April 25, 2007
By seadmin

I have begun a new chapter in our coaching session series aimed at helping individual investors to understand their options and to make informed decisions about their annuities. Yesterday, I had an enjoyable conversation with a reader in Pennsylvania. His name is Jim. He owned an annuity that was sold to him by an advisor two years ago. He has been making money in this product, growing his cost basis from $130,000 to $160,000, but he really did not understand what he owned. The more he researched things, the less he liked his choice. After talking with me, we discovered several problems.

  1. He had been advised to place his total 401(k) rollover into the annuity. There is absolutely NO BENEFIT to doing this except for the advisor, who is receiving a fat commission on the sale. Never place an IRA rollover in an annuity, since it just adds a layer of fees to your investment that creates a drag on its performance. In addition, use of an annuity as an investment vehicle for your IRA limits your flexibility and investment options. Finally, it restricts your access to the money. Jim is unable to withdraw from his account without surrender charges. He still has a deferred sales charge of 8% on his assets and is paying annual fees of 2.5%, instead of owning an ETF that has total fees of less than 0.5%.

  2. Jim is currently invested in the stock fund options within the annuity. This strategy is fine, while the market is in an uptrend. But Jim must be ready to end his stock fund exposure when the market retreats. I advised him to start building a position in his bond fund option and to cut down on his aggressive fund choices.

  3. Jim will be ready to start receiving an income stream from his IRA in the not-too-distant future. I advised him to check with his insurance company about his income options and to start with a life annuity payout. Then, he should check on the monthly income benefit from a period-specific payout. This requires him to check on the monthly payment that he would receive during the next 10 or 20 years. He found out that he was ineligible for these options until his annuity is more than three years old. This restriction was not explained to him by his advisor, who made several missteps in guiding Jim.

The bottom line is that Jim does have options. In August 2008, his annuity will be three years old and he can explore his payout option. He will protect his gains by having a sell discipline and he will be better able to manage his annuity now that he knows more about how that investment vehicle works.

If you want a FREE annuity coaching session with Doug Fabian, simply send an e-mail to askdoug@dougfabian.com.

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