Was our Variable Life Annuity a good idea?
My husband and I purchased a Variable Life Insurance annuity policy, and now we’re wondering if it was a smart investment. We are in our late twenties and make very good money. We bought the policy for retirement purposes. We no longer contribute to employer 401k plans are they are not matched by the employer, and we make too much money for a Roth IRA acct. So all the money we are saving for retirement goes into this annuity. There’s a minimum premium is $1700 quarterly, but we try to pay $3500 quarterly to fund it faster. After 7yrs it will be fully funded and then we can borrow against it at a lowe interest rate (which we don’t plan on doing) or keeping it until we are ready to withdraw from it when we retire. Is this a smart thing to do for us, considering our situation in our current tax bracket? We feel that we ware now in a higher tax bracket than we would be when we retire, so contributing after-tax dollars right now seemed like a good idea. Please help. I think we should have gotten a second opinion before we bought this policy.
I have looked at Variable Life Annuities before. I trade stock options, read financial statements, and explained CDOs and MBS’s to others, but it still took a while for me to get my hands around VLAs. In the end, I came to the conclusion that they are the perfect investment – to sell to others. They had guaranteed booster rates and other gimmicks, but it was all smoke and mirrors.
Basically a variable annuity combines a mutual fund with a regular annuity, depending on the riders. I’ve run spread sheet analysis on the two that I looked at (testing different assumptions for stock performance), and both did worse than a combination of a separate index fund and annuity. Plus the index fund/annuity combination is 100 times simpler to understand. I personally will never buy a variable annuity and recommend strongly against them to everyone I know.
Two side notes:
(1) Generally speaking, if you think that you will be in a lower tax bracket after you retire, then you would want to contribute PRE-tax dollars to a retirement plan (you want to pay tax under the lower tax rate, right?).
(2) I believe that FIXED annuities can be a good deal for retirement plans, but I wouldn’t purchase one now. Annuities have higher payout rates when interest rates are high (the payout rate is NOT the same as an interest rate, which is another thing that many financial advisors don’t explain to people…)., because financial companies hedge their exposure by buying US Treasuries (so they get paid slightly more by the US, than they pay to you if they figure out how long you will live correctly). Basically, now is a bad time to buy an annuity because interest rates are at near record lows.
Here is Berkshire Hathaway’s quote (Warren Buffet’s company): http://www.brkdirect.com/spia/EZQUOTE.ASP
Their note even indicates “based upon our mortality assumptions and the U.S. Treasury yield curve”. I do not recommend for or against BK’s annuities. They are less risky than other companies, but also have a lower payout rate.
HELL NO!
You should have gone with a no load fixed annuity. Variable annuities are ripoffs, just like whole life insurance.
The fees with variable annuities are outrageous! You could have gotten fixed payments for life with a fixed annuity.
You should have kept funding the 401 (k)s because of the tax break. As far as a variable annuity, you could have done better buying an index fund or growth stock fund and putting the rest in a bank CD and avoid all the fees!
So you are bypassing tax deferral on $15,500 individually & $31,000 jointly because you are not being matched by your company??? Wow, good thinkin. You are paying full taxes on the money up front.
And while the money is in this annuity, you are also paying high expenses. Did you think this plan up on your own, or did you have help?