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Teacher's Husband

Is Our Annuity A Good Investment Vehicle?

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I am writing this from Afghanistan and am unsure how frequently I will be able to monitor and respond to replies, but thanks in advance for ny advice you can offer:

 

My wife and I started maxing out her 403(b) two years ago. She is a teacher for Lincoln County High School in Georgia, and her school system does not offer many options, and all are annuity based. We chose to go with Midland National, primarily because it is fairly well rated by the big companies and also because they match 10% of my wifes contributions, netting us an additional $1500 a year. The annuity is titled "Flexible Premium Deferred Annuity Veridian Plus" - whatever all that means, and from our online statement (which also does not seem very forthcoing) it appears that we make a paltry 3 to 4% return.

 

Initially I thought that the additional 10% up front would help offset the low returns enough to make this a decent option, but upon reading and doing more research I am now quite skeptical. I cannot find details of our contract on-line (which makes me even more dubious), so I am not sure what the surrender penalties or other fees on the account entail. I have read about and am intrigued with the prospect of doing a 90-24 transfer into mutual funds, but I do not know if I am a candidate for this.

 

We are also maxing out our Roth IRAs annually and are essentially living off of my Army salary. I have recently switched the IRAs to pretty aggressive options, so with that in mind does the annuity make sense as solid asset allocation?

 

Also, we have not been putting anything into my Thrift Savings Plan (the Army's version of a 401(k)) because they also have limited options and the government provides no match, although those options avaialabe certainly seem to outperform the annuity. Should we consider switching our focus from her 403(b) to the TSP?

 

Thanks in advance for your replies,

Brian

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Dear Brian,

 

I don't work for the federal government and I have not read anything specific about the Thrift Plan. But I have read that it is a very low cost plan. I seem to remember reading a little about it in John Bogle's book The Battle for the Soul of Capitalism, and he had positive things to say about the cost structure of the funds in it.

 

Thanks for serving the country and best of luck to you.

 

Jeff

 

 

 

Also, we have not been putting anything into my Thrift Savings Plan (the Army's version of a 401(k)) because they also have limited options and the government provides no match, although those options avaialabe certainly seem to outperform the annuity. Should we consider switching our focus from her 403(b) to the TSP?

 

Thanks in advance for your replies,

Brian

 

 

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There is no way to put a blanket statement out there and say "annuities are bad;" not all of them are bad. However, they typically do have a higher cost than investing in mutual funds. Annuities do not equate to low returns, your investment choices motivate your returns. What you and your wife might want to look at first is what the surrender charge on her current annuities are before moving them. (A statement should have two lines, "contract value" and "surrender value") If the charge is too high, just leave them and start contributing to a different program. By different program I mean that the second thing you should do is see if she has any Tax Shelterred Custodial Accounts (TSCA's) available through her district. These will be mutual funds outside of an annuity. Begin contributions there and get help with the investment mix.

 

I am not well versed in the Thrift plan, perhaps others can assist with that specifically.

 

On a personal note, thank you for all you are doing overseas, we appreciate you!

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Brian,

I am not a financial advisor and I am new to the 403(b) world. However, I have been studying the process as much as I can. I still do not understand 100% the value of an annuity. Because of this, I have relied on colleagues and literature. All of which have said that in our case the annuity does not make sense based on the high cost and alternatives available. Does the military offer families financial services that could meet with your wife and map out a retirement plan for the both of you? Should consider current debt, assets, goals, and options available.

 

Some things came to mind after reading your post.

 

1. Are you sure of the details of the school's match? You said 10%, which seems oddly high for a public sector unless she is truly only making 15K/year. Is it dollar for dollar? My wife works for one of the wealthiest districts in Minneapolis and their match is dollor for dollar up to 1.54% of her salary. She can contribute more than the match, obviously. I work for a top 5 bank and our match is dollar for dollar up to 4% of our salary. We can contribut up to 50% of our salary but the match is still only 4%.

 

2. The school should have a list of qualified vendors. Do you have an updated list of vendors to choose from? Question HR, the union, and their business services department in why only annuities are offered (if that is correct). With changes to 403(b) regulations coming in 2008, they may have changes to their plans on the horizon. Find out if more options will be available. Ask about 403(b)(7) which is another name for the custodial program. It wouldn't hurt to send an email to the correct people to push for companies like Vanguard, Fidelity, T-Rowe Price, etc. My wife and I have done this with much dilligence and have not taken "can't be done" for an answer. Union reps should be representing her and other teacher's needs.

 

3. You should not consider the school's match the offset of the low returns or high fees. It should be considered part of your wife's salary and that money be earning money as if it were coming from your pocket. The match is not a bonus, it's part of her negotiated salary similar to health care and other benefits.

