Teach Me: Annuity Savings (IRA and Roth IRA)

I have been putting money into a Roth IRA being managed by a firm. Pretty sure I want to switch to putting my savings into an Annuity that will take less out of it annually. Pretty sure I want to stick to saving it in a Roth IRA for now.

Recommendations on how to do that, please.

Maybe not immediately, but I also think I will want to move the existing retirement funds I have from being managed by an organization into an annuity down the road.

Just trying to figure out how to handle my retirement savings that will maximize how much I'm able to get out when all is said and done.

If I was a youngster, I would be putting money into both.    

Maybe I'll learn more as other's chime in, but I always thought of an annuity as something you decided to do or not do with your accumulated funds as you retire.  Paying into one as you go is more like a cash value/whole life insurance policy, which, but the actual investment return for isn't great.

If your objective is to find a lower cost place for your Roth IRA to accumulate and cut your management fees, I'm pretty sure you can open a Roth IRA account almost anywhere at little to no cost depending on the balance, then invest in whatever funds you might want, keeping a close eye on the fees associated with the funds you select.

My workplace uses Fidelity, and I've opened Roth accounts for my wife there at no cost easily via web and phone call-- and I don't think that's because of my work account.

In simple terms, an annuity is like an antidepressant for your investments.  It mitigates the crashes, but it also dulls the highpoints as well.  You're protected somewhat from the volatility at the cost of some potential profit.

They also typically have maturity terms, meaning that you need to commit the money for X amount of time, or forfeit some of the gains.  This is why we have a fair amount of ours in annuities right now - they are more or less invisible in terms of college financial aid, because the money is not really liquid.  Ours was a 10-year term, and we're about 8 years in.

Now that DDs #1 and #2 are out of college, or nearly so, I'm planning on getting most of the money back out of the annuities for the final 8-10 year sprint before retirement (I'm 53).

If I was 30, I think I'd be looking at other lower-cost options that don't skim the peaks as much.  You've got some time to be risky, if you keep the money invested and weather the storms.

Open an IRA with Vanguard (or Fidelity). Roll the funds from your other IRA into that one. Depending on your income, you may want it into the Roth portion. 

The fund within the IRA should probably be a Total Market Index of some sort--or some mix of it. VTSMX (or VTSAX if you have enough money) is the simple button.

I have [some of] my money in my IRA into a different scheme now, but it is MUCH riskier and takes more work. VTSMX or the Fidelity equivelent is the way to go if you don't want to really think too much about it. 

At your age, you absolutely should not be in an annuity.

Why do you think you want an annuity, and more importantly, which type?

Also, keep in mind that most annuities for "accumulation" - rather than something like an immediate annuity, which is turning a lump sum into a monthly payout - are usually tax advantaged insurance products and in most cases, putting them in any kind of tax advantaged account doesn't gain you much (if anything), other than more fees.

Beer Baron said:

I have been putting money into a Roth IRA being managed by a firm. Pretty sure I want to switch to putting my savings into an Annuity that will take less out of it annually. Pretty sure I want to stick to saving it in a Roth IRA for now.

How much is that firm taking in fees? Are you investing via a (local) advisory firm?

Maybe I don't fully understand annuities, but I don't think I'm an "annuity guy". Annuities have always struck me as a bet between you and an insurance company about how long you'll live. If you live long enough, you might come out ahead, and make more than you put in (not considering time value of that money). Of course if you suffer an untimely demise, then the insurance company pays out less, and keeps more. For risk averse people, they guarantee income, but they cost a bunch up front and they're mostly non-transferrable, so when you leave this place the money can't be passed on to your heirs like an IRA could.

The problem that I see with doing this at such a young age is twofold. First, you probably don't have a bunch of cash saved, so the amount you could put into an annuity would only provide a meager income stream. $100k in an annuity will probably pay something like 8k/year in retirement. Second, you're losing out on tons of potential gains. Having that money invested properly for the next 20+ years, and following the 4% rule is far more likely to give you a better income stream in retirement.

