After reading through previous blogs to help brainstorm for this week’s post, I found myself reflecting upon personal experiences that led me down the path to becoming a Financial Counselor. One such instance – that admittedly, I did not fully understand for several years after entering this profession – occurred when my father retired ten years ago.
He only had a small sum of money in his company’s 401(k). This was completely fine considering he also had a pension, Social Security, and little to no debt. In this situation, he received more than enough money from his “guaranteed” sources of income – the pension and Social Security – to cover his necessary living expenses and could use his 401(k) as a flexible source of income, if needed. This is ultimately what my mom did last year when she retired, but unfortunately, this is not what happened with him…
Like many families, my parents worked with an advisor at a local, for-profit financial institution. They ultimately decided to roll his 401(k) into a Traditional IRA that also included the following:
- A deferred-annuity contract that allowed him to annuitize (turn the money into a lifetime stream of income) or pay a surrender fee if he later changed his mind – he did.
- It offered a guaranteed 5.5% rate of return on the base amount of the rollover and a guaranteed death benefit; however, each of these “riders” cost 1.25%, which was deducted annually from his IRA balance.
- The IRA balance was invested in four different mutual funds, all of which had an expense ratio over 1.0%.
Did he lose money because of this? Technically, no – last decade’s market return was quite impressive; however, those annual fees were costly for a financial product he never used. Am I judging my family, or their advisor’s decision? NO!! I was not a part of the conversation and do not know what factors played into it. My only goal here is to provide education on a very complex, and specific, financial product and how it should fit in to a retirement plan. You can also read this AARP article for a much more detailed summary on annuities.