It is not unusual to start thinking seriously about retirement when you reach age 55. It used to be a fairly straight forward process. If you had a 401(k) through your employer, you simply began to shave off contributions from your paycheck, selected the stocks or mutual fund you wanted to hold in your portfolio and watched as the value shot up.
Then the Great Recession hit us like a tsunami. Just as the invading waters come from nowhere, tear everything away and pour it out to sea, so the value in our 401(k) was sent adrift. Those once-full reservoirs intended to float our retirement boat turned to swamps. It was not unusual for portfolios that had reached the half-million dollar mark to evaporate almost overnight leaving behind insufficient funds to survive retirement—let alone enjoy it.
Even a half-million dollar pension fund can look small when you actually work out the amount of money you need to retire (recommended reading here).
Few of us had annuities in our retirement portfolio. Those who did were older and perhaps raised by parents who had gone through the Great Depression. While we listened to Wall Street and held onto our stock-laden portfolios hoping for the Market to rebound and make us rich again, they stashed their cash in annuities at the best annuity rates they could find.
Most of us laughed when they proudly reported that their best annuity rates ran as high as 4% with a five year hold. We had seen growth in double digits for several years and weren’t about to settle for 4%. Even our financial advisors warned us about being caught in a 3% fixed rate cycle when inflation is running at 6%. And then there were the surrender charges we would have to pay if we tried to wiggle out of the strangle hold annuities would have on our money.
Even the best annuity rates—some as high as 6%–would be bad if the Market rebounded and we wanted to withdraw our cash to pour back into stock or mutual funds. We would encounter various charges and taxes that would rob any meager returns annuities have to offer;
- Surrender charges – Try to withdraw money from your annuity during the 6 to 8 year holding period and Bam! You get hit with a surrender charge as high as 10% plus a service charge for the paperwork required to untangle your money from the investments already made by the Annuity Fund manager.
Yes. We all thought those old-timers were kind of foolish for stashing their retirement cash into annuities. However, our laughter turned to chagrin when they pointed out the hidden value in annuities that we had missed.
Even at annuity rates as low as 2%, the $250-thousand they placed into the hands of Annuity Fund managers would still be worth $250-thousand when they withdrew them at the end of the holding period. Plus they would have gained 2% in value. Even if they had to withdraw early, the worst case surrender fee would pale in comparison to what we had lost in the Stock Market during the Great Recession.
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