While I do have an annuity as part of my retirement savings; I opened it almost 20 years ago; I wouldn't do so today if I knew then what I know now. I am eligible for SS, I also have an annuity due me from working for a company for 24 years so why I bought another annuity was just stupid on my part. I could have put the money I dumped in it to work in a good low cost mutual fund or even a few stocks I would be money ahead.

Okay, I'm learning here. Sounds like "annuity" is not what I'm looking for. I thought that was a term for a fund that was not managed actively and so has lower annual fees.

My money is currently split between a couple different funds. An old 401k from a previous job, and a Roth IRA and another retirement fund that are being managed by a local advisory firm. If I recall correctly, the local firm takes either 1% or 1.5% annually. I also get reports from Fidelity, which they have placed a portion of my money into. I believe I might be getting double-dinged by both the firm and Fidelity to a total of 2% annually.

I'm only 36, so I'm fine with volatility. I prefer to not have to actively manage my funds. I want to just pay into an account I don't have to worry about that will pay the best dividends. My understanding is that as modest as my wealth is, I would be better off skipping the middle man and not paying extra fees each year to have someone "manage" my money that is basically just going to go into a fund and ride.

As to Roth vs traditional IRA the old argument was always that with a conventional you can put away per-tax dollars now off the top of your highest tax bracket and pay the interest later when it mixes with your income in a generally lower tax bracket. Lately I lean more towards towards conventional over Roth when you are young and can't afford large contributions because if you can only afford a minimal contribution you should get the most out of it early so it can compound. To take $200 out of your budget per paycheck you either take $200 after taxes (Roth) or $250 pre-tax into the IRA (traditional) and during those early years that extra $50/mo is going to have a long time to compound.

Switch to Roth when you are contributing enough to hit your annual caps and then maximize that benefit as soon as you can and taper down the traditional as you transition to insurance and annuity products later, and stash away monies into an HSA for eventual medical expenses.

That is what my plan has always been, and every financial advisor has given it the thumbs up as I have worked through it. I bring it all up to point out that buying annuities, and maybe even Roth, while you are young is probably not the best way to maximize for your retirement. Maybe you want the liquidity of the Roth, maybe you have some other reason to be going that direction, but I think you should probably get some expert advice.

Ok, we need some vocabulary education here. 

IRA: Independent Retirement Account

401k: Retirement account through work

403b: 401k for notforprofits (charities, schools, hospitals, etc)

Within any of those, you can be in any of the following--but you do not need to be in the above to be in the below: 

Index fund: a bunch of stocks in a fund, not actively managed

Managed fund: a bunch of stocks that are actively managed

Stocks: ownership of a company

Annuity: Insurance product 

Your local firm has you in a fund managed by Fidelity, or a Fidelity index fund. Unless you have a login for Fidelity, you probably don't have anything "in" Fidelity itself.

You need to roll your old 401k, and both of your IRA's (Roth and the other) into an IRA with Fidelity or Vanguard. To do that, you'll need to sell everything. Your local firm may charge a fee. Same with the 401k. Just do it. Roll it into Fidelity or Vanguard. Then you have cash sitting in there. Use that cash to buy whatever funds you think are correct for you. Probably some combo of VTSMX (Total Stock Market), VSPMX (Mid cap 400), VSMSX (Small Cap 600), VEMAX (Emerging Markets). 

You can also use the Vanguard Retirement Target date fund that applies to you. I am not a huge fan of those, but they're a decent simple button as well. 

Note: See what your returns with the local firm have been year over year. Maybe they're doing better than the market. Not unheard of. 

I agree, you don't want to be paying 2% in fees annually...

From your description you really don't want an annuity, you're looking for "passive", ie, index type funds as opposed to actively managed funds.

IMHO you have a few options to reduce the amount of fees you're paying. Some of this depends on the amount you can invest, and how hands-off you want to be.

