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  • What to do with Fixed Annuity

    Hi all, I appreciate any thoughts and advice you might have.

    Late 20s couple, first year attending. I have a fixed annuity (74K initial value, 1.7% fixed rate) with a value of roughly 78K that my wife and I started about 3 years ago. We did this to keep the money from sitting in a bank account earning essentially nothing, but it was before discovering WCI and before basically any financial literacy. The 3 year anniversary of the policy is coming up next month, which is when we could surrender the policy if we choose. We would end up coming out about 2K-2.5K ahead after the surrender penalty and taxes on the gains.

    Other info:

    - We have about 100K between our 2 savings accts and combined checking acct.
    - Somewhere around 50K between our retirement accts (her 401k, both Roth IRAs) I will finally be able to contribute to my gov 457b starting in November and will max it out in those remaining months.
    - Mortgage - about to close on 225K at 2.25%. Put down 75K (25%)
    - No student loans


    My question: I know there is no true "right answer", but what to do with this annuity?


    1. Keep the policy and keep making 1.7%. I assume we can surrender at any time, we just needed to make it past the 3 year mark.
    2. Pay down another 77-78K on the mortgage? (Current plan without this is to pay enough to have it paid off in 5 years anyway)
    3. Open taxable account and contribute to retirement savings? (currently hitting 20% savings rate or a little more without this potential extra savings)
    4. Any other suggestions?
    5. Combination of the above? (except #1 of course)

    Thank you again for your thoughts!

  • #2
    YOU could buy a Multi Yr Guaranteed Annuity for 5yrs at 3.2% if you like
    just pay the mortgage down with monthly additional principal payments
    Start investing in index funds in ret. accounts and taxable accounts
    KEEP EDUCATING YOURSE:F reading WCI and some good books like the online PDF. "IF YOU CAN" to start

    Comment


    • #3
      Originally posted by Buck View Post
      I have a fixed annuity (74K initial value, 1.7% fixed rate) with a value of roughly 78K that my wife and I started about 3 years ago. Other info:

      - We have about 100K between our 2 savings accts and combined checking acct.
      - Somewhere around 50K between our retirement accts (her 401k, both Roth IRAs) I will finally be able to contribute to my gov 457b starting in November and will max it out in those remaining months.
      - Mortgage - about to close on 225K at 2.25%. Put down 75K (25%)
      - No student loans


      My question: I know there is no true "right answer", but what to do with this annuity?


      1. Keep the policy and keep making 1.7%. I assume we can surrender at any time, we just needed to make it past the 3 year mark.
      -- get rid of
      2. Pay down another 77-78K on the mortgage? (Current plan without this is to pay enough to have it paid off in 5 years anyway)
      -- no idea why you used such a large down payment, no idea why you would accelerate payment.
      3. Open taxable account and contribute to retirement savings? (currently hitting 20% savings rate or a little more without this potential extra savings)
      -- yes. its 20% to retirement. then savings after that.
      4. Any other suggestions?
      -- set a dedicated efund and stop hoarding cash.
      5. Combination of the above? (except #1 of course)

      Thank you again for your thoughts!
      you dont list income but assuming her 401k 19.5, your 457 19.5, 2x bdrIRA you make 250.

      Comment


      • #4
        Originally posted by Peds View Post

        you dont list income but assuming her 401k 19.5, your 457 19.5, 2x bdrIRA you make 250.
        Combined gross income is about 334K, but the 20-25% savings rate from above is based on half year of resident salary, half year attending combined with spouse.

        A guess once I have year of attending salary, our tax deferred and Roth IRA space won't be enough to hit 20-25%. That clears up the question about opening up a taxable acct.

        In regards to the home and mortgage, we made sure we had at least 20% down to avoid PMI. We're thinking of paying it down quickly because we like to be debt free, and we know what kind of guaranteed return on investment we'll get there (2.25%). But I guess a part of that is also being "afraid" to take the jump and start throwing money into something else, like a taxable account.