 

4. Is she paying for life insurance? If so, what is the purpose of having an annuity and life nsurance? Again, I'm not 100% understanding of the annuity but I know the selling point of annuities is the death benefit attached in addition to the retirement payouts.

 

5. Do you have debt? Could the money you are putting into the Roth or the contributions to the 403(b) be more useful in paying off a car loan or something? If the annuity is returning 4% and inflation is about 3.2%, you're not really making 4%. In addition, if you have a car loan of 7%, your money is not really working for you. After debt payments are eliminated, use the freed up money to put toward savings. That's real savings.

 

6. What is the cost of your annuity annually? Find out from her rep. My wife's annuity was charging 1.7% on assets annually. In addition, the funds within the annuity had high expense ratios and 12b-1 fees. After accounting for inflation and the poor performance, my wife was losing money.

 

7. Call the company directly to get the surrender charges. They should be able to tell you exactly what you are going to pay. We went through this. My wife has 25K in her annuity value. She has been contributing for 8 years. The surrender charges are going to be about $1000 total. This is dependent on the term of the contributions. The more recent the contributions, the higher the % of surrender. This is based on her variable annuity. I'm not certain if your annuity is similar. Our hopes are that when we transfer her money out of the annuity to a 403(b)(7) with Fidelity, that she makes that at least 6% return which will make up that money lost and avoid the excessive fees she pays.

 

8. I don't think it's unusual that you can't find info on an annuity online. You will most likely have to ask for a prospectus. Or simply call the rep or company and ask for simple explanation of expenses. The rep is more likely to justify the expenses. Beware.

 

9. Don't lose focus of the 403(b) simply because there is a match. The objective is to find the right plan with the lowest expense (in my opinion). Annuities in general are not a low costing plan. So, I stress to find that qualified vendor list and seek a company that you can invest in mutual funds directly. If you can post the vendor list, I'm sure you can get a lot of help from readers.

 

Again, I'm no expert but I am learning a lot. If someone wants to tweak my advice or my questions by adding corrections or comments that would be great.

 

Based on my findings, I can only stress that you find out what services are available from the Army. I can't believe that they would not have financial advisors available. If not, maybe seek out a fee based CFP in your area. Fee base CFP with no interest in selling any products. Find out what the annuity contract is costing you. What are they taking annually and what would they take at retirement? Find out what other options available may be better.

 

Thanks for your service and God Bless.

 

 

 

 

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Guest Sierra

There is no way to put a blanket statement out there and say "annuities are bad;" not all of them are bad. However, they typically do have a higher cost than investing in mutual funds. Annuities do not equate to low returns, your investment choices motivate your returns. What you and your wife might want to look at first is what the surrender charge on her current annuities are before moving them. (A statement should have two lines, "contract value" and "surrender value") If the charge is too high, just leave them and start contributing to a different program. By different program I mean that the second thing you should do is see if she has any Tax Shelterred Custodial Accounts (TSCA's) available through her district. These will be mutual funds outside of an annuity. Begin contributions there and get help with the investment mix.

 

I am not well versed in the Thrift plan, perhaps others can assist with that specifically.

 

On a personal note, thank you for all you are doing overseas, we appreciate you!

 

BC: Using an annuity inside of a pre-tax account is in fact bad. Don't take my word for it. Check it out with the Securities and Exchange Commission.

 

Joel L. Frank

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The options available in the thrift savings plan are deliberately limited...and are extremely good.

 

All are indexed funds with extremely low costs. Cost is the first thing I look at in investment, as it's the prime determinant in returns.

 

I would use that plan, which a great many people wish they had, to the extent possible.

 

In particular, for bonds, look at the G fund, which gives the return of an intermediate bond fund with short term bond risk. No one else has this.

 

As with annuities, I'm suspicious of all of them. That's a blanket statement, I know, but they largely exist to be sold by insurance salesmen. I would see if there are other investment possibilities, including plain vanilla funds.

 

Good luck. Tim

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Should we consider switching our focus from her 403(b) to the TSP?

 

Thanks in advance for your replies,

Brian

 

Yes, the TSP is worth using. I am a Fed Govt employee and my wife was a teacher. We tried to fund the TSP, her 403b and a Roth when we could. Each has its advantages but especially if starting early I would use the TSP and build it up as a core fund. Later you might want to add assets it does not offer like REITs, commodities and specific foreign funds. And the G Fund may be the only bond fund you will ever need.

 

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BC: Using an annuity inside of a pre-tax account is in fact bad. Don't take my word for it. Check it out with the Securities and Exchange Commission.

