Overcoming Barriers To Financial Sanity, or: What The Hell Is An Annuity Anyway?

As of today, I have a new understanding of the fight-or-flight response that drives a lot of financial behavior.

I spent much of yesterday afternoon and evening with K., trying to sort out his financial situation. On his last trip home, his parents handed over the information on his assets that they've been administrating (administering?). He has a Roth and an annuity, and frankly, either I fail to grasp some complexity of the situation or his parents are not so much on top of the finances. The Roth is at Smith Barney. The manager takes an annual fee, plus has the money distributed over three funds that each have an expense ratio of over 2%. To my (untrained) eye, it doesn't even look like the funds are doing that well. The annuity—well, what is an annuity, anyway? So far as I can make out, it's just designed to beat inflation while keeping you from getting at it, because it earns a pathetic 5% and has all sorts of bizarre restrictions. Suffice to say, it's confusing and looks like not so much a good investment vehicle.

The various frustrations of this day have reminded him of how he got into this pattern of financial procrastination and shed some serious light for me on how many obstacles there are for young people learning to manage their own money.

It's so much harder to switch tracks than it is to set yourself on a constructive one from the start. He has to deal with undoing things as well as doing them. He has to figure out the workings and rules of something he doesn't want to deal with before he can decide which of his various options he does want to deal with.

It's almost ironic that despite all the tsuris, as things go, he's not in a bad position. He's making a plan now, when he's 28, so he won't be living paycheck-to-paycheck anymore, and he has assets to the tune of about $45,000. But the frustration! The confusion and the fear and the anxiety of trying to get all this stuff dealt with is really pretty intense—I got frustrated and confused and anxious just from being in the room. He's only recently gone freelance, and so he's only recently had the financial burden of paying for health insurance—his parents had been helping him out with that, but now he wants to shoulder it himself, and there were moments when the budget I was working up with him just looked hopeless—looked like he couldn't even spend less than he makes, let alone save anything, and I just wanted to cry, I was so frustrated.

This is it—the major barrier. The major barrier is experiencing these feelings, feeling like you don't know what to do, and you can't figure out what to do, and you can't even figure out how to figure out what to do, and the stakes are high and if you don't succeed your life will spiral out of control. This is why K. has put off getting his financial house in order, and this is why lots of people, everywhere, especially young people, who feel like there is some sort of secret adulthood knowledge that they have yet to acquire, put off dealing with their finances: because they don't want to feel these things. And I think it's totally understandable.

This makes me think a lot about the obstacles young people face in taking control of their financial lives and how we can overcome them, but for now, in this specific situation, there are baby steps toward financial peace.

Yesterday, K.:
1) Registered for Mvelopes Personal and established a spending plan that allows him to live within his means while saving for future purchases and for an emergency fund.
2) Opened an account with ING Direct to earn the $25 opening bonus and automated monthly withdrawals from his checking account.
3) Decided to roll his existing Roth into a Vanguard Roth.
4) Decided to take disbursements from his annuity to pay an existing debt and max out his Roth for the year.

This week, he plans to:
1) Set up a meeting with a tax preparer.
2) Roll his Smith Barney Roth over into a Vanguard Roth.
3) Figure out what on God's green earth an annuity is and how it works and if it will actually conform to this plan (see #4 above) and if not, whether it would be a good idea to liquidate it and open a brokerage account.

I think (and he agrees) that the best thing he can do for himself here, and therefore the goal of this process, is bringing his financial life under his own purview. I think that means it may be worth liquidating the annuity and paying penalties in order to put the bulk of its assets into an investment vehicle that suits his goals and does not unnecessarily inconvenience or confuse him. In this case, as in most cases, I think he has to understand his financial position before he can make informed choices about how to improve it. So more baby steps are to come.