VA prospect or no?

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Mar 29, 2007 3:20 pm

Guys,


71 yr old Widow. $2500 expenses every month. She has $150k in a CD paying her $4k a year and $150k in bonds paying her $8k ($500 a month used towards her bills). She recieves $1900 a month from pension ($500+$1900=$2400 for her bills.


Bond portfolio eating into her principal. (lost 20k in roughly 2 yrs).


I'm thinking VA. Give her upside potential (with more risk), end the yr to yr drop in account value, she can pull 5% income.


Is there a better and cheaper alternative? (I'm going to present two or three options.)

Mar 29, 2007 3:36 pm

You could take the whole 300m and put her in a 5 for life annuity rider. Her worst case would be $15,000/year until she dies. You didn't mention SS benefits, but this should work. I would see how involved her kids are in these decisions and talk to everyone at the same time. The kids will enjoy the probate avoidance feature. Maybe even throw in a death benefit to make them happy.

Mar 29, 2007 3:51 pm

she claims she's not dipping into SS benefits. she wants her sons to get this money as thanks for their help (they pitch in any big bills she may incur) but wants the benefit paid out to them over a spread to ease the tax burden.


i appreciate your thought. i'll look into this.

Mar 29, 2007 4:12 pm

I'm having a tough time really understanding the question, but in general I would say that an annuity is not a good option for her.


The issue is that non-qualified annuities are not good assets to leave behind at death because they don't have a step-up in basis.

Mar 29, 2007 4:34 pm

hey anonymous,


the question is in the title: is she a good prospect for a VA or not given she is living off income where the assets are not growing and relies on said income to come in every month.


also, could you explain your last line in dumb english for me please?

Mar 29, 2007 4:58 pm

Let me rephrase.  I understand the question, but not the facts behind the question.  I'm guessing that she has enough money from SS and her pension that she doesn't need any investment income.  Her goal is to leave money behind for her kids.


Ex.  She invests $300,000 into non-qualified annuity.  It grows to $1,000,000.  She dies.  Her beneficiary will inherit something with a $300,000 cost basis.  He cashes in the annuity and has $700,000 of taxable income. 


Ex. She invests $300,000 into growth stock.  It grows to $1,000,000.  She dies.  It gets a step-up in basis and is now valued at $1,000,000.  Son sells the stock for $1,000,000 and has no taxable income.

Mar 29, 2007 6:06 pm

She's 71, she's taking income... She's coming from fixed income...


Cost basis is likely to be the least of her worries. The chance that she'll have any appreciation at all is slim to none!


How's it go? A woman who's 65 today has a life expectancy of 84, if she's alive at 84 her LE goes to 91.


This woman is 71, she has between 13 and 20 years (or more or less).


Does she own a home? Has she considered a reverse Mortgage? These are ridiculously expensive loans (as mandated by HUD or whomever) but it's a good source of income.

Mar 30, 2007 12:00 am
Whomitmayconcer:

She's 71, she's taking income... She's coming from fixed income...


Cost basis is likely to be the least of her worries. The chance that she'll have any appreciation at all is slim to none!


How's it go? A woman who's 65 today has a life expectancy of 84, if she's alive at 84 her LE goes to 91.


This woman is 71, she has between 13 and 20 years (or more or less).


Does she own a home? Has she considered a reverse Mortgage? These are ridiculously expensive loans (as mandated by HUD or whomever) but it's a good source of income.



Kind of defeats the purpose of leaving something for the kids don;t you think?

Mar 30, 2007 12:27 am
anabuhabkuss:

hey anonymous,


the question is in the title: is she a good prospect for a VA or not
given she is living off income where the assets are not growing and
relies on said income to come in every month.


also, could you explain your last line in dumb english for me please?





She's a good candidate for some REIT preferred stock.

Mar 30, 2007 12:45 am

She might benefit from putting some of her money in a CD that pays more than 2.6%.  Say a GNMA UIT that pays about DOUBLE that with full faith and credit...and monthly income.

Based ONLY on what you're telling us here, this gal is NOT going to handle market fluctuations in a VA very well if things get ugly, no matter WHAT you tell her about the living benefits.

Folks like are her not concerned about the "return on principal", but rather the "return OF principal".  There is a LOT you can do to improve her income without putting her in a product that she won't understand.

You're going to need to either learn more about how estate and income taxes work, or tell us more to help us see how "spreading the benefit out" is going to help her kids with the "tax burden".  Unless she owns a bunch of land or a really big expensive house or a fine art collection(or some other substantial asset) she has a long way to go before the boys have to worry about estate taxes.  An inheritance is NOT subject to tax as income for the recipient.  So exactly what tax burden is she looking to address by spreading the benefit out?

You could consider putting a portion of her money in an immediate annuity, and then putting another slug in some sort of life policy to create a legacy for the kids, presuming that the numbers work.

