With companies
downsizing to stay in business and corporate takeovers occurring almost every
other day, the only thing certain in anyone’s career these days is change.
Take Chris, (age 48) for example. After 15 years as a shop-floor supervisor at a large
manufacturing company, Chris was unexpectedly laid off. In addition to the
initial shock of losing his job, Chris had to make some very important
retirement planning decisions.
Chris’s 401(k) plan assets had built up
steadily over the years to a tidy $89,367. This was his retirement money, and
he meant to keep it that way. Besides, there were unfavorable tax consequences
involved if he were to receive the money directly himself. Meanwhile, his
immediate concern was:
“Where is the best
place to move my current 401(k)?”
Chris had a number
of options. For instance, he could transfer the money into a long-term CD
(certificate of deposit) at his local bank or into an established mutual fund
family. However, one alternative that really caught his attention was to roll over his 401(k) assets into a
variable annuity, a tax-sheltered retirement savings vehicle that offers
multiple payment choices.
Why an Annuity?
A variable annuity
(unlike a fixed annuity, which has a relatively low, but guaranteed, rate of
interest) offered investment options that Chris had been familiar with in his
earlier 401(k) plan and also retained the advantages of tax deferral that he
had enjoyed so far. True, the investments were subject to market fluctuations and were therefore not guaranteed. But, since his tolerance for risk had borne
some excellent results in the past, Chris did want to put his money where the
potential reward, especially in the long run, could be much greater.
One point to note
is that most insurance companies impose an early surrender charge on their
annuity contracts. Typically, the surrender charges decrease and disappear
altogether over an eight- to ten-year period. Neither the insurance company’s
early surrender charge nor the Internal Revenue Service penalty for
distributions that are made before age 59½ were of major concern to Chris.
What also attracted
Chris was the annuity’s payout options. He could choose retirement income for
a specified period, say 20 years; over his entire lifetime; over his and/or his
survivor’s lifetime; or from several other available options.
Chris liked the
idea of investing his tax-deferred dollars among a variety of funding options
that were suitable to his own needs and tolerance for risk. Because he did not
intend to touch his money until after retirement (i.e., surely not before age
59½), he hoped to be free and clear of both the IRS penalty and the decreasing
surrender charges outlined in the annuity contract.
As you will
appreciate, not everybody’s needs and risk tolerance levels are the same. Each
individual’s overall goals, objectives, and tolerance for risk should guide his
or her investment choices.
Talk to your financial professional to better understand annuities and
retirement options.
