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last year my wife changed companies and had to wait a year before she could invest in her new company's 401K (non-matching plan). She's since started contributing the max to her new plan (as do I with my plan). However, we have a decision to make with the old 401k plan. Recently we met with two different financial advisors who of course pitched us on the variable annuities particularly those with the Guaranteed Minimum Benefit, one of which guaranteed that you would receive no less than double your original purchase price after a 20 year investment (all surrender fees disappear after year 8). The fees that I'm aware of so far are .55% (55 basis points) for the guaranteed benefit and 1.5% for account charges, no load with the option to annuitize or withdraw freely after 59 1/2. The fund also states that purchases are uninsured (not sure if that's standard or has dubious implications).
Now, i'm generally skeptical about advisors, and I read over the fund contract (Mass Mutual) and annuities in general. Still I can not seem to come to a conclusion as to whether this is a bad idea as most proclaim, based on the circumstances. From what I understand thus far, here is the incentive:
If I am guaranteed twice my purchase price, let's say 100k, then over a 20 year period my gain would be minimally 200k (3.5% return) - 2% account fees that i'm aware of, and whatever my normal tax rate would be. Not great, but not a loss with the exception of the standard tax rate which will be for a lower bracket. However, with a guaranteed benefit I would get either the minimum benefit or the actual gain if greater than the 200k. This in effect would allow me to invest more aggressively which I would not do without the guarantee. And if I in fact see a return of 12% from this investment stratedgy, then as I understand it, I would still only be giving up 2% to the broker for fees (which is probably 1.5% higher than your typical mutual fund) and paying the ordinary income tax rate, which may be a difference of 10 to 15% from the capital gains rate. The question is given the circumstances and those types of figures, would it not seem that there's enough incentive to buy this annuity if it in fact it allows me to invest more aggressively for the potential of a larger return while offering at least a minimal gain if there's a loss on the principal?
Now, i'm generally skeptical about advisors, and I read over the fund contract (Mass Mutual) and annuities in general. Still I can not seem to come to a conclusion as to whether this is a bad idea as most proclaim, based on the circumstances. From what I understand thus far, here is the incentive:
If I am guaranteed twice my purchase price, let's say 100k, then over a 20 year period my gain would be minimally 200k (3.5% return) - 2% account fees that i'm aware of, and whatever my normal tax rate would be. Not great, but not a loss with the exception of the standard tax rate which will be for a lower bracket. However, with a guaranteed benefit I would get either the minimum benefit or the actual gain if greater than the 200k. This in effect would allow me to invest more aggressively which I would not do without the guarantee. And if I in fact see a return of 12% from this investment stratedgy, then as I understand it, I would still only be giving up 2% to the broker for fees (which is probably 1.5% higher than your typical mutual fund) and paying the ordinary income tax rate, which may be a difference of 10 to 15% from the capital gains rate. The question is given the circumstances and those types of figures, would it not seem that there's enough incentive to buy this annuity if it in fact it allows me to invest more aggressively for the potential of a larger return while offering at least a minimal gain if there's a loss on the principal?
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