In general annuities are very popular with doctors and high income people because of tax deferred growth and may be some protection against law suits.
What kind of annuities are more preferable? Low cost offered by Fidelity or Vanguard or from insurance companies like variable annuities?
This is a great question, and like all great questions, doesn't have a simple answer no matter that you hope it does.
Annuities in their simplest form are CDs. Bank CDs don't pay so well, and better banks pay less than less highly rated banks. Obviously, if you pay less to your customers, your balance sheet will be stronger, right? Same for insurance co CDs, which are annuities. You are treading the line between getting a guarantee from a company which can honor it fully when the time comes and getting a tempting deal.
Two kinds of annuities, basically. Indexed and Variable.
Indexed annuities are tied to or measured against an index, like the S&P 500. Pros: principal or even principal plus minimal interest protection guarantee. When the market is down, YOU don't lose. you pay for these two ways, one is with a cap or maximum you can make. So if index is up 15% you might have a cap of 8% and only make 8% that year, but if index is down 35% (sound familiar?) you would be down 0%, kind of a big deal advantage. Caps change all the time, are low now because markets and interest rates are kind of messed up. Another pro is that these are like back loaded funds. You don't have to pay a surrender charge or penalty if you don't take money out early, same as bank CD. Your agent is therefore paid in part by the other annuity holders who foolishly cash in early, which you won't. Tax-free growth, but you can get that a few other ways too. Its the guarantee that is important to an individual family.
Variable annuities have an uglier history. With this annuity you actually have money at risk. Two buckets, basically, one fixed and one variable. You decide how much to risk in the variable bucket and you stand to lose it all, and its invested in a variety of mutual funds by ins. co, your choice, usually good, but fees, plus insurance costs. The argument against them has always been why pay fees on annuity as well as mutual fund fees when your variable bucket of money is at risk anyway? Tax-free growth is the agent's answer and it can make some sense, but...
YOU are a dr. You are not a retail investor. You are among the highly taxed, and have high exposure to creditors. You are unlikely to have high net worth, unless you inherited or married it, so unlike the Warren Buffett for whom an annuity is not appropriate, it may be for you. You don't get a do-over on your career. You are likely to be a late earner of high income, having given up compounding time, perhaps aquired student debt, and then when you get paid, its late and subject to highest rates. You should be looking not for a product at a time, but for the big picture of your ability to earn and save money for your or your family's future. Most docs work a LONG time, longer than other workers--do they love it? are they workaholics? Or, do some of them HAVE to work longer to catch up. You want to be able to practice because you like it, that's the goal.
So it is the STRUCTURE in which you hold your investments that may make more difference than the investments inside. If you can save money pre tax, you are saving about 40%. So what if an insurance contract costs a % more or less? Doesn't touch the tax bite for hurting or helping your actual returns. Lots of doctors, really good smart ones, focus on fees, which you will see a lot on this forum, because especially the emeritus guys, have been burned by financial advisors, planners, agents, brokers, developers, business partners, etc. You are looking for something concrete to compare. This is actually only one small part of the due diligence needed to help you invest well. As a tax attorney turned financial consultant, married to a doctor, I also belong to that victims' club, and you can learn a lot from victim's about what NOT to do. You are asking what to do NOW? What is best for you and your family.
Not a one size problem. The variable annuity market has addressed its problems of risk by offering two new "riders": GMIB and GMWB, guaranteed income benefits or guaranteed withdrawal amounts. Most don't give your money back like the indexed products at the end of a period, but will guarantee you income at a minimum growth rate, or a sum against which income can be drawn at a minimum growth rate. Good idea and does add safety but some people aren't comfortable not controlling the lump sum rather than the flow. Very recently features of both types of annuities are hybridizing. Your choice will depend on how well the individual can game the system, and yes, this can be done somewhat, and what your purpose is. If you are maximizing your retirement money, you won't need the alacarte riders of death benefit or others. If you need to leave money you don't spend to heirs, you may want this. Met Life has a good death ben policy. This is very family specific. You will probably want flexibility over time, as needs and goals change.