 

Joel L. Frank

 

 

Please show me where the SEC or NASD or any government body has come out and said that. I want the publication.

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While not as much of an ultimatum, it is most definitely a strongly worded caution against the use of annuities within an IRA.

 

http://www.nasd.com/InvestorInformation/In...dSell/index.htm

 

 

 

7. Variable Annuities within IRAs

 

Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.

 

Also, if the annuity is within a traditional (rather than a Roth) IRA, the government requires that you start withdrawing income no later than the April 1 that follows your 70½ birthday, regardless of any surrender charges the annuity might impose.

 

 

Individual Retirement Annuities.
Some variable annuity providers sell what is termed an Individual Retirement Annuity (IRA). You should be aware that this "IRA" is not an Individual Retirement Account (IRA). The Internal Revenue Service sets specific restrictions regarding Individual Retirement Annuities, which are not met by all annuity products. To learn more, please read
.

 

 

 

 

http://www.sec.gov/investor/pubs/varannty.htm

 

Caution!

Other investment vehicles, such as IRAs and employer-sponsored 401(k) plans, also may provide you with tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection. The tax rules that apply to variable annuities can be complicated – before investing, you may want to consult a tax adviser about the tax consequences to you of investing in a variable annuity.

 

 

 

 

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Especially in light of what the SEC said over 7 years ago. This ain't new. When that agency says CAUTION!, we know its bad.

About that same time, the American Federation of Teachers published a absolutely great article on annuities that are sold to teachers call "Shart Attack." This article is available on this websie. AFT got a lot of hate mail from the insurance industry.

Fast forward to today. Not much has changed unfortunately.

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Guest Sierra

Especially in light of what the SEC said over 7 years ago. This ain't new. When that agency says CAUTION!, we know its bad.

About that same time, the American Federation of Teachers published a absolutely great article on annuities that are sold to teachers call "Shart Attack." This article is available on this websie. AFT got a lot of hate mail from the insurance industry.

Fast forward to today. Not much has changed unfortunately.

 

 

And at the same time that the AFT was warning its membership against the use of variable annuities its largest state affiliate, the NYSUT, was entering into an illicit endorsement deal urging its members to use an ING variable annuity for 403b investing. How's that for dispensing pre-tax savings plans by two leading teacher unions? Do you think they are embarassed?

 

Joel

 

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BCinMi said that,

 

"Please show me where the SEC or NASD or any government body has come out and said that. I want the publication."

 

He was sort of calling out Joel on his claim that that SEC/NASD had issued warnings against variable annuities. Vince explicitly showed those warnings.

 

So I ask BCinMI once again: Please explain how variable annuities inside a tax deferred account can be a good option.

 

We await your response.

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AP you c r a c k me up.... "I ask you once again!!!" Sorry, I don't check up the website on an hourly basis so don't think I was ignoring you. Issuing a "warning" and saying they are "in fact bad" are two different things. There is a current NASD investigation on sales and use of Indexed based products as well..... but how many of you own and preach about those? I'm not trying to fight with you on this, I'm trying to get you to stop thinking about annuities as they were 20, 10, even 5 years ago. Just a note, that NASD article... not publication.... was written in 2003, before they even offered things like principal return with account value step ups.

 

I'll give you a few instances where an annuity could be worth the cost (and open it to the rest of you to go ahead and bash my skull in). After all this website is supposed to be about learning right?

 

For a person getting towards retirement who fears losing principal but wants to remain somewhat aggressive, annuities offer annual step-ups; aleviating the risk of a tanking market.

 

For a significantly older person who still has qualified money annuities can give enormous estate and succession planning benefits for the heirs.

 

Want me to keep going? I'm not even in sales and I can go all day. Why? Because I do the research beyond what the internet tells me. I carry some money in VA's and some in MF's, each for its own purpose. I gladly paid the cost last year to get a 14% return and lock in that account value. That's a good enough return for me to justify the cost and guard against loss. People keep bringing up "when the market tanks...", I don't care when it does, it won't affect those accounts. I will agree to this point: qualified money should not be in a bare-bones annuity chasis. Annuities are almost pointless UNLESS you utilize the riders. 5 years ago most of those riders didn't exist or were in the early phases. Mutual funds, while cheaper, offer no benefits for succession planning or principal guarantee. Here's the hard part, actually call some companies, request materials, and do the research yourself instead of listening to Suzie Orman all day and night. Or do, its so much easier to sit back and take what you hear to heart.

 

 

Hang on, let me get my helmet on before you bring out the aluminum bats and billy clubs.....

 

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