"rick++" <rick303[at]hotmail.com> writes:

- quote -

Nevertheless, Vanguard (and Fidelity) pose no disincentive
against folks rolling their VA to some other VA, which can
be done without any tax consequences. They simply don't
lock you into their product at all.

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joetaxpayer wrote:
- quote -

You may be correct, because I havent done this calculation.
However, I enjoy not paying taxes YET. I remember the late 1990s
when some actively managed mutual funds I had were making
double digit distributions. This would raise my tax bracket and
require finding or making liquid cash to pay those taxes.
Plus computing estimated taxes 5-6 times(*) a year.
Not to mention the compounding effects of delaying taxes are
more prominant if your investments are deferring double-digit gains.
Using deferred instruments like index funds and VAs make taxes
more manageable.

(*) The four quarters, the 2nd half of December to look for
any useful last minute tax moves, and regular tax time.

Surrender charges are artifact of the times when insurance agents
received commissions worth 10-20% of the principle. The insurance
company need to lock in money for 5-10 years to turn a profit.
The new annuity sellers like Vanguard make money off the
internal holdings. So they offer the insurance wrapper at
cost, without their penalty, to entice more savings.
There are still federal tax penalties for liquidating an
insurance product early. Perhaps the Vanguards consider
this enough of a disincentive. I agree its not clear the
lack of surrender charge gives the customer any more
income.

chris fasano <chrisfasano[at]verizon.net> wrote:

- quote -

Because life happens. I don't think there is ever "no possibility whatsoever of
needing the money". People get sick, lose their jobs, have parents/children get
sick, need money to start businesses, etc. Surrender charges are a risk that do
not seem to be balanced with an adequate reward.

-- Doug

"chris fasano" <chrisfasano[at]verizon.net> wrote
- quote -

Is six or seven years the norm? Seems like an arbitrarily
chosen (and low) figure. It seems to me one reason surrender
charges are emphasized is because too many investors are
sucked in by the other bells and whistles, thinking they can
always change their mind, to little detriment. Because of
surrender charges, not so.

chris fasano <chrisfasano[at]verizon.net> writes:

- quote -

Because folks often, after the fact, find out that they
bought inappropriate annuity products, usually with outrageously
expensive fees for things which they really don't need or
want or understand. And those surrender charges lock them
into paying those fees for years. The reason the ultra-low-fee
VAs from Vanguard and Fidelity can get away with having no
surrender charges is because they don't need to lock folks
in to keep the high fees coming.

- quote -

Because folks can save in other ways and buy immediate annuities
easily enough, too. It's an important, perhaps even essential
notion for folks to explore - at the time when they are talking
about living off their investments, usually retirement. But
most of us here at the planning and saving stage, are more
concerned about accumulation.

Surrender charges, while not necessarily a horrendous
thing, are a sure sign that you need to be certain you
understand what you are buying, why you are buyign it,
and how much it's going to cost you while you are locked
into it and how much it'll cost to get out. They are a huge
flaring neon sign, with sirens, screaming "be careful -
are you *sure*?"




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chris fasano wrote:
- quote -

The surrender fee is just one component of the [bad] fee structure.
My experience may not be the norm, but I have people coming to me after
the fact, and when I point out they are paying 2.5-3% per year in
expenses, but it will cost 10% to get out, well that's how I get focused
on the surrender charge.
"no one in their right mind" is really no way to start a sentence about
the financial products people buy. The poster who refied from a 5.25%
fixed to a negative amortizing variable would fall into that category, I
called her unfortunate, and avoided the ad hominem remarks. People make
mistakes.

