Required Minimum Distribution

[GaryR833755]

In 2006 I converted a 401k via a 72T mechanism that put the proceeds into a variable annuity (VA). I have been drawing a monthly benefit from that account to date. I was recently advised that I have the opportunity to convert the variable annuity to a life annuity by relinquishing the balance in the account. If I do this I will receive a monthly benefit equal to or greater than the one I am currently receiving. If I don't convert and the account goes to zero due to withdrawls and/or market conditions then the account ceases and I get nothing. There is no choice ofcourse and I will be conerting to the life annuity. However, I have two concerns/questions relating to RMD:

1 - The Variable Annuity (VA) has been accepted as satisfying the RMD which I started in 2023 (the year I became 73). If I convert to the Life Annuity (LA) will that also satisfy the RMD (the amount will be sufficient). The RMD during the VA was based on the fact that the account was originally a deferred retirement account. The LA is being purchased with the balance of the VA.  So therefore, will the LA satisfy RMD fore the forseable future?

2 - Based on the above information. Since I have been withdrawing from the VA since 2006 can that reduce the RMD going forward if I convert to LA?

I realize this is very technical and way beyond the basic info I am seeing on line. Can anyone suggest guidance and/or resources I can go to?  

[Tonster521]

@GaryR833755 First, I would carefully read the VA contract that you purchased in 2006. You may have elected a "Living Benefit" option that continues to pay you for life even if your VA account balance is zero. This provision was very common years ago. The amount could be 4% to 6% depending on the insurance company. Some VAs are RMD friendly meaning that if you live long enough to exceed the above withdrawal percentage (i.e., 5%, etc.) the VA will pay you the appropriate RMD amount for your age even if your VA is zero. That amount is adjusted each year. If you have not elected a "Living Benefit" option which is an additional cost and is called a rider in insurance jargon, you may convert your VA to a life annuity based on the provisions of your VA contract.  If your concern is running out of money, I suggest you obtain a quote from your current insurance company concerning converting your current VA balance to a life annuity. If you are married, you may also obtain survivor options for that income stream if you do not have life insurance to replace that income. Then I would compare that to the life annuity that you are considering. Remember, your current insurance company does not want to lose your VA. So, let them know if you have found a life annuity that may pay more than their life annuity. They may increase the amounts to keep your business. Also, remember to compare apples to apples. 

Another provision to consider is whether or not your current VA has a death benefit. There are many different types of death benefit provisions that may be included in a VA contract. Your life annuity will not include a death benefit provision unless you elect a reduced payment to provide a return of your remaining balance or elect a survivor option. With regard to your second question, your RMD is based on all your IRA, 401 K, etc. account balances. For example, if you have two (2) or more IRAs, you need to calculate your RMD based on all account balances as of December 31st of the prior year. I believe you receive a Form 5498 from those IRAs around May of each calendar year toinform you as well as the IRS the amount(s) of your account balances. So, it could change each year.

[GaryR833755]

Dear Tonster,

That was very, very helpful! Thank you!! The balance in my VA is about $80,000 now. I give the insurance company that and they have quoted a straight life annuity (no period certain or spousal). I checked Fidelity to see what they would pay for that amount. Suffice it to say that the LA I’m getting is much better. Incredibly so (without giving you numbers).

I sincerely appreciate your feedback and advice!!

Thanks again!!

GaryR33755

[Tonster521]

@GaryR833755 Here is the link that may help. I inadvertently to copy and paste. https://www.usaa.com/inet/wc/advice-retirement-rate-of-return-income-annuity?akredirect=true

[Tonster521]

@GaryR833755 LA can be a viable solution for creating an income stream. However, when you review their rates of return, they are generally negative until you attain average life expectancy.Thereafter, LA have positive rates of return the longer you live. So, in your case, your rate of return will be negative for about 10 years until about age 84. If you are in outstanding health, the LA may outperform the VA, but it will take at least 10 years or more since your life expectancy is around mid 80s . Essentially . you are comparing an investment with an insured contract. In other words. apples to oranges. The insurance company and their agents will market LA(s) based on payout percentages as opposed to rates of return. In other words. they are including a return of your investment in the payout ratio which confuses many folks. I am providing a link to an article that will link you to a rate of return calculator. You can enter various years into the calculator and it will develop a rate of return. With current high interest rates, you can meet and exceed most insurance companies over average life expectancy. However, if you are anticipating a longer life expectancy, do not want market risk, and are willing to accept negative returns for about 10 years (until age 84), then a LA is a great solution. Your VA will provide a number of investment options including equity investments which may provide attractive rates of return, but you will have market risk. Hopefully, you already have participated in the VA equity returns over the past years which should be very good.

