No. of Recommendations: 0
With all the recent discussion about variable annuities, would appreciate it if you
could play devil's advocate and find the holes in my logic below. (Warning: this is a
pretty long post).

Have a variable annuity with Fidelity worth about $100K of which about half
represents my contributions; the remainder is growth. Bought it and continued to
contribute to it when I was on active duty in Navy and had no access to 401(K)s.
(I had maxed out my IRA and my thinking at the time, right or wrong in retrospect,
was that it would provide a 401(K)-like tax deferred retirement vehicle.) I have
long since stopped regular contributions to it(as I'm now retired from Navy and in
a real 401(K) plan). I've run the numbers and see no advantage to cashing out
before 59 1/2 and paying the penalties. It's invested in a moderately aggressive
mix of funds within the annuity. I'm 54 and want to retire within a couple of years.
(I have assets other than the annuity as well as a Navy pension).

The conventional ("wise") advice is that an annuity is the last investment vehicle
you access since you don't have to begin drawing from it as early as with an IRA
and you therefore have more years for it to grow tax-deferred.

One thing I didn't realize when I bought the annuity is that when it becomes part of
my estate upon my death, its value will not be stepped-up as with mutual funds and
IRAs, so my heirs will pay income tax on the "capital gains".

So here is what I think makes sense and I would appreciate finding any flaws in
my thinking:

- At age 59 1/2 I immediately begin accessing the money (which, at a 10% growth
rate) could be worth $160K or so. That amount would be 4 - 6 years living
expenses on top of my pension.

- I do this by converting the current moderately aggressive mix into a very
conservative cash-centric mix, perhaps with a bond fund and a small amount of
Growth and Income in the mix.

A. Annuitize it over a 4 - 6 year payout period to take advantage of the fact that
annuity payments are considered to consist of a portion of my contributions plus a
portion of growth (meaning that I only pay taxes on the growth) OR
B. Self manage the withdrawals over the same period, realizing that if I do so, the
above small tax benefit disappears.

- My 4 - 6 years of living expenses are thus covered meaning that I can now
safely take other cash assets (which I had been holding to cover the first several
years of living expenses) and invest them in non-retirement equities for growth.

The advantages, as I see them, in this approach are:
1. I cover 4 - 6 years of living expenses relatively painlessly.
2. I get the annuity out of my portfolio at a relatively young age. If I am lucky
enough to live long enough, I have thus eliminated an asset which would be passed
to my children at a relatively high cost in favor of retaininig those that will be
passed at a relatively low cost.
3. I have the opportunity to redeploy cash assets to growth equity investments and
later to access those assets at a capital gains tax rate rather than at the ordinary
income rate.

Sounds like you know what you are doing.
You are correct that you do not want the annuity in your estate when you die.
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.