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  • 401(k) rollover? An annuity that captures gains, not losses

    June 1, 2012 by Susan L. Moore Vault

    Susan L. Moore Vault | Posted: Friday, June 1, 2012 12:15 am

    We have our 401(k)s in the market — stocks, bonds, mutual funds — for one of three reasons:

    1. We love the market.

    2. We are not given any other options.

    3. We don’t know a better way to go.

    The market provides opportunities for gains but also for big losses, as we learned in 2008. For safety, we can use certificates of deposits or government bonds but in those your money is positioned either for opportunity or safety, but not both on the same dollar at the same time.

    There is a way to have safety and opportunity on the same dollar at the same time. Filling the gap between the stock market and a bank is the fixed indexed annuity (FIA).

    Capturing the market ‘up’

    When the market rises, the FIA delivers interest. When the market declines, instead of losing money, it delivers zero percent interest. In this case “zero” is a “hero” because you’re not losing money as would have if invested in stocks or mutual funds.

    A study by the Wharton Financial Institutions Center at the University of Pennsylvania found that FIAs credited an average of 8 percent since their inception more than 14 years ago.

    FIAs typically do not allow for 100 percent of the gain, but the average investor doesn’t often get all the gain anyway. Dalbar, a Boston-based market research firm, found that an average equity fund investment from 1990 to 2009 earned 3.17 percent, or a little over one-third of the 8.2 percent gain the Standard & Poor 500 averaged over the same time frame. Since 1995, many FIAs have credited higher interest.

    Liquidity

    FIAs are not 100 percent liquid, the investment period can range from 5-16 years and they carry surrender charges. Consequently, an FIA is not a place to park money that might be needed for emergencies or for short-term savings. However, FIAs are designed for retirement savings. Most companies allow up to 10 percent free withdrawals per year after the first year and there are some FIAs that allow for 100 percent liquidity from day one. Most brokers recommend you not remove any more than 4 percent per year so as not to run out of money.

    Bonuses and income for life

    One of the most popular features of an FIA is the lifetime income rider, which has a fee of less than 1 percent (the only fee associated with most FIAs). The rider provides a guaranteed annual rate of growth (currently up to 7 percent) as well as guaranteed income for life. For example, you can rollover your 401(k) into an FIA, have a 6 to 12 percent bonus added to your premium and grow it at 7 percent per year and turn it into a lifetime income stream at the age of your choice.

    FIAs are not variable annuities, which is a securities product that exposes you to market risk and has fees such as mortality and expense fees, administrative fees, fund fees and rider fees. These fees can add up to more than 4 percent. Additionally, some brokers charge management fees on variable annuities.

    Individual Retirement Accounts (IRAs), by law, can only be owned by one person. If a 401(k) is your choice for your retirement funds and you follow your broker’s advice not to withdraw more than 4 percent annually to live on, you still have no way of knowing if the account will grow or decline due to market volatility.

    If you rollover a 401(k) into an FIA IRA, you may take your income on a joint basis so even if a spouse dies, the survivor will continue to receive income for the rest of his or her life. Even if you totally deplete the balance in your annuity, your income continues for life. The withdrawals are based upon a percentage of value but you will know, up front, exactly how much you will be able to draw for the rest of your and your spouse’s lives.

    A fixed indexed annuity may not be the right thing for you but I encourage you to explore your options so you can make informed decisions. Speak to a licensed insurance agent specializing in retirement planning to help you make the right decision for you and your spouse.

    Contact Susan L. Moore Vault, president of Moore Financial Strategies, at susan@moorefs.com or (520) 296-4464. She also hosts “Safe Money Strategies” from 6-6:30 a.m. Saturdays on KNST 97.1-FM/790-AM.

    Originally Posted at Inside Tucson Business on June 1, 2012 by Susan L. Moore Vault.

    Categories: Industry Articles
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