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Annuity


hdrider

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OK you smarter than me investor types I have a question.

We have an Annuity thats been hanging around a while with not a very large amount of money in it (About $140K) and we have been thinking about it a little.

It grows at a guaranteed 5% per year but we put pencil to paper and figured that if we started to draw money on it it would take about 22 years for us to bring in enough money each month for us to break even with what's in it now, heck we may be pushing it to make that 22 years looking at our family history.

Because it only grows at 5% and it's not a large amount of money waiting 3 or 4 or even 5 more years will not make that big of a difference when we do start drawing on it it my mind

 

Side note, we don't really need the extra money right now to survive on with our current life style but we could learn to splurge a little I guess LOL!! Not much because the monthly income would be just a little over $500.

 

So the question would be, what am I not think off? Or are we thinking the right way?

 

Thanks in advance

 

 

 

 

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Will payout be taxable? Is the balance inheritable? What would you put the funds in if you did a draw down?

 

Barb

 

Only a small portion is taxable and we never seem to pay taxes at the end of the year so it should not effect us much I'm guessing. The balance is inheritable but we have no kids to leave it to so are not worried about that at all. And I guess I don't know the answer to the question about where we would put the funds if we did a drawn down. The answer may be that we now pretty much spend what we have coming in each month, some times a little less and sometimes we take a couple hundred out of savings so an extra $500 would probably just allow us to eat out a few more times per month or maybe stay at a little nice RV park now and again or not wear our cloths until we get holes in them. What ever is left over just roles into savings.

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Five percent isn't bad interest, maybe splurge a bit from any other investments that aren't paying as well and save the annuity money for later?

 

Hopefully you have a will and trust and it covers disposition of all your stuff, leaving things to the courts to sort is a bad plan unless you hate your in-laws.

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a guaranteed 5% return with no risk is a pretty good deal these days. but it all depends on what type of annuity, what your other options are, your overall financial picture, what your tax details are and what your future plans are.

Some annuities have rules requiring you to begin withdraws at a certain age or after a certain time span. If its an IRA type annuity, its subject to the same "RMD" required minimum distributions as other pre-tax deferred accounts, as well as the early withdraw penalty if before age 60.

There are tax implications for both qualified or unqualified annuity withdraws. Since they're taxed as ordinary income (either the total or the gains), its important to understand if these withdraws will push you up into the next tax bracket or schedule them for years your other taxable income will be minimal. Depending on your age and SS status, these withdraws could also impact how much of your SS is taxable.

If the withdraws will just go to extra pocket money now, and if allowed by the annuity rules, I'd be inclined to leave it sit for a while, you never know what you may need it for 5 yrs from now.

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If you are getting 5 %, actually all of any interest you have received in the past is getting more than that. Its called "compound interest" or" interest on interest".

Jim2 has some great advice. Annuities are complicated when you start to pull money out. There are rules about how much of that $500 is from the principal and how much is from the interest.

Some company holds the annuity and should be a place to start about getting information on withdrawals.

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a guaranteed 5% return with no risk is a pretty good deal these days. but it all depends on what type of annuity, what your other options are, your overall financial picture, what your tax details are and what your future plans are.

Some annuities have rules requiring you to begin withdraws at a certain age or after a certain time span. If its an IRA type annuity, its subject to the same "RMD" required minimum distributions as other pre-tax deferred accounts, as well as the early withdraw penalty if before age 60.

There are tax implications for both qualified or unqualified annuity withdraws. Since they're taxed as ordinary income (either the total or the gains), its important to understand if these withdraws will push you up into the next tax bracket or schedule them for years your other taxable income will be minimal. Depending on your age and SS status, these withdraws could also impact how much of your SS is taxable.

If the withdraws will just go to extra pocket money now, and if allowed by the annuity rules, I'd be inclined to leave it sit for a while, you never know what you may need it for 5 yrs from now.

 

I know there is a certain age that we have to start drawing money and I think that's only a couple years away if I remember our money gals comments during our last meeting. As far as a penalty for drawing before he age 60 that will not effect us. But it looks like we have a little more digging for answers to do before jumping he gun. Thanks for the comments.

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Is the annuity inside of an IRA or 401k? If it is, the age of required withdrawal is the calendar year in which you pass 70.5 years old. Most annuities also have rules about the number of years it must be held or there will be a penalty for withdrawals. If your income is such that $140k is not a large amount, you probably don't need the funds but you still should consider what will happen to your estate when you pass? I believe that the key to your best course of action is in determining just what you want that money to accomplish.

 

I didn't really follow the 22 year part, unless you mean the number of years to withdraw over. In that case, it would make about $6,300/year if you ignore the effect of the 5% growth rate. Probably pretty safe to use $6,500 as a base for it.

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The principal amount ($140k) doesn't actually grow by the 5% guarantee. The principal grows based on how the underlying investments do in the market. However, the annuity will be based on the greater of market or the guarantee. The 22 years is the $140k divided by the estimated annual withdrawal (annuity amount). However, as someone pointed out. the OP is not taking into account the growth of the principal, which for most annuities may not be as great as the 'real' stock/bond markets.

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