Annuity for 25 Year Old Client

[aus0417]

I have a very lucky 25 year old client who has recently made a lump sum of money in the stock market (just under $1MM). He has contacted me about possibly buying an annuity and "living off the interest." I understand and have sold a few annuities; however, I do not claim to be an annuity expert. His main concerns are preserving the principal, income, and interest rates. He said he wants to generate an income that he can live off of while he is going through school (I believe he is starting medical school next year) for the next 6-8 years. What strategy do you annuity gurus recommend? or should I steer him away from an annuity?

 

[senior-advisor-indiana]

An annuity us definitely not the answer for a 25 yr old that wants to live off the interest.

 

[aus0417]

Can you explain?

 

[Norwayguy]

Can you explain?

Non-Qualified annuity distributions prior to age 59 1/2 years of age are subject to Fed & State Income tax as well as a 10 percent penalty tax. There are some exceptions however these typically involved either an immediate annuity or substantially equal payments based on life expentancy and would be rquired to continue for the greater of 5 years or until 59 1/2 years of age. You would need to do some calculations to see if this money or part of this money would compute to the required income he wants and he would need to give up control or be subject to the 10 percent penalty.

I am hoping before you are speaking to somebody about thier money and annuities you know annuity 101.

 

[aus0417]

I have a good understanding of annuities; however, I am not primarily an annuity producer. I understand that he will be subject to income tax and the 10% federal tax penalty. If he places money in CDs, money market accounts, etc. he is still going to have to pay income taxes on the interest every year anyway, so what I'm getting at is this: With savings accounts, CDs, MMAs, etc. paying so low, what are the reasons, other than the 10% penalty, that make buying an annuity (or multiple annuities) a bad idea for him? Keep in mind that I'm not saying he should place all his money into annuities. I'm just asking for some feedback on whether or not this is totally out of the ballpark or if maybe annuities might have a place for part of his money, given what he wants, which is basically not being in the open market, income, and preservation of principle.

 

[Franz Kafka]

I have a very lucky 25 year old client who has recently made a lump sum of money in the stock market (just under $1MM). He has contacted me about possibly buying an annuity and "living off the interest." I understand and have sold a few annuities; however, I do not claim to be an annuity expert. His main concerns are preserving the principal, income, and interest rates. He said he wants to generate an income that he can live off of while he is going through school (I believe he is starting medical school next year) for the next 6-8 years. What strategy do you annuity gurus recommend? or should I steer him away from an annuity?

Find out first if his capital gain is short-term (most likely). If it is, he owes A LOT of income tax.

 

[Norwayguy]

I have a good understanding of annuities; however, I am not primarily an annuity producer. I understand that he will be subject to income tax and the 10% federal tax penalty. If he places money in CDs, money market accounts, etc. he is still going to have to pay income taxes on the interest every year anyway, so what I'm getting at is this: With savings accounts, CDs, MMAs, etc. paying so low, what are the reasons, other than the 10% penalty, that make buying an annuity (or multiple annuities) a bad idea for him? Keep in mind that I'm not saying he should place all his money into annuities. I'm just asking for some feedback on whether or not this is totally out of the ballpark or if maybe annuities might have a place for part of his money, given what he wants, which is basically not being in the open market, income, and preservation of principle.

The issue at least in my mind is your post that he wants touse the income from this/these annuities. Yes savings/CDs/Money markets are paying very low interest now but when you answer the question on the suitability form saying he wants to start taking income this year or next can cause some problems.

Do what you want.

 

[aus0417]

What if he just plans on withdrawing the interest each year until he gets out of med school? At that point, I'm sure he will be able to let his money accumulate.

This is a short-term gain by the way so I'm not sure what he will have to pay in taxes but I know it is going to be hefty.

 

[Norwayguy]

What if he just plans on withdrawing the interest each year until he gets out of med school? At that point, I'm sure he will be able to let his money accumulate.

This is a short-term gain by the way so I'm not sure what he will have to pay in taxes but I know it is going to be hefty.

There is not short or long term gain in annuities its always Income tax.

Sorry just reread this post and realize your second sentence is about his money now not in the annuity.

 

[Brantley]

Your client could end up paying a significant amount of his gain in taxes. Short term gains are taxed as "ordinary income". You didn't share with us what his cost basis was but it's probably safe to assume that he will pay 40% of the gain in taxes depending on what state he lives in and the state income tax if any he's liable for in his state.

As for what's left over going into an annuity...not a great idea for generating income at 25. He could use an immediate annuity to generate income but from what you are saying it is such a short time he wants the income, the advantage of doing that in such a low rate environment would be less than appealing. Not to mention he's giving up control of those assets (converting a lump sum to an income stream). Only way to test that theory is to get some quotes from carriers, if you can find one willing to do this on a 25 year old...which may be difficult.

If you just want someone to bounce ideas with and discuss options, I'll be glad to talk with you.