[GaryR833755]

Thanks again Tonster!

I understand what you’re saying about rate of return but let me put a little more flesh on the bones of the LA.

Equitable is offering a monthly benefit of $3,735 for as long as I live in return for the remaining $80,000 in the VA. If I took the balance it would be a taxable event and lose about 20% of it. That leaves $64,000. At 5% (the lowest low/no risk investment I know of) that’s $3,200 A YEAR. The LA is over 12x. Yes, I am in excellent health (an accident not withstanding) and plan to leave long past 10 years (Uniform Mortality Table says 26.6 years).

I signed the paperwork yesterday and will start to enjoy a benefit that is almost $1,000 more a month as long as I am alive (and Equitable doesn’t go bankrupt). If I live 15 years I will be paid $672,000 which is more than my original investment in 2006 (not to mention all the payments I received to date).

I know my math may not be according to GAAP but it works for me.

Tonster, you have been incredibly helpful and an unexpected resource! I can’t thank you enough!!

Be well and live long!!

Gary

[Tonster521]

@GaryR833755 Insurance companies do not pay $3,735 per month or $44,820 per year for a $80,000 premium. The monthly amount you indicated is the range of a $400,000 to $500,000 LA premium, not $80,000. Call it $450,000, it will take you at least 10 years to produce a positive rate of return. Hopefully, you will enjoy good health and may obtain a positive return. You should look at laddering Treasuries, at least A rated Bonds, and CDs. Your returns will be better than what an insurance company will pay you. BTW, you have 30 days to review and retun the annuity. Good Luck.

[GaryR833755]

Dear Tronster,

I truly appreciate your diligence. And you are 100% correct. However what I am getting is not a new, fresh out of the box Annuity. My LA is the election of a GMIB (Guaranteed Minimum Income Benefit) in the VA contract. I checked the illustration providing the options and saw it is not predicated based on the $80,000, it is based on the original investment in 2006 of about $680,000. Equitable has had the use of the money (albeit being withdrawn monthly) for 18 years. That is the way the contract was written giving me the GMIB option at the 4-27-xx anniversary for many years. And the time is now before the balance in the VA goes to $0 (via draws and/or market risk).

Bottom line, the GMIB seems to be a fabulous attribute from VA contract that I will enjoy for many years. And it looks like it will satisfy my RMD requirements for all my deferred investments. A win, win, win!

Thank you once again for being a tremendously valuable sounding board and resource!!

Be well and live long,

GaryR833755

[Tonster521]

@GaryR833755 I am familiar with the GMIB. It is one of several "Living Benefits" options that insurance companies offer. You may recall I mentioned "Living Benefits"in my April 9th reply. Living Benefits with a VA are a good solution for folks who want guaranteed retirement income and do not want direct market risk. Essentially, you are transferring that risk to an insurance company. However, that insurance comes with a cost which is directly to you. That is a factor why your account balance is only $80,000. I am guessing that your VA with the GMIB cost you about 3% per year which in your first year was about $20,000. This is how you funded the Life Annuity (LA) over the past years. So, you already elected a future LA when you elected the GMIB in 2006 whether you realized it or not. To walk away from that benefit at this time for only $80,000 would be foolish. FYI, Equitable may be using their own actuarial tables to develop your monthly LA. It is not 26.6 years as indicated with the Uniform Mortality Table which is more economic than life/health. If they used that life expectancy factor, your monthly LA would be significantly reduced. The longer one's life expectancy, the less the monthly amount and visa versa. Take a look at the SSA  Actuarial Table which is based on empirical data for males and females. Those stats are life/health based.  https://www.ssa.gov/oact/STATS/table4c6.html My suggestion is to base your future decisions on the SS Actuarial Table which at this time is about 11 to 12 years. Of course, that is not "etched in stone" and needs to be reevaluated each year. The concept is that if someone (i.e., spouse, disabled dependent, etc.) is dependent on your income, plan accordingly. Hope this helps.

[GaryR833755]

Dear Tonster,

Yes it does make sense. The fees that Equitable charged over the years was somewhat countered by market gains (although there were a couple of bad years).

Thanks again for all your great advice!

 Be well and live long!

GaryR833755