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In the near future I will be receiving about $30,000 from an inheritance left by a relative. Currently, at age 44 I'm somewhat behind in my retirement savings, am self-employed, and will be maxing out my SEP-IRA on my own for hopefully years to come.
My Morgan Stanley broker recommends tax differed variable annuities for this money, yet, the MF thrashes annuities and states there's better places for a long term investor to put this $$$.
If you were in my shoes and wanted to invest this $$$ toward your retirement, what vehicle would you use?
Thanks,
Richard
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Richard -

The answer to your question is a bit complicated...

A tax-deferred annuity can be a good place to park a lump sum of money for retirement (that's what it was designed for!), however the two drawbacks to overcome are: the money is locked up 'till age 59½ (earlier withdrawal results in tax + penalty), and when funds are withdrawn in retirement you'll draw out gain first (which is taxable as ordinary income) before principle.

Using an annuity might be ok, after considering your entire financial situation, including goals & other financial obligations. Be sure of your needs before making a long-term commitment...

Good luck, PP
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Check out post #11725 on this board for a detailed analysis of variable annuities.

Dodgeball
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As is so often recommended here, I would not feel pressured to make a decision in the near-term. You can always put the money in a money market fund (or in short-term CDs) for a few months. Then learn everything you can (from this site and from books). Only when you are very comfortable with your decision should you commit the money. If you decide to go the variable annuity route, look very carefully at expenses. Vanguard and TIAA-CREF have the lowest expenses.

jtmitch

PS Go to the library and get the NY Times from Sunday July 9; in their quarterly mutual fund sumary they also have a listing of performance and costs for all the variable annuity subaccounts. (The WSJ had a similar section shortly after the first of July but I don't remember the date.) I will bet you anything that what your broker is recommending has an expense of at least 2% (plus whatever sales commissions might be involved). Vanguard and TIAA-CREF, on the other hand, will be under 1%. Doesn't sound like much, but do one of the calculations that shows the difference over 20 years and you will be amazed!
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Richard (a.k.a. Donkin8), you asked:

<< In the near future I will be receiving about $30,000 from an inheritance left by a relative. Currently, at age 44 I'm somewhat behind in my retirement savings, am self-employed, and will be maxing out my SEP-IRA on my own for hopefully years to come.
My Morgan Stanley broker recommends tax differed variable annuities for this money, yet, the MF thrashes annuities and states there's better places for a long term investor to put this $$$.
If you were in my shoes and wanted to invest this $$$ toward your retirement, what vehicle would you use?
>>

The problem with the question is that we nor I am not YOU. I don't even know if you have an Emergency Fund nor how much you have or should have in it. That's one of the first things I would look at. My financial situation is probably quite different than your as are the details of my goals and objectives. What I might do with this $30K (if I were only age 44 again <grin>)depends on the details of my other assets, investment and objectives.

Annuities do offers some benefit along the line of the tax deferral. But you have to realize that in an annuity you're putting the growth in an income taxable position where it might be better to be in a long term capital gain position. So, this issue has something to do with just what your current tax status is and what it might be when you retire. It also depends on just how and when you plan on using the annuity proceeds.

Generally speaking, in most cases there are better ways of placing this cash. Why not have your Morgan Stanley broker recommend a portfolio of stocks (or whatever asset allocation is appropriate to you)? A position in some good large cap stocks can also give you tax deferral if that can work for you. If tax deferral in important to you, mutual funds outside of a qualified plan or IRA is not something I find attractive - except for those who have no or little investing experience and/or knowledge.

If you have anyone dependent on you and your carrying any life insurance, you might consider how a variable life contract like a VUL might be used as it can be a much better vehicle than an annuity for the amount your are looking at. For example, you might take the $30K and buy an Immediate Annuity they will it all out over an 8 year period and use the payment to make maximized NON-MEC payment to a Variable Life Insurance Contract. After the 8 years, you're likely to never have to make additional payments and you can even use it to get an income stream that isn't taxable. Doing such a thing is complex. So if you're not prepared for that and don't have any interest in carrying ANY life insurance, then you're not a good candidate for this kind of planning.

Since many Morgan Stanley offices do have some good Financial Planners, you might want to ask you broker to help you do some planning and see if there would be any additional cost for it. For sure, you don't want to be in a rush to get into anything . . . . ESPECIALLY an annuity. Figure out your planning either on your own or with some help from experts. In either case, it would be a good idea to read a couple of books on Personal Financial Planning and/or Retirement Planning. There are a lot of them in the book stores. I would caution that you avoid those that focus on HOW to invest as this comes AFTER the financial planning process.

Finally, to directly answer what vehicle would I use . . . since I have a good Emergency Fund, very little debt and I'm fully funding retirement accounts and am fully funding my own VUL's long with my other stock investments through a comprehensive financial plan . . . I would invest this amount in large cap value stocks (not mutual funds).

I hope this is helpful.
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Richard - I read all the responses to date on your post. They're all pretty good. Assuming you have everything else in place - emergency money, etc. annuities are generally terrible COMPARED to other available opportunities. Sure, "tax deferred" sounds nice, but you can get the same thing, in large part by picking a broad cheap index fund (Vanguard total market for example). Index funds tend to be tax efficient (they don't trade in and out and therefore don't hit you with income other than small amounts each year). The beauty is long term capital gains rates out in the future and minimal set up and ongoing costs. You can also purchase Spiders on the AMEX through a discount broker and get the same result.

One of the posters suggested that you run the numbers as a comparison. I just did a little comparison you might find interesting. Take $30,000 and let it run out for 20 years at 11% per year. The reuslt I got was about $241,000. Take the same amount and let it run at 10%, a measley 1% difference. Result $202,000. But it gets better. Now take 20% (max cap. gains rate off the $241,000 and 34% (NOT the max. ord. income rate). The $241,000 goes down to $193,000. But the $202,000 is now down to $133,000! Okay I know that there is no tax on the investment base. But this is just a comparison of the impact of annual costs and tax rates. It is huge! Also, your broker will clip off some part of the base so you won't even start even. And, as one of the posters pointed out, the annual costs will likely exceed 1%. In short, I am being charitable to the tax-deferred annuity.

Another thought. Have you set up a ROTH IRA for this year yet? If not, and assuming you qualify, you should take $2,000 and set one up since all the earnings on the ROTH will be tax free forever if you follow the rules.

I despise annuities and the people who sell them. They are expensive to purchase(your broker will make money), generally expensive to run (the operator will make money), difficult and expensive to get out of, and result in ordinary income rates when you cash in. In my humble opinion tax deferred annuities are a commissioned salesperson's solution in search of a problem that doesn't exist.

Take your time, read the FOOL, read some good books on investing and take control of your financial life. Just remember, in every investment situation, just as in poker, there's a sucker at the table. If you can't identify the sucker... look in the mirror.
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