1. Open a Roth IRA and a rollover IRA (for the 401k) with a discount broker like Schwab, Fidelity or Vanguard. I'm a bit biased towards Vanguard (because co-op) but have funds with all three for historical reasons. Invest in a target date fund that mirrors roughly when you want to retire, keep adding to it, don't worry, be happy (and maybe give up a little in returns for the easy button)
2. Check out a roboadvisor like Betterment - there's another one, but I can't remember their name. They charge much lower fees (IIRC around/less than 0.5%) and basically use statistical models to spread your investments between low cost funds. You *should* get better returns with not much more risk compared to a target retirement fund.
3. Most of the discount brokers also offer advisory services/investment services for much lower fees than a local investment advisor/sales person
4. Learn enough to become dangerous, err, halfway comfortable to do your own investing. That's an option and there are good (and of course, bad) example portfolios out there as a starting point. But it takes work and if it's not something you're super interested in, I'd advise against it.

There's also a variation of 1, where you stick a large part of your retirement portfolio into a target date fund and augment it with another fund or two that statistically boost returns without bumping the risk much. It's usually 80% target date fund and the 20% split between 2-3 other index funds or ETFs max. That's actually what I'm doing with my 401k right now...

Oh, and at 36, volatility is your friend for a decent retirement. And congrats to saving early.

While I've worked in the financial industry for most of the past 20 years, the above is just my opinion as I'm not a financial advisor.

And last but not least, you'll be surprised how many traders who take big calculated risk every day stuff their retirement savings into index funds.

mtn said:

You can also use the Vanguard Retirement Target date fund that applies to you. I am not a huge fan of those, but they're a decent simple button as well. 

Completely agree - they're usually a pretty safe bet, in exchange for somewhat lower returns. "Decent" is a good word to describe it, and IMHO they do make a decent baseline. I wouldn't want to have all my money in them.

mtn said:

Note: See what your returns with the local firm have been year over year. Maybe they're doing better than the market. Not unheard of. 

Pretty rare over the long term, and if they're charging 1-1.5% annually, they already start at a disadvantage.

There are 2 basic types of 401k: Roth and Traditional. There are 2 types of IRAs: Roth and Traditional. When rolling a 401k into an IRA it's most common to keep the same "Type", so Roth 401k becomes Roth IRA while Traditional 401k becomes Traditional IRA. It's possible to convert from one "type" to another (IE Traditional 401k into Roth IRA) but it usually requires a tax payment that can be significant. Any money that goes into a Roth IRA you'll need to pay taxes on before hand. This means you don't pay taxes when you pull the money out later in life. A Traditional IRA allows pre-tax contributions now, which can lead to more growth over a span of decades, but the money you take out later will be taxed as normal income. There are other differences, but those are a decent starting point.

Whichever route you choose to take, I'd probably pull your money out of your current firm. That 1-1.5% could add up to hundreds of thousands of dollars of potential gains lost in your accounts. They'd need to be outperforming the market routinely in order to justify the fees. A Roboadvisor like Wealthfront or Betterment allows novices an easy, simple option and charges much lower fees. You basically just tell them your age and risk tolerance and it handles the rest. If you're willing to take it a step further, and choose one or two funds yourself then Vanguard is the place you want to be.

MTN gave solid advice. If you have some time and want to learn more, this is a terrific read.

"Index Fund"! That's the term I was looking for, not "annuity".

I am currently hitting the cap on my IRA contributions. I came into a healthy inheritance a couple years back and recently got a $12k/year pay raise over what I'd been doing. My sort of easy button plan is just to keep maxing that out at least until the current employer is able to start offering 401k plans.

So, it sounds like what I need to do to start is just to look into Fidelity or Vanguard and just put in funds directly.

Once I've got that figured out, I'll start looking into how to pull the funds out of old accounts and roll them into something else. If I were to try to pull the money out of my current managed Roth IRA account and put it in a Roth IRA index fund (am I getting that right?) would I actually be able to do that if I'm hitting my annual cap with new funds I'm putting in?

In reply to STM317 :

Wealthfront was the one I couldn't remember, thanks for mentioning them!

Seconded on the Betterment IRA.  My parents started an IRA for me when I was in school, with Vanguard, but I think they have a 10,000 minimum or something now.  Betterment has no minimums, although you do pay less in fees once you reach certain thresholds.  At $10,000 I think it's about 0.25% per year.  They give you a nice basket of Vanguard funds, you can tailor how "risky" you want it to be, and have automatic deductions taken out of your checking/ savings account.  We opened my wife's Roth IRA through Betterment.  