        Comment


        • #5
          Originally posted by Kennyt7 View Post
          YOU could buy a Multi Yr Guaranteed Annuity for 5yrs at 3.2% if you like
          just pay the mortgage down with monthly additional principal payments
          Start investing in index funds in ret. accounts and taxable accounts
          KEEP EDUCATING YOURSE:F reading WCI and some good books like the online PDF. "IF YOU CAN" to start
          Thank you for the reply!

          Just picked the index funds for my retirement account yesterday, and we have target date funds in the Roth IRAs because our balance wasn't high enough to get anything else.
          "If You Can" was a good read, and I usually read every blog post and listen to all podcasts.

          Comment


          • #6
            Where do you have the Roth’s? Fidelity Vanguard etc. have many low cost index based ETF’s and MF with no minimums. Might check that out. Don’t understand the “high enough”. Fractional MF shares available.

            Comment


            • #7
              Originally posted by Tim View Post
              Where do you have the Roth’s? Fidelity Vanguard etc. have many low cost index based ETF’s and MF with no minimums. Might check that out. Don’t understand the “high enough”. Fractional MF shares available.
              We have the Roths at Vanguard. Maybe I was mistaken, I thought they required 3K minimum for the index funds we were looking at (US total stock, US total bond, total international).

              Comment


              • #8
                Originally posted by Buck View Post

                We have the Roths at Vanguard. Maybe I was mistaken, I thought they required 3K minimum for the index funds we were looking at (US total stock, US total bond, total international).
                yes but they have ETFs. TDF are perfectly fine right now, but eventually youll see why you might want to break them up.

                Comment


                • #9
                  I would not surrender the annuity until there is no penalty. It is actually paying more than a money fund right now. I would not at your age prepay your mortgage. You need to open a taxable account and continue to max out all retirement accounts.. This money will magically compound over the years. Full disclosure I bought 3 deferred annuities in my 30s. At the time they were at 8%. Currently they are 3-4%. I continue to hold them as part of my fixed income (bond) portfolio for diversification. Current surrender value $84K. If I need some income will annuitize them.

                  Comment


                  • #10
                    Originally posted by Hatton View Post
                    I would not surrender the annuity until there is no penalty. It is actually paying more than a money fund right now. I would not at your age prepay your mortgage. You need to open a taxable account and continue to max out all retirement accounts.. This money will magically compound over the years. Full disclosure I bought 3 deferred annuities in my 30s. At the time they were at 8%. Currently they are 3-4%. I continue to hold them as part of my fixed income (bond) portfolio for diversification. Current surrender value $84K. If I need some income will annuitize them.
                    I will definitely consider keeping the annuity, not sure how much longer until there is no penalty though. Sounds like I have a policy to review.

                    About a year or so ago when I started trying to become somewhat financially literate, I questioned what I would do with this money, and I just thought a HYSA or money market fund would be a good option, pay about the same, and be much more liquid. Then 2020 happened and the expected return of those options obviously dropped

                    Comment


                    • #11
                      Originally posted by Peds View Post

                      yes but they have ETFs. TDF are perfectly fine right now, but eventually youll see why you might want to break them up.
                      Yeah now that we'll be having more accounts available to us, it will help to swap out those TDFs for other funds to keep my desired asset allocation in check.

                      Comment


                      • #12
                        If you are close enough to not paying a penalty don't - otherwise consider that there are typically 10% penalty-free withdrawals annually that you can use to get some out earlier. Either way, the annuity doesn't do too much for you at that interest rate even with compounding and tax-deferral (in fact you most likely are running into higher income taxes upon maturity)
                        Founder, Coastal Wealth Planners- Fiduciary Tax-Sensitive Retirement Planning & Wealth Management www.coastal-wp.com email: [email protected]

                        Comment


                        • #13
                          Leave the annuity in place. Consider it not an investment, but rather an insurance product. It will just be a different bucket.

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