I may have an opportunity to purchase one in a few months, and was wondering if anyone out there in Dope Land has one, and how does it work for you? The one I may qualify for would pay 7% interest, payable monthly, quarterly, or annually, and is tax-free income. 
I am very aware that the money would not be withdrawable without penalty for quite some time - IIRC, 10 years.
Since the OP is looking for advice, let’s move this over to IMHO.
Colibri
General Questions Moderator
What type of annuity? If it is a variable annuity, I wouldn’t touch it with the proverbial barge pole. Here’s why.
Actually, you cannot withdraw until age 59.5 without taxes and penalties to pay to the IRS. There are also surrender fees - additional penalties you will pay to the insurance company if you withdraw or transfer the annuity to another company within a certain number of years - that might be the 10 years you are thinking of.
The reason you cannot withdraw for some time without surrender fees is that they have diverted so much of your money in commissions to whoever sold you the annuity that they need a long time to make their money on it.
7%? I sell the things where appropriate and no company I deal with will lock that in. Something’s fishy there.
In other terms I find some of that articles numbers dodgy, too. My firm won’t sell them except in a rough 50-62 age range and without surrender penalties. For commission-based products we don’t get 7-8%, either. AND an annuity at the $250k mark gets a couple of points discount, too.
So be cautious. VUL can be a decent move for someone looking to lock in long term income. But what you lay out might fall under the too good to be true rule.
I converted a pension lump sum into an annuity, with the help of my financial advisor. The critical thing for me is that the annuity would still have value for my heirs, where the pension’s value would be much diminished for my wife, and be worth nothing for my kids. It is also a reasonably small chunk of my portfolio, and is found money in the sense that my planning was done with the assumption that the pension would be worth nothing - and it turned out to be worth a whole bunch more.
I’m also above 59 1/2, though the annuity, like the pension, doesn’t start paying until I hit 65 - which I’m fine with.
I also converted my pension fund into an annuity. The annuity rate was going to change on Jan. 1, 2000, so I retired a month before my 63rd birthday on Dec. 31, 1999. The fact that they announced the change 6 months early was to encourage people to retire. I think my rate was something like 8.5%, locked in. This was reduced because after I kick off, my wife will continue to get 60% of what I get now. When we are both gone there will be no residual. Since the university is now taking a bath on all these annuities, they are no longer doing it. For one thing university professors simply live longer than average. Now, as I am ending 14 years of retirement, I realize it was one of the best financial choices I ever made. The downside is that there is no COL adjustment; that is what my other savings are for.
7% and tax free? I agree with Mr. Chance that something is very fishy. You really, really want to investigate this fully before sinking money into it.
It’s through the very reliable insurance company where I have my car insurance, and I will be 50 next year.
I, too thought this seemed a little too good to be true in light of current interest rates.
I’m not permitted to answer questions on a message board like this but if you PM me I’ll be glad to help if I can. Maybe I can give you some questions to ask.
There are two separate issues you need to look at.
First, an annuity is an investment vehicle that can be held within a variety of qualified accounts. Therefore, there’s no single method of taxation for an annuity. An annuity in a Roth IRA would be tax-free, like all investments in a Roth. An Annuity in a 401k or traditional IRA would be taxed on 100% of the earnings (unless you have basis in the qualified plan). An annuity outside of a qualified plan divides the payouts to you between earnings and principal and the earnings amount is taxable. So this “tax-free” status sound fishy, but if it’s true, it might not be something special to the annuity - it might be a characteristic of the plan that holds the annuity.
Second, you really need to read the fine print on how return on investment and withdrawals work. For example, my wife wound up with an annuity in a 403b plan. We found two surprises with that. 1) while it was paying 6% when we first got it, it only guarantees 4% annually. (This actually is still pretty good; I’m not complaining.). So your 7% might not be what you actually received. Surprise 2) We discovered in trying to roll over the plan that you cannot withdraw more than 10% of the original value per year, even in a rollover, which means it takes about 12 years to completely drain the account. So we’re still in the process of rolling it over. Again, this actually isn’t so bad - some annuities will charge you ridiculous fees for early withdrawals or closure.
As a general rule, you need to be very skeptical of annuities. They are complicated. There’s lots of fine print. And in many states (or is it national?) annuities can be sold by insurance agents who are not licensed to sell any other investment. If someone can only sell annuities, guess what their opinion on annuities will be? Their advice may not really be in your best interest.
I do not, but probably like Hari I do have an option via TIAA-CREF to convert some of my retirement to an annuity.
Because of their reputation and lack of commissions, I might consider that in my 70s but not now. I would also consider a SPIA, but never a variable annuity like the one my mother was sold - which involved very high commissions and very poor returns.
I was a programmer for a large insurance company and I never really understood their variable annuity products. My basic take on them was that they introduced so many variables into them that it was impossible to take two from different companies and compare them. Nowadays simple annuities as well as term life insurance are commodities. Any reasonably intelligent person can compare them and they can be bought easily online. This is not how many insurance companies make most of their money.
With the Boomers retiring, these products will get more numerous and more complicated. Everybody wants a comfortable retirement and still leave all their money to their kids. Anyone who can convince them it is possible will get rich. For the vast majority of us, it is not possible.
Keep in mind that part of the contract you sign says that any verbal representation made by the sales person is non binding. Only the contract is binding.