Since the max an individual can contribute in a calender year to a Roth IRA is $5,500, have $5,500 / 26 put in every other week when you get paid.  This is about $211.53.

If you have a spouse, even if he/she has no earnings, you can still put another $5,500 per year into a Roth IRA in _his/her_ name, provided you make at least $11,000 per year (I think...double check that figure)

The 401k max is 18,500 per year for 2018, so you can have up to $711.53 per bi-weekly paycheck deposited into a 401k. Your spouse can also do $18,500, but only if s/he works and makes at least as much as they contribute to the 401k.

I've leaned towards Roth IRA over traditional.  My reasoning is that the Roth gives you a known factor- you pay the taxes now, so whatever you earn is tax-free.  If tax rates go up in the future, it doesn't matter.  Also, I presume that I will be putting into the IRA a lot less than I'll be taking out.  So it's a calculation that a little at a higher rate is less taxes than more at a lower rate (assuming my retirement rate _is_ lower, which as I said is not a guarantee.  

EDITED Example: if you put $5,500 every year into your IRA (Roth or Traditional), for 40 years, that's $220,000 worth of contributions.  If your combined tax bracket is 20%, you had to earn 275,000 to make those 220,000 worth of Roth contributions.  But, if your IRA worth after 40 years is $1.2 Million, and you spend all that money through your retirement, even if your combined tax bracket is only 15% you'll still pay $180,000 in taxes on traditional IRA withdrawals (versus only $55,000 if you had the money in a Roth).  

Whatever you do, disregard the day-to-day volatility of the market and dollar-cost-average.  You're saving for retirement- something only maybe 25% of people do, anyway- so you're already ahead of the game.  

Oh, and make sure you buy some Bitcoins, too.  I hear they're hot.  

In reply to Beer Baron :

Rollovers don't count against your yearly contribution limits.  There may be other limitations, though.  Check with a tax advisor. 

Beer Baron said:

Once I've got that figured out, I'll start looking into how to pull the funds out of old accounts and roll them into something else. If I were to try to pull the money out of my current managed Roth IRA account and put it in a Roth IRA index fund (am I getting that right?) would I actually be able to do that if I'm hitting my annual cap with new funds I'm putting in?

What you're looking for is called a "trustee to trustee" transfer normally, at least when it comes to 401ks - not sure if the same term applies to Roth IRAs as well. Someone at the discount brokers (like Vanguard) will be able to talk you through it as they do that all the time.

You do not want to withdraw money from the Roth IRAs and contribute it to a new one, hence the need for the rollover. There are two reasons - one, it'd count against your contribution limits and second, you can only withdraw contributions tax and penalty free. If you withdraw gains, the IRS is going to hit you up for penalties.

I'd also look into potentially keeping the money with Fidelity if that's where your advisors are parking it right now. Fidelity is a good company, and it might be easier to just keep the money there in your own self managed IRAs. You can also transfer the old 401k (not the current one if you have one) into a rollover IRA there.

Oh, and if you do transfer the money somewhere else, don't let the company you transfer from send you a check. Usually that means the company will withhold 20% that you have to make up before the end of the tax year before you get it back, if you don't make up the 20% the IRS is going to hit you with tax and penalties.

So, for the purposes of this discussion: 

I've got a Fidelity 401k, and I rolled my last employers 401k over into an IRA. 

My wife has got two old employer 401k with TranAmerica and TIAA. We'd like to move those into an IRA for her. 

Would it be cheaper to swap them to Fidelity (since I'm already a member) or Ally (since we use them as a bank) or Bettermint (since they are cheap all around) and have Roboadviser services?

It wouldn't make any difference. Look at the fees, figure out which one is cheaper. I wouldn't do Ally. 

Definitely go with a discount broker, not Ally.

As to which one, figure out which services you want and how much they're going to cost you - pretty much all of the discount brokers that are targeting investors as opposed to traders have some sort of advisor service.

Ally used to be known as GMAC. My experience with the company under that name precludes me from ever recommending them to anyone.