Don't Dump That Old Annuity

Carrie Schwab-Pomerantz and Terry Savage
Mon, 18 Aug 2014 21:00:00 -0700
Lifestyle

Millions of people purchased annuities over the past decade — and now they are trying to figure out what to do with them. Many purchased variable annuities had mutual-fund-like investment choices, which are just now getting their investment value back even after years of market losses.

Should you dump your annuity now that you're even and use the cash for something else, especially since the surrender charge period is over? Or is there hidden value that should be investigated before you make (another) big mistake?

Mark Cortazzo is a certified financial planner and senior partner of MACRO Consulting Group — a firm that specializes in annuity advice, not only for individuals but for registered investment advisors and fee-only financial planners who turn to them to work through the fine print in their clients' existing annuity investments.
Updated: Tue Aug 19, 2014

Millions of people purchased annuities over the past decade — and now they are trying to figure out what to do with them. Many purchased variable annuities had mutual-fund-like investment choices, which are just now getting their investment value back even after years of market losses.

Should you dump your annuity now that you're even and use the cash for something else, especially since the surrender charge period is over? Or is there hidden value that should be investigated before you make (another) big mistake?

Mark Cortazzo is a certified financial planner and senior partner of MACRO Consulting Group — a firm that specializes in annuity advice, not only for individuals but for registered investment advisors and fee-only financial planners who turn to them to work through the fine print in their clients' existing annuity investments.

If you're looking for advice, don't turn to the insurer that originally sold you the product. They might have a perspective that is totally contrary to your best interests — hoping you will cash in a policy that could cost the insurance company big money if you hang onto it! Equally dangerous: a new salesperson might want you to raise cash to sell you new products and earn new commissions.

Correct Decisions Have Huge Consequences

You need an expert to help you decide. Here's a true story about one woman who sought out Cortazzo just in time:

A 67-year-old woman invested $100,000 in a variable annuity in 2007. She has not taken any withdrawals yet. And the cash value of her investments is just about even after years of switching between fund offerings inside the contract. But, the benefit base (upon which she could take income) grew at a guaranteed 5 percent per year for at least 10 years, and is now $140,710.

She can't take all that money out at once, but she can start taking the allowable withdrawal percentage, which will be 5 percent of that $140, 710. Her payouts will be $7,035 per year. That was a tempting option. But as Cortazzo's review of the contract showed, if she waits until age 70 to start taking withdrawals, the benefit base grows to $162,889. And the withdrawal percentage increases to 6 percent annually for life at age 70.

Instead of taking withdrawals now, if she waits three years until she reaches age 70, her guaranteed minimum paycheck would be $9,773, a 39 percent increase in annual income for life!

That is just one of the reasons you need an expert to review your annuity and answer questions — before you take any action to cash it in or withdraw money.

Key Issues in Deciding What To Do with Your Annuity

Cortazzo says that many of these older policies have "hidden" guarantees that make them even more valuable today than they were when you bought them. So look beyond the performance of the investments or the fees you have already paid. Start fresh with an analysis of the possibilities going forward. Here are a few examples:

Look for High Yielding Fixed Accounts Inside Your Annuity: Cortazzo observes that most variable annuity-holders are focused on the performance and fees of the investment sub-accounts. But you might also find a "fixed account" investment alternative inside your contract — one that might have a guaranteed minimum interest rate of 3 or even 4 percent! So, if you're not ready to take the money out of your annuity yet, you can park the money in this fixed account and earn far more than you would get just taking the cash and putting it in a bank CD.

Evaluate the Annual Guaranteed Accrual Rate: Most of these variable annuities gave you two promises, and people tend to focus only on the first — the promise that you would get tax-deferred gains in your investment accounts. Those gains could be taken out after the surrender period, but grow tax-deferred until that time comes.

But it's the second guarantee that most people overlook — and it could be even more valuable. Most of these annuities were sold with a guaranteed accrual on the original investment — a promise to pay as much as 6 percent a year! You can't take it out in cash, but it does serve as an "income base," allowing you to withdraw 6 percent a year, and still let the investment returns build on the remaining base investment. And any remaining balance in the account would go to your heirs, since they are "withdrawing" — not annuitizing.

Use the Annuity to Balance Overall Investment Risk: Even if you don't want the cash income now, there is another use for this money inside the annuity. Instead of investing it in the most conservative option inside the annuity, take the most risky option!

After all, with the annuity you have that guaranteed compounding on the base investment upon which you can always take income — even if your risky investments inside the annuity are a complete bust. Then become more conservative with your investments held outside the annuity. Those investments don't have any downside guarantee, such as you get with your annuity investment.

If Choosing Withdrawals, Be Aware of "Bands" that Increase Payments If You Wait: Timing is everything in annuities — and an untimely withdrawal strategy could cost you a lot. Some annuities bump up your withdrawal amount if you wait until a certain age (as in the example above) — or they increase payments if you have held the annuity for a certain number of years. Check carefully to make sure you don't start withdrawals just before one of those break points. (Hint: The insurer has no incentive to remind you of this!)

Consider Adding More Cash: You're probably thinking that's the last thing you want to do. But some older annuities, with high interest guarantees, allow you to add more money to the contract — also, earning that higher rate guarantee. Needless to say, the insurers aren't publicizing this option! But it sure beats bank CDs at less than one percent! (Also, check to see if adding cash starts a new surrender period.)

Getting Help

I know this is overwhelming. That's why you might want to take advantage of the Macro Annuity Review, which costs $299 and provides a detailed report on contract structure and features as well as advice on how to potentially improve the utilization of contract benefits. To learn more visit annuityreview.com or call 973-998-9845.

If you're one of the many people who bought annuities to benefit from tax-deferred growth, you may be smarter than you think — even if the investments inside the annuities weren't too stellar! It pays to investigate before you dump that annuity. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" "Terry answers readers' personal finance questions on her blog at www.TerrySavage.com. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.