Should I invest my inherited IRA in a variable annuity?
I inherited my husbands IRA worth $232,000. Should I invest it in a variable annuity that will charge me 1.65% per year. They say I will have complete access to it at anytime with no surrender charges. Is this a good way to go? They are going to put $45,000 in cash earning 1.0%. The remainder will be invested in conservative mutual funds. They claim I will not have to pay more fees for the mutual funds. Is this a good idea?
First of all, I’m sorry for your loss. It’s great that your husband had saved and was able to leave you a legacy. Thus, it’s important to take care of this inheritance.
Ideally, I always tell widows and widowers not to make any financial decisions for at least 6 month, or until they are ready and able to concentrate and make the sound decisions. In your case, if $232k is your only financial resources, I would make sure to talk a reputable CFP® to see if you need to pay off all debts before proceed to any investing. For example, if you have 23% interest on your credit card debts, unless an investment can generate an equal or better return than 23%, I would pay off the debts first. Secondly, annuity is usually used to make up the difference between your retirement income (pension, social security income, etc) and retirement expenses. By itself, annuity is not good or bad product; it’s just a tool. When used properly, an annuity that provides lifetime income can be beneficial, thus gives you a peace of mind. When used poorly, it has so much detrimental effects that you may never recoup the cost. Therefore, a reputable CFP® who knows your financial situation can clearly tell you if you need any annuity in the first place. If you do, she/he should be able to explain how many benefits you need and what kind of tradeoff you have to make for the benefits. Furthermore, he/she should also show you a product-comparison so that you can make an informed decision.
Best luck to you!
A variable annuity (or any type) depends on your goals and time commitment. An annuity is a risk management tool, so if you feel uncomfortable about the investment choices being made, make sure to evaluate all of your options (versus purchasing a fixed, fixed indexed, or immediate annuity). It seems as if you have already received a recommendation and want some sort of assurance, however, I will provide you with a few questions that should be answered before proceeding.
1. What is the total amount of fees charged?
Most variable annuities have the following fees:
- Mortality and Expense (average of 1%)
- Administrative Charge (average of 0.15%)
- Sub-accounts (average of 1%)
- Death Benefit Rider (average of 0.15%)
- Guaranteed Lifetime Withdrawal Benefit Rider (average of 1%)
As you can see from the information above, fees alone can total at least 3% or more. On a side note, the Death Benefit and Guaranteed Lifetime Withdrawal Benefit Riders are optional features.
2. What is the surrender charge?
The typical variable annuity has a 7-year surrender charge, although no surrender charge annuities exist. Typically the insurance company will charge you more in fees since they don't have a time commitment. Refer to the surrender charge schedule to confirm what is being told to you.
3. How are you being compensated or what is your commission?
The typical variable annuity pays a 5% commission with a trailing 1% commission every year you keep the policy. The commission can be higher or lower.
As far as the recommendation to put $45,000 in cash earning 1%, there are fixed annuities that are paying higher interest rates (e.g. 2% per year for a 3-year commitment or 3.15% for a 5-year commitment).
Not all annuities are created equal, therefore, you should do your own research and ask questions.
If you have any further questions, I'd be happy to help.
My sympathies to you as you grieve your husband's death.
PLEASE say you haven't done this yet!
In no way, shape or form should you consider investing an inherited IRA into another tax-sheltered investment, least of all an annuity, which contains substantial Mortality & Expense charges that would otherwise needlessly reduce your balance.
The only annuity that allows one complete access to all the principal is a no-load annuity and very few of them are 'sold', such that you probably wouldn't have stumbled upon this idea. I rather believe that a commission agent has recommended this strongly to you, since there is a VERY healthy commission attached to the sale; read anywhere from 4-10% with various bonuses, AND most likely credit towards that agent's award trip offered by their sponsoring company.
So, that said, IF you still have your husband's Inherited IRA, please consider your cash flow needs from this sum of money and invest in a diversified portfolio of indexed, (institutional preferably, since the expenses are razor-thin compared with the expenses on a retail offering) no load mutual funds or Exchange Traded Funds. The mix of assets will be determined on a couple of facts: your need for income, your age, your overall need to grow the monies, and your propensity to withstand some short-term price volatility.
Final reminder, bond prices fluctuate too. And if you buy a bond and do not hold it until its maturity, you could suffer price depreciation at the time of sale. And if you buy a bond mutual fund, your risk of losing principal is also present, especially if the duration/length of the bonds is over 5 years.
Interest rates and bond prices are on an inverse relationship, so as interest rates rise (as I believe they will in the next 5 years) the price, or principal will go down. Be aware of this, as some investors believe they can't lose money in bonds, which is not true, especially in a rising interest rate environment. Credit risk, of course, also contributes to the potential for loss in bond principal. Know that if a bond is paying you more than the current Treasury yield (which is often referred to as the risk-free rate) there is principal risk that you will want to manage. The 10-Yr US Treasury bond yield is approximately 1.625%, so IF you are being 'sold'/'offered' a yield in excess of that, the credit quality is less than 100% guaranteed.
Of course, this investment will be melded into ALL of your other monies, in order to create the most diversified portfolio that will meet your short-medium and long-term expenses. So, I caution you about segregating buckets of money; they ALL have to work together to help you achieve your objectives.
Good luck and God Speed.
Very sorry to hear of your husband's passing.
I usually would not recommend investing IRA assets into a variable annuity.
The main benefit of a variable annuity is its ability to grow in a tax-deferred manner for an expense. An IRA does this already at no expense.
1.65% is $3,828 a year assuming an investment of $232,000. Additionally, I am unaware of any mutual funds that do not have expenses.
Time should be taken to work with a financial professional that can help you assess your situation and determine an appropriate asset allocation or mix of stocks, bonds and cash based on your particular objectives and time horizon. Once an appropriate allocation is determined, an appropriate portfolio could be implemented. It is important to be wary of high cost investments.