds are not created.Annuities with there expenses, various features and tax issues surrounding them make them something that should not be dealt with without good knowledgeable help. For the most part, annuities are not something that a typical consumer should try and deal with on their own . . . especially Variable Annuities. It can get very complex when trying to determine which annuity, if any, would be the best match for YOUR particular set of issues. So, as you do your retirment planning, you might want to give some serioius consideration on using some expert help. . . ???
Currently, a little more than half of my retirement is going into CREF variable annuitiesI have all of my 403(b) going into TIAA-CREF's "Group Supplemental Retirement Annuity" (TIAA-CREF-speak for 403(b) plans). They seem to be a pretty decent choice: decent "investment accounts", very low M&E fees (0.005%), low investment management expenses (almost as good as Vanguard), and web access for checking one's accounts and reblancing between "investment accounts".Now they do tend to be somewhat on the conservative side, so if one wants to pick up aggressive, or a heavier weighting in small and mid caps, one has to look elsewhere. (I have taxable investments and Roth IRA elsewhere, where I can get more small, mid, and aggressive exposure.)Like many 403(b) providers, they offer a range of "investment accounts", some stock based, some bond based, a real estate account, a "traditional annuity" account, and a money market account. (See http://www.tiaa-cref.org and click on "Retirement accounts" near the top of the page for the list of investment options.) For the long term, the stock-based investment options generally produce better long-term returns. TIAA-CREF also has an asset allocation questionaire on their site to help suggest a mix of investment accounts.Of the 403(b) providers available through my employer, TIAA-CREF is the best one--the other options are either much more expensive insurance companies, or load funds.I've heard that Annuities are a bad idea for retirement . Do variable annuities share the problems with annuities?There are several problems with typical annuities:1. Annuities are insurance company products. (TIAA-CREF is technically an insurance company.) Almost all annuity products carry excessive fees, such as high M&E fees. The M&E is insurance that if you die before annuitising your account (if you ever do), the beneficiaries will get a specified amount. Many insurance companies guarantee that the beneficiaries will get at least the premiums you paid. (Many people view this worthless because it is very likely that after five years of contributions the balance will be higher than the total of the premiums, so the continued M&E is pure profit for the insurance company.) Some insurance companies guarantee premiums or an amount based on the current account balance, ratcheted up once every few years.My former 403(b) provider had an M&E fee of 1.05%/yr, which guaranteed the beneficiaries would get at least the premiums.My current 403(b) provider, TIAA-CREF, charges only 0.005% M&E, and they guarantee the beneficiary would get the current account balance (which could be less than the premiums if there is a serious market downturn), but I consider that level of insurance on the account appropriate.Vanguard also has low insurance expenses on their annuities.Many annuity contracts put the M&E fees in one place, and the investment advisory fees in another place, making it harder to see the real cost of that particular investment.Fortunately, by picing TIAA-CREF (and those picking Vanguard) made good choices in this area!2. Variable annuities outside of a qualified plan convert long-term capital gains into ordinary income. So if investing outside of a 401(k) or 403(b), I would rather pay long-term capital gains taxes of 20% or 18% in a somewhat tax efficient investment than put it in a variable annuity and have the gains taxed at 28% or higher (whatever my ordinary income tax rates will be at that time).Within a 403(b), this doesn't matter because all gains within a 403(b) or a 401(k) will be taxed at ordinary income tax rates, no matter whether this is in a 403(b)1 as annuities or in a 403(b)7 as mutual funds. (More specifically, all money in a 403(b) will be taxed at ordinary income tax rates when it is taken out. However, by being funded with pre-tax money, the "tax favored" nature of a 403(b) is usually a good deal unless one is paying high expenses, such as prohibitive M&E expenses on top of high investment management expenses.)3. Almost all traditional annuities in the accumulation phase and all traditional annuities after they have been annuitized earn significantly less than the long-term average market return. This reduced return is in exchange for removing market risk from the customer. (This includes the "Tranditional Annuity account" from TIAA-CREF.)Unless I need "asset protection" (varies based on state law) or "asset hiding" or wants the insurance protection of premiums offered by some annuities, I would be inclined to put after-tax money in taxable investments, preferably something reasonably tax efficient (tax-managed funds, an S&P500 index fund, or a total market fund), before considering an annuity.