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JP in NJ

403(b) Advice Needed

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What should I do with a Variable Annuity from Valic which has accumulated over $90,000 in the 15 years I have paid into it? I mentioned this in a recent thread, and one of those circular little arguments which seem to creep up at times on this board ensued. But hey, there's nothing wrong with that. In fact, I like circular little arguments, and the discourse here is (usually) very civil and very enlightening, so go ahead and start a debate if you care to. As I see it, there is a choice I will have to make before the summer is over. What would you do in this situation?:

 

CHOICE 'A' is basically to do nothing but stay with Valic and to keep contributing as close to the maximum amount allowable for the rest of 2005. This despite the fact that I agree with the contention driven home many times in the 50+ pages of this forum that Valic's VA is an undesirable plan with high fees.

 

Why stay with a plan you know is lousy? Because I am so close to the end, is why. I would ask Valic to calculate the maximum allowable monthly payout. I would stop working in early '06 and begin taking those as Substantially Equal Periodic Payments until age 59 1/2. The larger payouts would provide more income than I would actually need in retirement, but I would be more than capable of investing this extra income on my own. The high payouts might even drain a good chunk of the account, but so what? Sound like a plan?

 

CHOICE 'B', on the other hand, would involve a '90-24' transfer before this year is out, and a setup in another 403(b) plan, one with much lower fees. I have seen Vanguard's and Fidelity's plans recommended several times in various places throughout this forum, and have no reason to doubt that switching to one of them is, indeed, sound advice. But the question then arises: At this late date, with as little as five months to go before retirement, wouldn't this changeover involve new fees that would negate the original purpose of leaving Valic (i.e. to avoid big fees)? My school district has since allowed for greater choice since the day when I signed on with Valic, but wouldn't there be up-front costs and commissions to be paid with any of these new products?

 

Further, the experiences of those who have written to the forum while changing from one 403(b) plan to another have not always reported smooth sailing. This also has me thinking that changing at this point would seem to be a plan of action more suitable for someone with more time to go before they separate from their employer. What do you think?

 

As before, thanks for reading this and for responding.

Edited by JP in NJ

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Guest Sierra

Choice A would continue the bleeding during the payout phase. So if you desire to stop the bleeding and still embark on your SEPP next year why not bite the bullet now and effectuate a 90-24 transfer to a pure no-load firm. There are no up front or start up costs if you go with a no-load firm. If your retirement income from the Teachers Pension and Annuity Fund of NJ is enough for you why start a SEPP with your 403(b) at age 52? Would you not be better off in growing this money in a no-load environment until you need it for life style reasons or age 70.5 whichever come first?

 

Peace and hope,

Joel L. Frank

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Hi JP,

 

Thank you for reposting your question(s). I apologize for your having to repost. I, among others, was doing "our dance" which was not germaine to your question, and prohibited you from posting on your thread. I feel that this behavior was rude.

 

At this time I am starting a new thread for sidebar discussions. Hopefully, this thread will facilitate better responses by us to those seeking help.

 

Ira

 

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I would transfer my assets to a no load fund company. I think that valic might surrender charge for their funds based on length of holding. If that's the case, I would transfer those funds that are not affected, and transfer the rest of the funds as they are not affected.

 

If no load funds are available at your school district, I would change to them now. The district offices are open during the summer. I would not place any other money at Valic.

 

I don't remember if there are no load funds in your district. If you have any questions about the funds that are available , post them.

 

When you say VAriable Annity at Valic. Is that a 403b or a variable annuity?

 

Ira

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I would do a transfer in your situation. Vanguard would be a good choice (their Wellington Fund is worth looking into if you want a "balanced" fund). I am also a fan of the American Funds American Balanced Fund (C shares if less than 7 years until you pull out the money). It is higher cost than Vanguard (probably lower than your valic expences) but is very well managed. It may also be worth your time and money to see a CFP (possibly fee-only) and have them tailor a portfolio that matches your risk tolerance and time horizon.

 

Enjoy retirement. I only have about 25 years more to go.

 

Chad

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Ira - No need to apologize - the sidebar discourse/discussions/arguments fuel the engines that keep this forum chugging along in such an interesting way. It should be no big deal, I feel, to just move a question or two on an individual situation to another thread, as I have done here.

 

The discourse, after all, has contributed to my learning more here in the last three weeks than I did in the 15 previous years as an 'annunitant' with Valic.

 

Thanks for responding, and Joel and Chad seemed to immediately agree with you that it would be best to close out my relationship with Valic. My contract specifies 5% surrender charges on money taken out early.

