Thursday, April 2, 1998

Q. I was recently widowed at 69. I have no debts, and own my new home clear ($180,000). Seeking advice on the investment of my total $500,000 nest egg (half of which came from my deceased husbands IRAs), it was suggested by two investment advisors that I buy:

  • 10% Columbia Universal Flex Choice Annuity
  • 5% American Scandia Variable Annuity
  • 20% Arizona Life CD-Five Annuity
  • 25% Jackson National SPDA Annuity ( an IRA)
  • 25% Physicians Life Index 7 Year Annuity ( an IRA)
  • 10% Western United CD-Max V Annuity
  • 5% Eaton Vance High Income Fund

Their letterhead had the designation LUTCF.

With Social Security, I would like to continue to live comfortable and buy a new car once in awhile. Your thoughts?

—D.S., Georgetown, TX

A. Lets put it this way: when you go to a fishmonger he isnt likely to offer beef. Or, to a hammer, everything looks like a nail. The LUTCF stands for "Life Underwriter Training Counsel Fellow." This is a high and relatively rare professional designation for the use and sale of insurance products. Their investment choices reflect their specialization and predisposition to select insurance products. They are recommending that 95 percent of your money go into such products. It will produce generous commissions for them but wont provide a reasonable plan for you.

Dont get me wrong: there are good uses for fixed, variable and immediate annuities but these advisors suffer from excessive devotion to their product.

I think you should seek advice from a Certified Financial Planner (CFP) or from a registered representative who comes well recommended. While both the CFP and broker would be compensated, as these advisors would (and should) be, their "tool bag" will contain a broader array of options.

The insurance vendor plan appears to offer some immediate tax benefits. It does this by annuitizing a portion of your assets. Unfortunately, this occurs at the expense of the total earning power of your nest egg. At least 85 percent of your nest egg would be in fixed income investments. Most would be earning about 5 to 6 percent interest. If you changed your mind, you would be subject to harsh penalties. Unless you are in poor health, this simply isnt a reasonable allocation of your assets.

One alternative would be to put a portion of your nest egg into an immediate annuity, providing higher income and some of tax benefits they appear to be proposing, while investing a corresponding amount in a tax efficient equity mutual fund. The remainder, 60 to 70 percent of your nest egg, could be invested in a balanced fund or a combination of equity and income funds. The probable result: a higher total return and a better chance at maintaining your long term purchasing power.

Q. My wife and I are 64 and 65, respectively. Both of us had had cancer in the past year. Mine is in successful remission with at least an 85 percent five year survival rate. My wife is in lengthy chemotherapy with perhaps as low as a 20 percent five year survival rate.

I need to decide whether to take a fixed pension annuity from my employer or a discounted lump sum payment. A joint and survivor annuity would bring $56,000 a year in income. The lump sum payment would be $660,000 with a supposed discount rate of 7.03 percent. The remainder of our estate is about $3 million. The $56,000 a year would be about half of our estimated $120,000 in retirement income. What would you do?

—F.F., Dallas, TX

A. Money is only a tool. Id go for the fixed annuity. The return is higher than youd get trying to invest the lump sum in the current market. It will allow you to devote your remaining years to things more important than money. In order to avoid giving too great a gift to the actuaries, however, you should consider a joint and survivor annuity with 10 years certain. It may lower the income a bit, but it will eliminate the chance of a major give away while increasing current income.

With a $3 million estate before the pension transaction, annuitizing the pension is a fruitful way to diminish future estate and income taxes.