Mar 30, 2007 1:12 am
joedabrkr:

She might benefit from putting some of her money in a CD that pays more than 2.6%. Say a GNMA UIT that pays about DOUBLE that with full faith and credit...and monthly income.Based ONLY on what you're telling us here, this gal is NOT going to handle market fluctuations in a VA very well if things get ugly, no matter WHAT you tell her about the living benefits.Folks like are her not concerned about the "return on principal", but rather the "return OF principal". There is a LOT you can do to improve her income without putting her in a product that she won't understand.You're going to need to either learn more about how estate and income taxes work, or tell us more to help us see how "spreading the benefit out" is going to help her kids with the "tax burden". Unless she owns a bunch of land or a really big expensive house or a fine art collection(or some other substantial asset) she has a long way to go before the boys have to worry about estate taxes. An inheritance is NOT subject to tax as income for the recipient. So exactly what tax burden is she looking to address by spreading the benefit out?You could consider putting a portion of her money in an immediate annuity, and then putting another slug in some sort of life policy to create a legacy for the kids, presuming that the numbers work.





Dude, I don't even understand a GNMA UIT!!! My firm paid out SO much money on these products between 2001 - 2003. Brokers simply forgot to tell people that refinances make GNMA's @ the higher rates disappear, principal gets returned instead of reinvested and then it's SPENT! If we think our man can't explain VA fluctuations to his client, this is the next best choice! Next you're going to help us understand what a tranche is!

Mar 30, 2007 11:31 am

If you do go the VA route, make sure you don't put every dime of her free cash into it.  Keep some in CDs, or bonds, or even money market, as an emergency fund.  If she comes to you needing an extra $5,000 because her roof blew off, you DO NOT want to have to take it out of the income producing VA.  Taking money out of most of the gauranteed income products causes the VA company to re-calculate the income stream (usually not for the better).


To the earlier posts, the kids should be more worried about mom having a predictable, rising, income, than about how much they are going to pay in income taxes.  If the kids are worried about an inheritance, you may want to look into a basic LTC policy. Otherwise, that $300,000 could be eaten up in health care and a nursing home.

Mar 30, 2007 11:49 am
anonymous:

Ex. She invests $300,000 into growth stock.  It grows to $1,000,000.  She dies.  It gets a step-up in basis and is now valued at $1,000,000.  Son sells the stock for $1,000,000 and has no taxable income.



Is telling her to put her life's savings in a handfull of low-dividend paying growth stocks a responsible option for a fixed income investor with a small portfolio? 


The answer to the original question is yes, a VA is a very suitable option.  I'm a little unsure if she needs any income off this portfolio but here's one strategy (of many possibilities):
-$100K in CDs.  At a 5% average ROR and $12,000 annual withdrawal, this will last 11 years.  If she doesn't need the income, reinvest the interest.
-$100K in VA with GMIB.  If she lives long enough to drain her CDs then she can start withdrawing from this account (or annuitize with a 10 or 20 year period certain if that is the better option at the time).
-$100K in VA with step up death benefit.  This guarantees a return for her kids yet is still accessible if she were to need it.


The advantages of this strategy are:  you're not completely taking her out of her CD comfort zone, you guarantee a known amount of income for life but add market potential, you guarantee a minimum rate of return for her kids (that is higher than she would most likely make in CDs) and again add market potential, and finally you reduce the income she will need to pay taxes. 

Mar 30, 2007 12:37 pm

Thanks all so much...ive got a lot of homework to do.

Mar 30, 2007 12:48 pm

 Annuities can make sense if the primary purpose is money for her.  If the primary purpose is money for her children, annuities don't make any sense.  Personally, I don't find non-qualified variable annuities to be the best choice for an investor except on rare occasions.   


Mar 30, 2007 1:08 pm

hey,


it is the primary purpose. she needs money to pay bills. someone brought up mortgage. that's something I'm looking into because she said she refinanced for 15 yrs a few years back and it's put her in a hole. i'm trying to find out what happened through statements.


i also need to keep in mind her estate as a whole as joebroker mentioned and find an appropriate solution with that in the equation.

Mar 30, 2007 1:24 pm

The truth is that none of us know whether annuities are appropriate because we are not dealing with all of the facts.


Why does she need the money to pay her bills?  You said that her bills were $2500.  She gets $1900 from her pension.  As long as SS gives her $600, she has enough.

Mar 30, 2007 2:29 pm
now_indy:

To the earlier posts, the kids should be more worried
about mom having a predictable, rising, income, than about how much
they are going to pay in income taxes.  If the kids are worried
about an inheritance, you may want to look into a basic LTC policy.
Otherwise, that $300,000 could be eaten up in health care and a nursing
home.





Sounds like a job for TIPS. More seriously noone here is qualified to
give recomendations without knowing the entire situation. I would
personally argue against using a VA if at all possible. Too inflexable
and selling VA's to older folks is recipe for suitability issues..



You could build a portfolio of higher yielding prefered stocks, REITs, bonds etc vs locking it all away in VA.



As for assured principal, Now's the time to lock in high CD rates.

Mar 30, 2007 3:21 pm

You could build a portfolio of higher yielding prefered stocks, REITs, bonds etc vs locking it all away in VA.


Spoken like a true pro.

Mar 30, 2007 8:00 pm

I agree 100% with AllREIT.  Look into some closed end funds, as well.  They typically a pay a steady stream of income monthly or quarterly.  Why lock the money up in an annuity when you can produce a comprable monthly income other ways.