Anthony Capital, LLC
Whether your question is about social security draw age, balancing risk and return in an investment, tax planning, or which strategy you should use to cover long term care needs, your chance for success improves dramatically with accurate information. Matthew believes his role is to guide clients through these trade offs using various tools, experience, and his training as a certified Retirement Management Analyst which centers every decision on improving retirement outcomes using math and science.
Matthew has become an expert in optimizing the financial lives of public and private sector employees. Several years ago, recognizing a huge need for benefits education and basic financial planning, he teamed up with The Society for Financial Awareness to offer workshops, seminars, and private consultations with a goal toward education. This collaboration has given thousands of public and private sector employees access to fiduciary advice while requiring no minimum investment amount. This educational approach that focuses on the best interest of the person has created millions in dollars of value for the attendees and their families.
He is a well know presenter in San Antonio and surrounding areas having taught hundreds of seminars touching on subjects ranging from debt solutions, investing, Social Security, pensions, insurance, and other financial topics.
Being the 8th of 11 children- Matthew has real life experience in financial planning as he put himself through college, graduating from Brigham Young University with no debt and money in the bank. He speaks fluent Thai and enjoys traveling whenever occasion permits. His personal life centers around being a father to 3 boys and husband to a beautiful and creative wife.
Brigham Young University
Assets Under Management:
You're doing a fantastic job of looking at the multi-faceted aspects of RMDs. Your question is also a great one because not only does it show how complicated these can be but how imminent they loom not just for you, but for all retirees with money in tax deferred accounts.
There are several approaches that would work but I'll start with that one which seems most applicable to you (this is for informational purposes only though).
That strategy would look like this: Take your RMD and have the provider send 100% of it to the IRS. Using this as a tax payment offset, then take a portion of the remaining funds equal to the tax payment just made (be aware of tax bracket thresholds) and convert some of the remaining funds to a Roth IRA. Repeat this each year until all monies are Roth IRA.
The advantages of this plan: Roth IRAs are not subject to RMD rules.
You do not experience any difference in your income or taxes on that normal income as this is largely an insulated transaction- meaning your cash flow in retirement is unaffected.
You can leave this Roth as a tax free gift to your son and granddaughter that can continue to give them lifetime tax free growth as well!
As for which accounts, I would need to examine your situation and contractual obligations closely before increasing the specificity but if you look at the 10% free withdrawals as an optional cash account, that might provide more liquidity to maneuver this strategy, especially since you mentioned you don't think you'll keep them beyond the surrender period.
I hope this helps.
If you've lived in the house 2 out of the last 5 years, $250,000 over what you paid is tax free. If the house is in the name of you and a spouse and you've both lived there, $250,000 per person ($500,000) over the original price you paid will be tax free to you.
So depending on how much it's appreciated, you could be gaining some money without paying any tax!
In your situation, that was not a bad solution at all. It gave you a guaranteed return on what would otherwise have been a cash/ money market fund returning little to nothing. More importantly however, it was only one part of a much larger plan.
But let's take a more specific look at your main question "should annuities be used as temporary investments?"
What is a person's timeline? "several years ago" you had more than 2-5 years until retirement, which makes the 4 year commitment less daunting. For some people reading this, that could/ should be a deal breaker. Annuities will generally tie up money for a specified time with only 10% being liquid usually- any money withdrawn in excess of 10% is penalized with 5-12% penalties. So for people with a need to access money within 5 years, any annuity longer than 5 years is inappropriate.
What is your risk tolerance and does your overall portfolio reflect that risk level? In your situation, you are not risk averse which would usually make anything but a variable annuity likely inappropriate. However, you wisely recognize a need for some sort of "cash equivalent" holding to hedge against a broad market decline. Hopefully, you've limited your annuity holdings to a portion of your total investments otherwise your gains will be very disappointing. For other more risk averse investors however, fixed, indexed, and even immediate annuities can be a great option for risk management assuming they are used appropriately and are not overly allocated in terms of overall portfolio percentage.
Lastly, type of annuity and details of the specific contract matter. In your case, you actually did well because you worked with an Investment Advisor, not just a straight insurance guy. While there is nothing wrong with straight insurance guys, they tend to see the solution to every problem as (SURPRISE!) more insurance. This seems like a small and unrelated note but it really is everything- most investors are not steeped in the investment world and I've even seen lawyers confused by the various contract terms in annuity contracts. Because Investment advisors act in a fiduciary capacity and are therefore legally liable for advice they give, they are at large far more interested in the details that really matter to the investor within annuity contracts. For example: in your situation, the 4% you secured in contract is very competitive even today with the rising interest rates. And because they have access to nearly limitless investment options, Investment Advisors generally will be more hesitant to lock in sub-3% rates. Add to this the requirement that they have transparent fees, and you can be assured that not only are you getting competitive rates but that costs and fees will not be popping up to rob you of the smaller returns you do receive on the cash portion of your portfolio.
