A 60-year-old Bakersfield woman, who I will call June, has been working on a financial plan that will allow her to retire in five years.
Before seeking my advice last year, she bought a variable annuity to replace the "defined benefit pension" plan that her long-term employer had ended and replaced with a 401(k) plan.
The 401(k) plan features several under-performing investment options. June feared her savings and Social Security, plus the money in her 401(k) plan would not provide sufficient retirement income. She hoped the monthly payments from her annuity would make up the difference.
An annuity is an insurance plan in which you make a series of payments or a lump-sum payment. In return, the insurer makes periodic payments to you immediately, or at a future date. A variable annuity is an annuity with exposure to investments, such as stocks, and pays off at a certain "rate."
Recently, June was notified by the insurance company that sold her the annuity that they wanted to buy her out. Thousands of people throughout the nation are receiving similar notifications, as companies try to cut their losses sooner than later.
It seems many companies that sold variable annuities during the boom years -- in early 2000, when June bought hers -- bet stocks and other investments would continue to go up. Instead, they went down during the Great Recession of 2008-09.
And while we are encouraged by signs that the economy is recovering, the recovery may be too slow to provide the monthly retirement checks June and others expect.
June's question to me: Should she take the buyout? The company offered to pay her significantly more than the current value of her annuity. And if she took the money, where would she get her supplemental retirement income?
With an increasing number of annuity-selling companies expected to offer buyouts, June's questions will become common. I told her to carefully consider:
* The company's ability to absorb loss. If she did not take the buyout, will the company be able to make good on its promise to pay? In June's case, the company is large and well-funded. It's a good bet it won't renege.
* Would she be better off with a lump sum payment now? If June were in poor health and not expected to live for many more years, she should take the money now. But June is in good health. People in her family live long lives. There also may be unfavorable tax implications if she takes a lump sum payment.
* Could she take the buyout and reinvest the money in another annuity? Companies have "wised up." They have rolled back benefits and cranked up fees. In fact, I am working with another client who unwisely recently bought an annuity without reading the fine print. She is paying way too many fees and the investment will not begin paying off until she is 68 -- three years after she wants to retire.
My advice to June: Don't take the buyout. My advice to everyone: Seek the counsel of an attorney, accountant or financial adviser before investing in such things as annuities. Make sure they are good, honest deals that meet retirement needs.
-- Steven Van Metre is a Bakersfield financial planner and certified estate planner who specializes in retirement income strategies. His Bakersfield College Levan Institute for Lifelong Learning Tuesday evening class on retirement planning will begin on Jan. 29. His Saturday class will begin Feb. 2. These are his opinions, not necessarily The Californian's.