I've posted about immediate fixed annuities before. And I am a fan of
these, for the right purpose.
http://www.immediateannuities.com
Shows that a male can get $666/mo on $100K. This is 8%. This is what I
suggested as one portion of his portfolio. Instead of buying into one
with an inflation factor, the plan is to use 4.5%/yr (and then more each
year), and save the rest. By 82, his spending would pass the monthly
check, but even at 5%, the savings accumulate to 70K, and he can spend
from that, or purchase an additional contract.
Why are these not talked about more? Well, with an 8% fixed return, I
doubt the fees can be that much for the seller, and they are so
straightforward, there's less room for confusion.
JOE

On Thu, 12 Oct 2006 10:50:58 -0500, joetaxpayer wrote:

- quote -

If someone purchases an annuity with no possibility whatsoever of
needing the money within the next six or seven years I don't see why
there should be so much focus on surrender charges. Who the heck
cares? Why would somebody enter into a contract thinking they might need
to withdraw more than what's allowed in the next year or two? Nobody in
their right mind would do that. I just don't understand why surrender
charges are given so much weight in the annuity discussion as they seem to
garner.

And I'm confused as to why annuitizing the contract doesn't come up more
in the conversation. This is the fundamental purpose of these
transactions, but no one ever talks about annuitizing.

DFIGTREE wrote:

- quote -

Dave, in this forum we've debated whether a .25% fee plus the .10% fund
fee make the Fidelity worth it. (And I'm on the fence, believing it may,
under certain circumstances.)
The fact that you're stating that you are paying such a high fee,
presumably to defer taxes, but put this in an IRA, leads me to conclude
you are mocking me. And that's ok. Just way off topic. I wish you well.
JOE

joetaxpayer wrote:
- quote -

management fees, 12b-1fees and other expenses. So, Joe, did I make a
good deal (in my IRA) or a bad deal IYHO?

DFIGTREE wrote:
- quote -

Bingo! I have no vested interest in bashing any product, never been
personally burned. And open minded, BWS, Tad, and Rick all providing
points I'm happy to add to the 'positive' side of the equation. If
there's a right customer for a product, well, it's our job to point that
out, I'd think.

Took a bit of googling, but I have the AXA prospectus. Fortunately, the
fees are listed on page 10 of some 430 pages.

"Daily charges on amounts invested in variable investment options for
mortality and expense risks, administrative charges and distribution
charges at an annual rate of 1.25%."

There is a surrender fee (up to 7%) for amounts withdrawn beyond 10% of
the account's value in the first 7 years.

Optional 'benefits' include .25% for annual ratchet to age 85, and ".60%
of the greater of 6% Roll-Up to age 85 benefit base or the Annual
Ratchet to age 85 benefit base, as applicable."

You may also choose to pay .50% for Guaranteed principal benefit, .65%
Guaranteed minimum income benefit, and .35% for Protection Plus benefit
charge.

The good news is that each of the underlying funds (there's a page and a
half) have their own fees which stack on top of the above. These fees
range from .63% for an S&P index fund up to 3.21%(!!!) for the Laudus
Rosenberg VIT Value Long/Short Equity.

I believe your original note regarding a guaranteed 6% was only if the
product was converted to a fixed payout, i.e. immediate annuity. This is
actually the one annuity product I do recommend. It's the opposite of
life insurance, it pays a fixed rate until you die (or there are joint
options for the spouse). The rate is higher than the current market rate
as once you die, there is no further payout (or once spouse dies if you
choose that option.)

http://www.axaonline.com/rs/axa/serv...pdf/132535.pdf

Rick set me straight that my list was outdated. Maybe I should have
acknowledge the existence of the Fidelity (.25 fee plus .10 for S&P
fund) or Vanguard, I agree, but there are still products out there that
adhere to my list of charges and fees, and this appears to be one of them.

JOE

AXA Accumulator. Don't know if there is an online prospectus at the
AXA site. Self directed investments from 80 or 90 fund equivalents.

joetaxpayer wrote:
- quote -

- quote -

Can you share a bit more about the product you were looking at?
Was it an 'indexed' annuity?
What were the surrender fees/ mortality fees?
Is there a prospectus available on line, for a better analysis?
JOE

DFIGTREE wrote:
- quote -

Thanks everyone for taking the time to share your expertise and
opinions.