Going forward, I cannot say that annuities are the best option. Or even treasury notes for that matter. Instead, I'd recommend you continue to consult your investment Advisor each time you begin looking at cash-equivalent options because "if it ain't broke, don't fix it".
This depends largely on your pension plan. But that said, generally if you took a survivor's benefit when you retired and your first spouse later passed, then you could potentially continue that spousal survivor benefit.
If you were not married at the time you retired, then you will need to contact your benefits department and ask them if it is still an option to add a survivor's benefit to your pension- But be prepared to have your pension cut while you're alive to fund this option. Sometimes, it can be less expensive to just buy a Guaranteed Universal Life Insurance policy but it never hurts to ask.
When you hear back from them, if you still have questions don't hesitate to contact me.
To begin, annuities can be very complex with several different types of annuities available and each of those generally having a number of subgroups. To really assess what will happen to a specific annuity after death (or even to understand its features prior obtaining one), a qualified, fiduciary financial advisor should be consulted.
(The following is not individual advice nor an exhaustive list of annuities and their features but rather an oversimplification for the sake of education.)
Let's split annuities into two parts: Immediate and Deferred. (These terms refer to when the annuity starts paying you money).
Immediate: One of the most common Immediate annuities is a Single Premium Immediate Annuity. These allow you to exchange a lump sum for a guaranteed payment for certain period such as 5, 10, or 20 years, or a lifetime (the lifetime option can be on joint lives as well meaning that the last person to die of the two original people named keeps getting the same monthly check). People with a very low risk tolerance or who have a very long life expectancy often find these appealing. What is sometimes misunderstood however is that once elected, the lump sum is no longer your asset, but rather the insurance company's asset. In other words, you don't own your money anymore. You traded it for a paycheck. This makes these less desirable for people with shorter life expectancies and those desiring to leave money to heirs. Another drawback that is often understated is the fact that only a small part of the money coming in is investment income- the vast majority of it is just your money coming back to you.
Hypothetical Immediate Annuity: Pay $100,000 to ABC insurance company. They now own the $100,000. In turn, they send you $500 a month for the rest of your life. But until you've received checks for 16.6 years, you've made no money but just been receiving the original $100,000 in payments. Often these do have return of premium riders or other potential benefits you can add, but each rider usually decreases the monthly payout thus stretching out how long it takes to get your own money back to you. For most immediate annuities, when you die your estate gets nothing and payments cease (unless you were still within the guaranteed period i.e. 10 year certain and you die at year 8 then the estate would pick up payments for the next 2 years until the 10 years are complete).
Deferred: These annuities are often similar to traditional investments in that you are not generally giving the money to the insurance company but rather letting them invest it for you. In return, you can be guaranteed returns at a fixed rate, guaranteed a rate within a specified range, or given a varying rate based upon market performance. These can be cashed out when you're done with them or can be annuitized which means you switch the money into payment mode. Unlike the the majority of immediate annuities, in payment mode on most deferred annuities you are still owner of the money but the amount you "own" is decreased by each payment of your money you receive. It is possible however to add a lifetime income rider to these so that the annuity cannot stop payments to you while alive even if the account value reaches $0 but these are almost always subject to an additional cost. Hypothetical Example of Deferred Annuity: Put $100,000 into annuity, wait 10 years to draw. At that point you can take out $135,000 lump sum (with taxes due on all growth if bank money (N/A if IRA money)), start paychecks of desired amount every month until money is gone, or if the rider was elected for lifetime income $500 a month for the rest of your life. The disadvantage of these is that they generally have surrender periods which means even though the company does not own your money, they have a right to use it for a specified period (7, 10, 15 years are most common). If you decide you want it back in that specified period or if a financial need comes up that requires withdrawals above the allowed percentage (often 10%), then you can pay penalties in excess of 12%! This means that in the $100,000 example above, you could lose up to $12,000 to the insurance company if you decide to stop the investment during the surrender period. Ouch!!
At the annuity owners death, any remaining money in the actual account goes to named beneficiaries. (It should be noted that if you elect the lifetime income option on these types of annuities, they will often have two amounts listed on your statements: one is the actual money in the account and the other is how much they are basing your monthly payment on. The first is liquid; cash in your pocket money. The second is really just a theoretical number for calculating your payment and does not pass to beneficiaries as a lump sum (usually).).