Readers have asked a host of intriguing questions over the past month: what to do with a retirement-account rollover; how to take advantage of the government's new debt-forgiveness plan; whether to buy health insurance through a former company's plan or in the open market. Here are a few answers.
If you have questions that you'd like answered in a future column, write me at kathykristof24@gmail.com. I can't promise to answer every inquiry, but I'll occasionally use this space to respond to questions of general interest.
Q: I recently took a buyout from my former employer and need to make a decision about what to do with my 401(k). I was approached by a financial advisor, who suggested that I put about 40 percent of the money in bonds and CDs and put the rest in a variable annuity. The annuity has a 2.65 percent annual cost. Is this a reasonable plan? Do I need an annuity in my IRA?
A: No, you shouldn't put an annuity in an IRA. One of the reasons it's a bad idea is that annuities are layered with fees, some of which give you the benefit of tax-deferral. But you already have that with your 401(k). The additional benefits you get with an annuity, frankly, are rarely worth paying for -- and with this one, you're paying dearly.
How dearly? Let's say you had $100,000 that you planned to leave invested for 20 years. Assuming that you earned an average of 8 percent on your investments, the 2.65 percent this annuity charges would cost a whopping $193,704 in fees and forgone investment returns over that time, according to the Securities and Exchange Commission's mutual fund cost calculator (http://sec.gov/investor/tools/mfcc/mfcc-intsec.htm). That leaves you with a nest egg of $272,392 at retirement, assuming an 8 percent average annual return.
If you're considering the annuity because you need some hand-holding, you'd do much better by simply hiring a fee-only planner. If you just need somebody to help you invest wisely for retirement, you should know that a number of mutual fund companies offer so-called "target date" retirement funds. These funds mix your assets based on when you plan to leave the working world, which makes the intimidating job of asset allocation a cinch. Better yet, they do it for a relatively small cost.
If you opted for a target date retirement fund offered by T. Rowe Price, for example, you'd pay about 0.65 percent each year. That would cost you roughly $56,992 in fees and forgone investment earnings over the 20-year period and leave you with $136,711 more to spend than you would have had with the annuity. With this scenario -- assuming the same 8 percent investment return -- you'd have $409,103 at retirement.