Dave

Some low cost annuities:

http://personal.fidelity.com/product...efhp=pr&ut=A17

https://flagship.vanguard.com/VGApp/...ExpContent.jsp

"rick++" <rick303[at]hotmail.com> wrote
- quote -

Could you please clarify? What income tax rate are you
anticipating in retirement, when you draw on the VA? What
capital gain and dividend tax rate would you have paid in a
taxable account during the last four years of bull market?

Columnist Scott Burns, among others, has also pointed out
how such income sources can have a devastating effect on the
taxation of one's income, due to social security tax laws.
Said SS taxation being a very different animal from that to
which most of us are accustomed before receiving SS.

No dispute re tax diversification being an option to bear in
mind, in view of not being able to know what future tax
rates will be. I happen to think income tax rates are headed
up, in the long run, to pay for Social Security and
Medicare.

joetaxpayer wrote:
- quote -

Joe,
Given these low-cost products out there, the one I've toyed with is
REITs in a VA, strictly for the tax deferral. For an individual who
doesn't have enough IRA dollars -- that's the assumption for everything
below.

The current numbers aren't working out quite the same but before this
REIT surge of the past several years, the yields were up in the 6.5%+
range. My gut is that for a higher-bracket taxpayer (fed + state) a .25%
cost would be much more than made up for by the deferral of tax on those
dividends.

On the flip side, of course, there's the loss of the 15% gains rate and
step-up of basis at death. Those gains are currently a big part of REIT
returns, for the investor of say 6 years ago, and the last time I looked
it seemed to be close to 50% of long-term REIT total returns, for the
asset class overall. Then again, this 15% capital gains rate is
relatively new and might not be around forever.

Another candidate (when IRAs/QPs aren't available to provide the tax
deferral) is high-turnover asset classes, like say International
small-company stocks or US small-cap value stocks. Even relatively
tax-efficient, passively managed funds like Vanguard's SCV fund spit out
significant (taxable) distributions from time to time -- unlike say a
broad-market index fund. Similarly, with volatile asset classes (the
above two qualify)...during their surges you may want to rebalance
dollars out of them. Emerging markets run up 70%, you're probably
looking to sell and shift to the slow lane with some of those dollars.
It's a tax-cost-free shift within a VA but in a taxable account you
might be resistant to doing it, because of the tax hit that would result.

Just as general wealth-accumulators though...I agree with the consensus
that VAs are low on the list, perhaps best reserved for special
circumstances (e.g. someone with very little in IRAs, lots of investable
cash, and no ability to get money into IRAs or other qualified plans).

-Tad

rick++ wrote:
- quote -

Rick, Elle and I exchanged spreadsheets some time back, assuming a .25%
cost (as Fidelity has). Over time, that extra cost was enough to negate
the gains from tax deferral. Can you provide the assumptions you make
when saying that the VA is a solution? If you maintain that the buyer is
in this for the long term, then the only deferral is on the reinvested
dividends or cap gain distributions, no? If we assume the long term 7%
growth, 3% Dividend or near that, the VA buyer is paying .25% for sake
of deferring 3%, that kind of looks like an 8% annual cost (.25/3.00),
the way I look at it.
I am still reviewing prospectuses which include high costs and surrender
fees, I hope those are fewer in number as time goes on.
JOE

joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

*potential* (far far from guaranteed!) protection of assets
from lawsuits. This may be achieved in other ways, too,
however.

Generally not considered as assets when applying for
financial aid for college, certainly not on the federal
application and possibly not on private applications, too.



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"DFIGTREE" <david.Feigenbaum[at]verizon.net> writes:

- quote -

The first question is not "buy or don't buy?" It's "what am I
trying to achieve here?" Then and only then, comes "does this
instrument help me meet that need or not?" And after that,
perhaps, "is there some other way to meet that need? and is
this way reasonable and effective (and, maybe without too
many downsides)?"

- quote -

Generally, VAs are used to supplement IRAs when folks have already
maxed out the IRAs and are not recommended (responsibly) for
use inside an IRA.

Before we even look at the costs of the VA you are considering,
it'd help if you told us more about your situation and what
you are trying to accomplish and why you think a VA might
help you do that.

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