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Welcome to “Ask Stacy,” a short video feature answering money questions submitted by readers and viewers. You can learn how to send in a question of your own below.
If you’re not typically a video watcher, give it a try. These videos are short and painless, and you’ll learn something valuable. But if you can’t deal with video, no problem: Just scroll down this page for the full transcript of the video, as well as some reader resources.
Today’s question is about annuities; specifically, whether a retiree is wise to take some money out of a 401(k) and put it into an annuity.
Confused about annuities? They’re not all that complicated. Check out the following video for a simple explanation.
For more information on this topic, check out “Ask Stacy: Should I Buy an Annuity for Retirement Income?” and “11 Pointers to Investing in Your 60s and Beyond.” You can also go to the search at the top of this page, put in the words “annuity” or “investing,” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your money Q&A question of the day. I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Becky:
“I am 69 years old. Are annuities the best way to go from a 401(k)?”
Before we attack this question, let’s understand annuities.
An annuity is essentially an investment issued by an insurance company. There are three different kinds:
- An immediate annuity
- A deferred annuity
- A variable annuity
When you buy an immediate annuity, you give the insurance company a lump sum, and they give you monthly payments. There are lots of options for how you receive the payments. For example, the payments could extend over five years, 20 years, the rest of your life, or for your life and then your spouse’s life.
I suspect it’s this type of annuity that Becky is asking about. She’s wondering if she should take some money out of her 401(k), then get monthly income by putting it into an immediate annuity.
A deferred annuity, on the other hand, is like a bank CD, except it’s from an insurance company. You give them your money, they pay interest on it, then give it back at some future date.
The final type of annuity, a variable annuity, is like a mutual fund — except that instead of investing through a mutual fund company, it’s sponsored by an insurance company. As with mutual funds, within the variable annuity, you’re typically investing in stocks, bonds, or a combination of both.
Why do people want to invest through an insurance company? Why not just get a CD from a bank, or a mutual fund from a mutual fund company? The reason is that insurance companies bring a couple of advantages to the table.
Investments with an insurance company “wrapper” allow earnings to grow tax-deferred, meaning you don’t pay taxes on earnings until you receive them. Another advantage offered by insurance companies is the ability to bypass probate. So, as with an IRA or 401(k), you name a beneficiary when you set it up. If you should die, the money goes directly to that beneficiary, bypassing probate.
These are a couple of reasons why people use insurance company products, versus regular products from banks or brokerage firms.
When you’re shopping for an annuity, no matter what kind it is, be aware of fees. Annuities often have monster fees, and they’re not always clear. For that reason, avoid buying annuities from commissioned salespeople. Did you hear that? Do not deal with commissioned salespeople when you buy insurance products of any kind if you can help it.
If you need professional advice, get it. But try to get it from someone who charges by the hour, instead of somebody who gets commissions.
As with mutual funds, some companies selling insurance products have lower fees than others. Insurance products from TIAA-CREF, USAA and Vanguard have historically included lower fees.
Another thing to know: Interest rates are now starting to rise. If you’re thinking about a deferred annuity, or an immediate annuity, be aware that the higher the interest rate is when you lock it in, the more money you’re going to make. So, the worst time to buy an annuity is when interest rates are really, really low. And the best time to buy an annuity — whether it’s immediate or deferred — is when interest rates are high. Therefore, if it’s me, I’m waiting for interest rates to rise before I lock into these investments.
Also, be aware that annuities typically have long surrender penalties. When you put money in, it’s going to be locked up, often for 10 years or more. So, you want to get the best deal you can. Since I’m seeing interest rates rising, I’m waiting before I lock my money into any kind of annuity.
I hope that answers your question, Becky. Let’s close today as we always do, with our quote of the day. This is from Basil the Great, a fourth-century Christian theologian.
“When someone steals another’s clothes, we call them a thief. Should we not give the same name to one who could clothe the naked, and does not?”
Interesting thought. Have a super-profitable day, and meet me right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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