Annuity for a 33 Year Old?

[nathan.lee]

I'm not sure why anyone would recommend an annuity for a 33 year old. One thing nobody has mentioned is the fact that he would have a 10% penalty for ANY withdrawals until he is age 59 1/2. So unless he can live without the money which would be in an annuity for over 26 years, it's not a good solution.

The same can be said of a client's 401K or IRA. However, I rarely see any objections to recommending that a client max fund those accounts.



Shepnerd,

Make sure your best friend has ample savings to cover his fixed cost for 6-12 months. Make sure he is maxing his 401K and/or IRAs if he has them. Make sure he keeps enough NQ money around to cover major expenses like kids, homes, cars, vacations, etc. If he still has money left over that he wants to be ultra-conservative with and recognizes the tax implications, then an annuity might be an appropriate solution.

Just my humble opinion

 

[sman]

The same can be said of a client's 401K or IRA. However, I rarely see any objections to recommending that a client max fund those accounts.

Apples and oranges my friend.

Shepnerd,

Make sure your best friend has ample savings to cover his fixed cost for 6-12 months. Make sure he is maxing his 401K and/or IRAs if he has them. Make sure he keeps enough NQ money around to cover major expenses like kids, homes, cars, vacations, etc. If he still has money left over that he wants to be ultra-conservative with and recognizes the tax implications, then an annuity might be an appropriate solution.

Just my humble opinion

Nothing wrong with that advice.

 

[iceco1d]

The same can be said of a client's 401K or IRA. However, I rarely see any objections to recommending that a client max fund those accounts.





Just my humble opinion

You're getting a tax benefit from those accounts, plus possibly a match in the 401K. You're confusing a tax type with a product.

You could encourage the client to get the tax-free savings power of a Roth IRA, and put a FIA inside of it, IF that is something the client was interested in.

 

[DHK]

Shepnerd,

Make sure your best friend has ample savings to cover his fixed cost for 6-12 months. Make sure he is maxing his 401K and/or IRAs if he has them. Make sure he keeps enough NQ money around to cover major expenses like kids, homes, cars, vacations, etc. If he still has money left over that he wants to be ultra-conservative with and recognizes the tax implications, then an annuity might be an appropriate solution.

Just my humble opinion

I have a problem with the term "make sure". It's not my job to 'make sure' that my prospects do everything that I recommend that they do.

It IS my job to make good general recommendations based on the facts that I obtain. For example: If I'm recommending a NQ annuity, that I don't take every last time that he has - that I've helped verify that there are other liquid funds available to him.

It is NOT my job to make sure my clients are 'maxing out' their 401k and IRA. I can recommend it, but it's up to the client to do it. If the client WON'T do it... then my recommendation would be better than the client doing nothing.

An advisor needs to know that his job is to advise... not to do the client's book keeping and cash allocations for them every month.

 

[tkirk97]

I am guessing that the client is in a pretty high tax bracket to have "six figures" in CD's at age 33. Also, pre 59.5 liquidity could alos be an issue.

I think I would be looking to tax-free, insured, municipal bonds. Seems more appropriate for this type of client.

Also, why would you want to defer a 33 year olds gain on an annuity to the future- My guess is that tax rates are going up over the next 26 years-- if your not a believer look at historical tax rates- Top marginal tax rates over the last 100 years are 59.45%. SO you would be defering the gains into a more hostile income tax environment.

Just a thought, but pretty sure I wouldn't be using an annuity for this client.
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If it's qualified money, I wouldn't hesitate to use an annuity if he's a conservative person. That money already can't be accessed till 59.5 (easily).

I'd probably have a hard time using one for a 33 y/o with NQ funds.

Please explain how an annuity is suitable in this situation-- the traditional purpose of an annuity is tax deferal-- you are already accomplishing this, not sure why you would pay for an insurance wrapper inside of an IRA unless you were going to use a GMIB/GMWB, which wouldn't be that suitable for a 33 year old.

That logic makes no sense.

 

[iceco1d]

Tkirk - The "traditional use of an annuity is tax deferral" is a tired argument from the 1990's. No one uses annuities for "tax deferral' these days. In fact, given where tax rates are likely headed, using NQ annuities damn near guarantees you pay higher taxes in the future, rather than lower (unless your income is going to drop significantly).

The current reasons to use an annuity are #1 for the income rider, and #2 as a vehicle to provide a better interest rate than what is available in a CD or other bank deposit.

If the client isn't using their IRA limits, they could purchase a fixed annuity and get a better rate than a CD, and have the interest entirely tax-free for retirement. They could elect to purchase a FIA within a Roth IRA, and have a CHANCE to get maybe 4% plus interest, on a completely tax-free basis, in exchange for the RISK that they get 1% interest if the market does poorly.

The client could also look at a structured note, or a market linked CD; all depends on what type of details the client is looking for (liquidity, term, best rate, DCA or lump sum, etc.).

How about this...YOU explain how ignoring a clients Roth IRA limits, and ALLOWING them to expire, so you can sell a muni bond is suitable? Why not buy a higher yielding corporate bond in a Roth IRA? Or a GNMA? Or a combination? That money will be totally tax-free for life, and they can harvest capital gains moving forward with no tax implication, and change strategy anytime they like because they will be in a qualified account. So really, why don't YOU explain the suitability of a muni?

Let me guess...your b/d just got a pile of them in their inventory, you can't shop the street at your firm, and there is some type of sales incentive to push them? You know, since the bond desks at every wire, and most regionals, are profit centers for the firm.

 

[nathan.lee]

You're getting a tax benefit from those accounts, plus possibly a match in the 401K. You're confusing a tax type with a product.

You could encourage the client to get the tax-free savings power of a Roth IRA, and put a FIA inside of it, IF that is something the client was interested in.

I realized that I made an overly simplistic statement. My original objection to SMAN's comment was his reasoning that moving this 33 yr. old client into an FIA was unsuitable because of the tax implications regarding early withdraw, i.e. before 59 1/2. My point is that we have the same tax implications on 401Ks and IRAs and without knowing more about the client, we really can't make any sort of valid recommendation.

DHK,

I will attempt to refrain from substituting "recommend" with "make sure" in the future.

 

[shepnerd]

Good posts, guys, thanks. I learned a few things on this.

 

[coachd]

I had my first one when I was 25. I was not in the business then. My planner said I should not do it. Funny how out of his clients I had one of the highest percentage gain in my overall portfolio.
I did not have all my money there. and when young I do not think people should. But I did not want my money sitting in CD's getting taxed. I was not going to use the money until I retired.
It also allowed me to be very aggressive in my stocks because I knew I had safe money.
My point is we to often do cookie cutter planning with people, and not really let them tell us what they want to happen. What will they feel comfortable with.

 

[dsimo11]

I have the same "problem" right now with a 36 yr old female. The agent originally suggested a 10 pay, but she is already covered with a huge DB from another policy. The problem with being under 40 is that most companies dont offer the income riders for that age. Its been a mess figuring out the best route!