She Bought an Annuity But Doesn’t Know What to Do With It

The Problem

Before ­retiring in 2014, registered nurse Ellen Donahue put $180,000 of her IRA into an annuity in order to have guaranteed income later on. Now 75, she and her husband, Joe, 73, don’t need the income; they live comfortably on Social Security, Joe’s military pension and required minimum distributions (RMDs) from various retirement accounts. She came to me with two concerns: First, the annuity account’s value was dropping steadily. Second, she didn’t know how to get her money out. “I don’t know how we let someone talk us into these products when we didn’t really understand them,” Ellen said.

The Advice

Annuities come in many shapes and sizes; Ellen’s was a fixed index annuity (FIA) with a guaranteed income rider. The money in the annuity grew based on a formula where she earned a percentage of gains in the S&P 500 but wasn’t subject to any losses. The rider, a separate purchase, guaranteed a certain amount of annual income no matter how the FIA investments performed. It carried an annual fee, most recently around $4,000.

Ellen had three options for getting her money out. She could turn on the income rider, which would produce a flat amount of income that would last the rest of her life (or her life and Joe’s combined). She could withdraw varying amounts based on her income needs or wants. Or she could pull her money out of the annuity and reinvest the money within her IRA. Since turning 70½, she has withdrawn money from the FIA to fulfill her RMDs. Those RMDs, plus fees that outstripped earnings, were eating away at the FIA account’s value.

I consulted Scott Witt, a fee-only insurance adviser in Milwaukee who, among other things, helps clients decide what to do with their preexisting policies and annuities.

Witt started by comparing the annuity’s account value to the benefit base of the annual-income rider. The account (or cash) value of an annuity is the money you could walk away with — its investment performance minus surrender charges, rider fees and other costs. The benefit base is a bookkeeping entry the insurer uses to calculate the rider’s guaranteed income. Ellen’s cash value was $141,000, while her benefit base was $300,000. A benefit base significantly higher than an account value indicates that the income rider is the best option, Witt said.

Witt also noted that, based on Ellen’s age and her FIA’s income base, triggering the rider would give her a $19,500 annual income for life. But if she cashed out the account and used her $141,000 to buy an annuity in the current market, she’d receive only around $13,000 annually, he said. That, too, pointed to triggering the rider.