Question about IRA/Roth/TSP contributions

Politigator said:

We are talking about guaranteed income streams including variable annuities. The fees and commissions are high on all of those. Are you disputing that?

SPIAs are more reasonable fee wise, but they aren't as popular, because they aren't as lucrative for "financial advisors". SPIAS can make sense, but the payouts are comparatively modest if you add an inflation protection component.

What if anything with the above do you disagree with?

Click to expand...

78 said:

Most everything.

* You quoted up to 4.00 M&E on VAs. Not even close. You're adding in optional rider costs.

* You suggested that VAs are structured like Class A mutual fund shares, the load coming off the top. Also inaccurate. 100% of the premium goes to work. BTW, a typical advisor fee over time will exceed the commission amount you cited, which also is inaccurate. No VAs offer 8% comp. If they did, I'd tie you up and force you to buy one and put all your money in a short-term bond fund.

You don't have to go through a broker. You can buy a no-load annuity from Fidelity or Vanguard with 100% liquidity and low M&E expense.

And why would you? Because you want to save additional funds tax deferred without contribution limits, without employee match restrictions per ERISA and because annuity contracts can't be attached in a court a law, something physicians appreciate.

Sadly, not everyone has your vast financial acumen, L-boy, and so they find it necessary to step over to the dark side and work with a financial professional on furlough from prison. Perish the thought.

Click to expand...

Politigator said:

I'm sure they make sense for some, but I still think they are oversold. You compare them to qualified plans, but qualified plans either have up front tax deductible deferral (traditional) as well as future earnings deferral, or else future earnings tax free (Roth). An annuity has no up front deferral, and earnings, while deferred are fully taxed at ordinary I come tax rates when withdrawn. If coupled with social security they may your social security into taxable status. Annuities actually have worse tax treatment than capital gains investments.

Being able to shield from liability certainly has value for some.

Click to expand...

The cost for these guarantees can vary greatly by insurer, but they typically cost from 1% to 1.5% of the total invested year-in, year-out. There are exceptions, so it is important to know areas to watch:

• Surrender charges: All annuities impose penalties on those who switch out of them within a specified period (typically up to eight years with decreasing annual amounts). The insurance company charges these penalties so they can recoup the initial cost of the annuity, which could include a sales commission to whoever sold it. Since many are purchased by retirees for immediate access to funds, they often allow a small amount (usually under 10%) be withdrawn annually.
• Mortality, expense and administrative fees: The insurance company will deduct a flat maintenance fee or a percentage of the total value annually to cover record keeping and administrative expenses. The industry average for mortality and expense fees runs about 1.25% but can be much higher, and administrative fees are typically about 0.15%.
• Underlying fund fees: Investors also pay management fees or expenses imposed by the sub-accounts that make up their investment options. Much like fees on 401(k) options, these vary widely, with index options being among the lowest.
• Fees for additional features: Special features on annuity products all add fees. An investor may pay a small amount for additional death benefits or a cost-of-living annual increase provision, but these costs add up: another 0.6% or more in fees to be exact.
• Earnings caps: While some annuities set floors on market performance so investors' value cannot go down, they usually also have an earnings cap that limits upside potential in good market years. For example, a fund with a 12% cap will only earn that much even if the underlying investment earns 30%.
• Tax deductions: Another rarely discussed downside to annuities is that the investment management fees and other charges are not tax deductible as they would be on other investment accounts. The IRS views them as insurance contracts and fees for things like riders as premiums.

Click to expand...

Politigator said:

Your point that you can get lower cost annuities is a good one. What percent of annuities sold are low cost?

Click to expand...

78 said:

Most everything.

* You quoted up to 4.00 M&E on VAs. Not even close. You're adding in optional rider costs.

* You suggested that VAs are structured like Class A mutual fund shares, the load coming off the top. Also inaccurate. 100% of the premium goes to work. BTW, a typical advisor fee over time will exceed the commission amount you cited, which also is inaccurate. No VAs offer 8% comp. If they did, I'd tie you up and force you to buy one and put all your money in a short-term bond fund.

You don't have to go through a broker. You can buy a no-load annuity from Fidelity or Vanguard with 100% liquidity and low M&E expense.

And why would you? Because you want to save additional funds tax deferred without contribution limits, without employee match restrictions per ERISA and because annuity contracts can't be attached in a court a law, something physicians appreciate.

Sadly, not everyone has your vast financial acumen, L-boy, and so they find it necessary to step over to the dark side and work with a financial professional on furlough from prison. Perish the thought.

Click to expand...

GatorInGeorgia said:

Which one were you in? Curious if we know each other. :)

Click to expand...

Gator By Marriage said:

I have a question for the TSP experts. Last night I had a beer with an old colleague and we got to talking about the TSP. He’s 60 and currently on a second career that he only sees himself doing another couple a years. He was wondering what % of his TSP should he keep in the market? (C, S, and/or I funds). It got me wondering the same thing for myself, though I am only in my mid 50’s. I too am employed in a second career and would like to work another 4-6 years. How aggressive should I be? As all of us who are investors in equities know, the last few weeks have been amazing, but as I believe pigs get fat, but hogs get slaughtered, I do not want to be too greedy! I love the TSP for its low costs and ease of interfund transfers, but the range of investments is not very broad. Any thoughts?

Click to expand...

78 said:

The TSP fund lineup is extremely limited. It's more important the overall percentage split you elect between stock and bond.

For four to six years out, I'd recommend a 60/40 split of blue-chip equity (C Fund) and bond (G Fund as I feel we're ripe for a pullback and government securities get more of an uptick from accommodative Fed policy).

Any money you're pulling first in your time horizon is likely coming from the fixed income portion of the pie. For that reason, and because you're only in your mid-50s, you don't necessarily have to adjust the mix more conservative as you get closer to your income date. You have to rebalance periodically to restore your 60/40 split.

On average you'll be pulling profits from the C Fund and diverting it to the G Fund. The F Find as an instrument of fixed income becomes more appealing as you rotate through a market pullback and/or recession to recovery.

Click to expand...

Gator By Marriage said:

That very much makes sense. Thanks. Would you flip that around to 40/60 once I actually retired, or stay 60/40? Or some other ratio?

Click to expand...