When I mentioned structure earlier, here's an example. I call this the OJ plan. A doctor can have an annuity inside a defined benefit plan, customized to allow him or her larger deductions that a 401K profit-sharing plan. This means the premiums are DEDUCTED, so cost 40% or so LESS than after tax purchase. If your agent isn't discussing this, you don't have one who "gets" doctors' problems. (Its called the OJ plan because OJ Simpson was found civilly liable for killing his ex wife, but still didn't have to give up his NFL pension, which was a defined benefit plan! It has the strongest government asset protection under ERISA (labor) law, done properly. Same with all qualified plans, now can be used together after the three new pension laws and the many new regs of the last several years. This is a benefit which will probably be taken away by the O admin, so you should get it while you can, if you can. So, had you bought the annuity outright, it would cost retail say, 100,000. In the plan, you would not pay the extra 40K in tax so it would cost you only 60K and the 40K you were going to pay the government would be used to pay for a retirement for you instead. Sweet. But there are sweeter tactics still. Your biggest ticket item is tax. Don 't be fooled by insurance agents who talk to you about tax-free growth. They should ALSO ALWAYS be looking to find you DEDUCTIBLE premiums AND tax-free growth. Another great option for you is the retirement plan executives often use to give themselves a "Roth" for those who don't qualify for a ROTH ira or 401K because of too high income. The executive version is even better, since they don't pay full tax on the contributions and they get the benefits tax free in retirement.
I agree you need to be skeptical of low cost, as it often represents either a jetta presented as a lexus, or something is missing. I mean, have you seen Fidelity or Vanguard's balance sheet and headquarters and checked executive salaries? On the other hand there are definitely unfair and overpriced products out there. But face it medicine has its inequitable pay scales too. Ask a pediatric fill-in-the-blank.
Lest you think I am also evading what you hoped was a simple answer, such a buy ING INDEX SIX, or Pac Life Value, I am not. Annuity products and rates change constantly. You should be wary of single company products. NW Mutual goes after residents and signs them up early, did it to us and still does it to docs, great sales technique, but its a single company with agents it owns, so they can't and won't shop for you. Its a good company, but you are better off with a truly independent advisor who can shop around. You are by FAR best off with an advanced planning specialist, and someone who totally understands your tax dilemma, and feels your tax pain. That is the biggest ticket item facing most doctor family budgets so its the first area of defense in saving big bucks. Fees and costs of these products PALE in comparison. So, say an annuity product has 2% in fees whereas another has 1.25%. One is tax deductible at 40% and one isn't. Who cares which one you buy if you get the deduction? You saved 38% vs. 38.75%. I am guessing you get the point. I hope you now start asking about exit strategies and tax on the back end! That also takes some thinking and forethought. I understand your frustration, but there really are professionals in this field who can help you. Unfortunately, the great majority can't. Some financial designations can be obtained for money with a 6th grade education, and some are as hard or harder than medical school. I will, however, give you this. I would have lasted about a half a day in medicine! Its about who you know and what they know. Usually doctors choose advisors by talking to other doctors, or using friends or friends of friends. Banks aren't your friend even if your banker is friendly or IS your friend. In financial matters, knowledge is power. You could have learned this, but you didn't, so you need a professional who did. Ask a lot of questions, insist on seeing it in writing. Another way insurers get away with hurting you is that by the time the annuity is due, you forgot what you bought. NOTHING the agent says matters.
You have to read the contract.
Seriously. Or get someone to do it for you. I, for example, actually read annuity contracts in bed at night for fun. My radiologist husband is rather horrified but have you seen the stuff he reads all day? Each to his/her own.
You need to know:
Minimum investment?
Amount of annual withdrawals without surrender charges.
terms of riders
strengrh of company
is the offer too good to be true? look hard if one seems a lot better than others
bonus? If so, at what cost?
available investments in variable annuity, how many and how good, and most importantly, how aggressive can you be?
Ask "what's the most I could make in a year?" and what's the LEAST? if its not written down, it doesn't count.
that NO ONE knows the future. NO ONE. That's the investment game: decision-making intelligently with not enough information. Kind of like medicine?
For those here who say avoid annuity and employ muni bonds, or tax-managed equities, well, yes, it depends. First, avoid the highest tax rate on the most money you can. Then look elsewhere. There are ways to buy muni bonds in a basket, cheaper than directly, and some are even insured as to interest payments and payoff at maturity, currently paying over 4% and have some liquidity! Mostly financial and investment decisions are about costs--the more hands money passes through, the less there is left, so finding ways to buy institutional level is really smart, and as a doc you sometimes, most times, can do this. Stay off google and retail sites and read Google Scholar instead. Capital Ideas by Peter Bernstein is a bible, and the smartest in the business are sometimes the CFAs, that's Chartered Financial Analyst. That's for investment risk, not insured non-risk. And yes, I teach CME and would do GME if asked, prefer warm climates but have a soft spot for residents and fellows, now more than ever. Best of luck and thanks for your commitment to soldier on.
