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What Every Investor Should Know About Planning And Saving For Retirement
Today’s video blog is going to be answering the question, Should You Get Out Of An Annuity You Already Own?
I know this is a topic that comes up all the time in our reviews that we have with clients. There’s really a few things that I think you need to look at before you just go ahead and cash that annuity in.
The first one is, is there a surrender penalty. Most annuities have some length of time that you have to hold onto the annuity and if you were to get out of the annuity within that surrender period, you could be faced with some pretty hefty penalties, sometimes eight percent or more depending on how long you’ve had it and what type of annuity it is. So, in my opinion, I think it’s very hard to justify getting out of an annuity and paying that kind of a penalty to get out. But if you aren’t thinking about that and you are considering getting out of an annuity, one thing I think to pay attention to is the anniversary date of the annuity. Most of these surrender periods usually decline a little bit each year on the anniversary. So, you might find that you’re very close, within a month or two or a few months of one of those anniversary dates where maybe your penalty that you pay might go down from four percent to three percent or three percent to two percent or something like that. I generally, find it very hard to justify paying any more than a percent or two to get out of an annuity and even then, very rarely do I think that makes sense.
The second thing I think to consider when you’re getting out of an annuity is, are you losing any living benefits. You have to think about why you bought the annuity in the first place. What were some of those reasons? One of those reasons might have been because you hoped or thought the annuity was going to produce some future income, maybe through a living benefit. What some of these annuity contracts look like is you might have a living benefit, for example, that is much higher than the current contract value or the amount that you would actually cash out. So, let’s take a quick example. Let’s say you put $100,000 into an annuity and let’s say, the market really hasn’t gone anywhere, it’s still worth $100,000 but your living benefit income base is $130,000. Well, you have to think about that. Let’s say they’re paying five percent off of that 130,000, so you’d have $6500 a year of potential income or withdrawal guarantee from that annuity and if you were to try to duplicate that on your own, it might be a much higher withdrawal. You might not be able to replace that same level of income. So, pay attention to what living benefits you potentially might be giving up by getting out of that.
You also want to look at what you are moving the money to. How is that going to be better than the current annuity that you own? Again, think back why you bought that annuity in the first place and make sure that whatever you’re moving to has a decent chance that you’re going to be doing better over the long run versus what you have by just keeping the annuity.
The next reason I want to talk about is loss of death benefits, so very similar to the living benefit losses. You might have a death benefit guarantee that’s higher than your actual contract value. I’ve seen some of these where there’s some pretty substantial differences. You have to think about your age and when that death benefit is likely to be paid out, but especially if you’re older and you’re maybe closer to the end of your life. Nobody ever really knows but then that death benefit might be a lot more significant versus if you’re younger and you’ve got a lot more time than maybe giving up that death benefit may not be significant but, you still want to consider that.
You also want to look at the cost. Maybe that’s one of the reasons that you’re thinking about getting out of the annuity is you think that it’s too expensive and maybe there’s a lower alternative and that very well could be a good reason to do it, but again, you want to weigh all of these costs, the surrender penalties, what else you might be giving up by that annuity and what you think any new investment might do for you that might be better or different than the current annuity. So anyway, I hope that helps. I hope that helps answer some of the questions that you might have about an annuity that you already own. If you want us to run an analysis for you, we have access to a complete database that includes information on virtually every annuity that’s ever been issued and we can run some quick numbers for you, give you some idea as to whether or not it might make sense to get outta that annuity or keep the one that you have.
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I help individuals make the transition from working to retirement.
As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.
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