Name Withheld
A: First, you do not need a tax-deferred annuity inside an IRA! An IRA is tax-deferred already. The annuity adds extra cost (including the 10 percent commission your agent earns).
Second, this investment will never pay as much as the market does. I can see why it’s tempting: you gain if the market goes up and can’t lose if it goes down. But what do you gain? Here are some questions to ask about any equity-indexed annuity:
What’s my real guarantee? Not as high as it sounds. The 3 percent minimum promised by American Eagle (a Conseco product) is paid on just 90 percent of your original investment. Over eight years, the true minimum is 1.65 percent of the money you put in.
How does the insurer figure the annual market change? The formula varies from company to company. Conseco takes an average of the S&P’s monthly performance over a year and compares it with the level of the market on your starting date. Your gain, if any, would be the difference between the two.
For example, say the market index rises from 1,300 to 1,500–a 15 percent gain. But prices zigzag, and the average of each monthly gain comes to only 1,400. You’d be credited with the rise from 1,300 to 1,400–a 7.7 percent gain. You don’t get the increase you read about in the newspaper.
If the market rises, what do you earn? Conseco is giving new investors 100 percent of their gain. But that will change at the company’s will. On annuities sold in previous years, investors are now receiving only 55 to 70 percent of any gain.
What if the market falls? You’ll be credited with zero that year.
How long does the investment last? Eagles last eight years. You can then cash out or roll over your money and start again (earning the salesperson a new commission). If you withdraw more than 10 percent of your money in midcontract, you’ll pay a surrender charge.
I’ve mentioned before that Conseco, Inc. has financial problems, although it’s not clear how that affects its insurance arm. To me, equity-indexed annuities are mystery products. I’d be happier with a simple mix of stock and bond mutual funds.
Q: My only granddaughter is 15. My wife and I have been giving her $20,000 a year since she was born, under the Uniform Gifts to Minors Act. She’s now worth $200,000 and will come into the money at 21. But it’s dangerous for a 21-year-old to get so much. It may wreck her life and make her a target for all kinds of Romeos. For estate reasons, we want to keep giving (her divorced father is custodian). Can we postpone or stretch out our granddaughter’s receipt of the money?
Cedrick Justis, Newark, Del.
A: I see why you’re worried. Your granddaughter might be worth $500,000 at 21. It takes a prudent young woman not to let her boyfriends know she’s rich.
Under UGMA, you can’t change the day she receives the money, but you can give future gifts in a different way.
If she’ll go to college, consider investing in Delaware’s College Investment Plan (known as a 529 plan), says Joseph Hurley, a 529 expert. You and your wife could contribute up to $100,000 this year. That sum can be treated as five years’ worth of tax-free gifts, paid in advance (file IRS form 709). The money is out of yourestate–though, if needed, you could take it back. It grows tax-deferred. When used for college, the gains are taxed in your granddaughter’s bracket. For info on all the state 529 plans, check Hurley’s Web site, savingforcollege.com.
With the $200,000 already in the child’s account, the custodian (her father) might invest in a no-load, tax-deferred annuity, says planner Bill Starnes of Delmarva Ltd. in Hockessin, Del. There’s normally a 10 percent penalty on withdrawals prior to age 59i. But she could start withdrawals at any time–and avoid the penalty–by taking periodic payments that are designed to last for life. Two firms that sell no-load annuities: Vanguard and TIAA-CREF.
There are many other options, Starnes says. For example, you might create a lawyer-drawn trust for future contributions and plan on using the current UGMA for college. At this point, I’d say you need professional tax and financial-planning advice.
Q: I’m 52, a single mom and plan to retire in 10 years. I work for the federal government. Is it too late to start a retirement portfolio?
Name Withheld
A: It is never too late. Run, do not walk, to the employee-benefits office and start having money withdrawn from your paycheck automatically. If you contribute just $30 a week, you’ll have almost twice that amount to invest, thanks to the sum the government adds to your account. You might amass $48,123 by the time you retire, assuming a 7 percent return, says planner Dean Cherpitel of the Legacy Trust Co. in Overland Park, Kans. If you make the full contribution that you’re allowed ($88 a week), you’d have $94,726.
So comb your budget for spending cuts and start saving every cent you can. Often, you find that your budget somehow adjusts itself, once you start having savings taken from your pay. Cherpitel thinks you should put the maximum into the stock fund.