 

I search-engined this forum's previous discussions on surrender charges, and the advice was usually of the 'bite-the-bullet' variety; people were advised to pay the charges in order to set themselves up in a better plan.

 

But most of those receiving this advice were not as close as I am to retiring. This is why I mentioned taking SEPP payouts, but instead of taking the originally-planned small payouts I was wondering what the LARGEST permissible payouts were, even if it drained the account by age 59 1/2. This would still allow me to set up a more desirable no-load account on my own. Wouldn't this - effectively playing by their rules - avoid my having to fork over the hefty hunk of change that the surrender charges would amount to?

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JP, How much can you move out without a charge? When are eligible to move out the rest? I'm guessing you will be able to move out some each month, and dollar cost average into different funds, which can be a good thing, especially in funds with high betas(variances) risky types.

 

But stop contributing to Valic, NOW. Are there no load companies in your district? If you don't know post a list of companies that you are eligible to invest in for us to look at.

 

Don't worry, if there are no eligible companies. You can invest outside a plan in a index or tax efficient fund. We can help with that.

 

OK, the balls in your court.

 

Ira

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JP, I would reiterate part of what Ira said earlier: find out what part of your money is already free of the surrender charge, and transfer that. Next, find out which part of it is susceptible to the lowest amount of surrender charge, maybe 1% or 2%, and consider transferring that. The rest, you may want to keep in place until it becomes free (or at least a lot cheaper) to move it.

 

Good luck. Hope this helps.

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Hi JP;

 

Look there is no exact right answer - just too many variables to yield a simple solution. I think though - You'll keep too much grouchy-ness if you stay with VALIC!

 

It sounds like you've really thought through why you're hanging it up-use those thoughts in deciding what to do. By the way, while you might have only a few months left to teach, you're likely to have many more years to invest your assets. Get moving in a direction that makes sense to you, rather than going by just what is convenient.

 

Part of freeing yourself from the issues and subjects of these boards is getting to a place where you can live life and let the financial markets just recede back to where they belong.

 

In my view , that means Vanguard. Because low fees preserve your ability to change your mind with minimal frictional expense. Vanguard will charge no commissions to move into their products. If there is a surrender charge (do your homework, please) with VALIC, leave it alone until you are gone and then take a lump sum distribution.

 

Learn to play a new instrument - its good for the soul - like finding a new (& diversified) asset class!

 

Cheers! and good luck -

 

Danc

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I am re-entering the thread after a few weeks in which I was off finding some things out about my district which I will report here in the hopes of receiving more of the excellent feedback that is the forum's trademark.

 

First, thanks to all those who have responded so far. I have spent many a steamy afternoon of this sweltering NY/NJ summer season in the cooled comfort of an easy chair "going to school", i.e. reading this board and the related author / web recommendations that have been made here. Thanks also to Founding Father Dan who created the site, and to the cast of colorful regulars who show up here - sometimes contentiously but always in an interesting way.

 

I am writing up a little report on what I have learned here which I will post on my district's website used by 200 teachers, staff and administrators inviting all to read up for themselves if they haven't already. Since I am inviting people I know to come read this public website, I had to edit some of my earlier posts which identified certain corrupt political figures "pimping" on local inner-city school systems in this neck of the woods. Better to keep my mouth shut, I says to myself, before Tony Soprano sends Paulie Walnuts over to my house in the middle of the night to shoot up some windows, if you know what I mean....irrelevant to the financial discussions here anyway.

 

Oh yes, one final thing (sorry, I'll get back to business in a minute!): Thanks for the encouragement and personal anecdotal stuff in the other couple of threads in which I have participated.

 

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Regarding the matters talked about earlier: I checked back with the persons handling the 403(b) and annuity accounts at my district's board offices, and while friendly could not really do much more than provide the names and phone numbers of the board-approved vendors. It was a short list of five, three of which (Equitable, Met Life and Prudential) all offered the same type of 'wrapped' annuity plans I have already experienced with Valic. A fifth was with Lincoln Financial Services. I spoke briefly with their representative who offered a 403(b) mutual fund package in American Funds or Russell Funds as the best alternative to the higher costs of Valic. He claimed he could make the transition from Valic to, say, American Funds a smooth one, transferring those funds eligible to be moved out of Valic without incurring early withdrawl fees, and moving others as time went by.

 

A few questions, hopefully without starting a whole new debate: He is first and foremost a salesman, no? American Funds have front-load fees, are pretty well-managed and seem to encourage more conservative placements for retirees, and this guy is a middle person working for his firm (Lincoln) and handling the set-up of American Funds' accounts, correct? His plan seems the best of my district's generally poor choices. Or is this not worth doing? I should have - but didn't yet - find out the EXACT fee schedule involved and I will no doubt answer my own question.

