Q: My net estate value is $674,100. I am 67-1/2 years old and I still work full time. I plan to continue working until I'm 70. Based on a financial agent's advice two months ago, I moved $380,000 from my IRA to an indexed annuity. Recently, another recommended moving the $380,000 from the indexed annuity to a stretched variable annuity. The rest of my assets are mainly in stocks. I am divorced, and I have an adult son and daughter who I would like to benefit most from my estate after I am gone.
K.M., Groton, Conn.
A: Scam alert: Moving money from one type of investment to another in such a short time frame guarantees that only the sales people involved will enrich themselves.
Commissions paid to sales agents on annuities can be substantial, and if you jump from the fixed annuity to the variable version you'll be paying two commissions back to back.
This could carve $40,000 or more from your estate, plus similarly painful penalties for bailing out of the first annuity so soon.
It also raises the question as to whether this agent really has your best interests in mind.
This adviser may tell you that the potential reward from the stretched variable annuity outweighs the expense of moving it. But that's much easier said than proved, says Christopher J. Reilly, a certified financial planner in Philadelphia.
"Please, do not rush to move that," says Mr. Reilly.
He wants you to first gain a clear understanding of the benefit of making the switch, both in the terms and the costs.
You will be very hard-pressed to benefit from moving it this soon due to penalties on withdrawals that occur early in that contract, he says.
As soon as possible, Reilly recommends that you diversify your IRA among a few investment types in proportion to your appetite for each, such as an annuity, mutual funds, and bank or government securities.
With your children as named beneficiaries on the account at inheritance time, stretching the distributions from the IRAs should be one of several choices for each to consider independently of one another.
Be aware that a minority of annuities, including some offered by the company you are dealing with, have limits on payout choices.
Also, in some cases, "stretching out" the period of the taxable withdrawals to the heirs may be less attractive, as in a case where the money is subject to uncompetitive rates on the deferred balances, and the child can add the lump-sum distribution to his or her own tax return without much pain.
Hence, you can decide to park your money where you maximize choices at your passing, and your children must choose the smartest way to distribute it.
Most important, says Reilly: Make sure you have a budget that will satisfy your income requirements to live. Remember to plan for unexpected healthcare expenses and long-term care.
Lastly, be careful having more than 5 percent of your money in any one stock, especially if it's part of the assets you'll be drawing down.