I am 65 with a $48,000 annuity that comes with a 10% surrender value. I can avoid the surrender "hit" by taking a distribution over time. It earns a steady 4% annually, but I am thinking of using it to supplement travel and home improvements in the next five years, at which point I will start drawing from my other, main 403b account. The question: Is it best to take it out over the next five years, ten years, or bank on my living a good long time and earning way more than either of the other distributions. I am in good health, and otherwise am pretty sound, financially. What other factors should I consider in my decision?
I assume you already know how much you intend to spend in the next few years, and the only question is which funds to tap first. I'm also assuming there's no tax difference between tapping the 403b and annuity for income.
If that's correct, I would next wonder if you also have decided how you want your investments allocated between equities, bonds, real estate, etc.?
Assuming that's true, I would think about your annuity as being similar to bonds, but as a relatively attractive one compared to what you could get in the market today, assuming you get to keep your entire 4% return on the annuity (i.e., there aren't annual or other expenses).
Personally, I would allocate a little more to a guaranteed fixed income asset than I would to a bond fund, since the bond fund can lose money while the annuity probably can't. This is especially true in what's likely to be a rising yield environment, which creates capital losses on bonds, but not on your 4% annuity.
If your 403b account doesn't have a bond or fixed income alternative that's more attractive than your annuity, I'd be tempted to let the annuity grow until market rates make it less attractive than what you can get in the 403b, and then withdraw it over time to avoid the surrender fees. All the while I would try to maintain a reasonable mix of equities, bonds & equivalents, real estate, etc.
Thanks for your reply. Your assumptions are correct. I hadn't thought of leaving the annuity in place, and starting to tap the 403b, based on the nice steady 4%. Still, my question is really more about a general rule of thumb (if there is one or three), concerning cashing the annuity out in 5, 10, or Lifetime durations. It would seem that the lifetime option is the largest sum payout (given my faith in living a long life!). Is the only downside that it comes in much smaller increments?
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