 

But in deference to what 'TR', French Teacher and others here have been saying in many other threads, he is at the same time a qualified advisor who, I have found, has handled the accounts of several colleagues who similarly moved out of their previous annunity contracts into his plan and seem happy with him.

 

If I agree with Ira, Joel, Chad and Danc above - that Valic shouldn't get another nickel - is this the best of the other choices, what with my need for just a few more months of tax deferment?

 

Best wishes and thanks again.

James P.

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Hi.....Loads stink...you might want to consider an index fund outside a tax deferred account. The taxes in index funds are very low because the buy and hold stragegy of index funds.

Also there are tax managed funds that are available.

Ira

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Ira -

Thanks for the reply. I was inspired to hear of your own early retirement and subsequent ukelele lessons. I had a friend, since passed on, who played well. He'd play in front of kids and mentally handicapped adults, twirl the ukelele in his hand, pop himself on the head with it on the last drum beats of a number, then laugh himself silly....my kind of guy! I'd love to begin living the musician's life.

 

Anyway (off on a tangent again) (I'd make a lousy Federal Reserve Chairman).....you raise an interesting point: What if someone faced with unfavorable options from an employer simply bypasses the use of those employer options altogether? I would have to do a couple of projected 1040 tax forms for '05, my last full-salaried year. I would check to see what the difference would be between fully funding the employer tax shelter or stopping it now and opening a '401' plan on my own. Of course, the tax deferment with the latter would not be as great as the $14,000. + over-50/$4,000. which the employer 403(b) plan offers for '05.

 

The key factor would be to figure out exactly what the fees would amount to for both the guy from Lincoln Financial and the front-loads from American Funds, in total. These could then be compared to the tax savings, and I would have a clearer idea as to which way to go.

 

The problem is this: With Valic, I have always found it difficult to figure out exactly how much is coming off the top to pay the fees. I look closely at the quarterly reports and end-of-year reports and, though a reading comprehension teacher, have a difficult time reading these statements. Maybe it's me, but they don't exactly spell it out for you. Maybe we should contact Elliott Spitzer over in New York and see if he is making that part of his industry-wide reform: The company should be required to spell out how much EXACTLY, in dollars and cents, the annuity client has paid out in fees at the end of each calendar year.

 

Anyway, maybe I can get this guy from Lincoln Financial to tell me exactly how much it would cost me in commissions, loads, fees and other charges if I signed up with him?

 

Thanks again.

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JP, I was just thinking. It may be possible to put money in one of the load fund money market accounts, and transfer out to a no load fund provider without paying a load.

 

As far as index funds, for example for the total market index at vanguard, I think that the taxes are about 1 percent a year.

 

Remember, that the money that you make on 403b are taxed as ordinary income. Now, stocks are taxed as capital gains which are at a lower rate. I'm not sure if the total market index fund will be taxed as ordinary income or as capital gains. (If ordinary income, you might want to consider a basket of equities--I guess growth oriented which do not issue dividents)., if the total market is taxed as capital gains when you sell, then I would go with the total market if it falls within you asset allocation plan.

 

I'm new at yukulele playing, and the teacher showed the group that I play with how to flip the yukulele in unison. I like the idea of popping the yuke on the head on the last beat. Hopefully, if I practice enough, I can make a living playing the yuke if I don't scramble my brains any more than they have been.

 

Ira

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Jp,

I work in nj and have a valic account. I want out. I have been with them for 5 years, and plan on working for at least another 25 years. In my taxable account I invest w/VANGUARD. This summer I started to research fees w/ valic. I'm in index funds s&p 500, mid-cap, and small-cap the fees are 1.38, 1.41, and 1.48 . When I saw this I wanted to throw up on my valic advisor, and I felt like a fool because I am so cost conscience with my investments thats why I invest w/ VANGUARD. I called payroll and asked for a list of vendors they gave me all ins co. except for one very fine co. FIDELITY , not VANGUARD but close enough. My account is around $23,700 and my surrender charge is $1020. The fees for this account w/valic would be about $350 a year. W/FIDELITY my cost for index funds

(.10 expense fee) would be about $48.00 including custodial fees. It would only take me a little more than 3 years to recover the lost of the surrender charge and I would not have to give valic another penny towards high fees. This was an easy decision since valic will only give up the surrender charge 5 years after you stop contributing to their funds. So my advise to you is to consider the FEES first before you make your decision. Good luck in your retirement. IF anybody sees a hole in my situation please let me know. momaz

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