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Annuity to supplement income after retirement?
Old 09-07-2012, 07:51 PM   #1
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Annuity to supplement income after retirement?

I'm considering a fixed index annuity from National Western Life to supplement our income in retirement. It is linked to the S&P 500 and has a guaranteed income rider. I know about the early withdrawal penalties and the limited growth potential.
I've been looking online and see many that say stay away from annuities. I'm thinking they mean variable annuities.
I'm looking for some advice on this and if you feel that this may not be right for me give me some other option(s). Please be constructive.

Information that may be helpful is that I'm 62, my wife is as well and I'm receiving a pension. I'm in excellent health and expect a long life.
Let me know if I've omitted any other pertinent information.
Thanks
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Old 09-07-2012, 08:33 PM   #2
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Run.

The annuity they are selling sounds like a variable annuity or a equity indexed annuity. Both typically have high fees and enrich the agent selling them rather than the buyer.
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Old 09-07-2012, 09:17 PM   #3
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Make sure you read all the disclosures, that should keep you busy till Dec. at least.
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Old 09-07-2012, 09:55 PM   #4
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Make sure you read all the disclosures, that should keep you busy till Dec. at least.
Yes, I plan to attempt that.

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Run.

The annuity they are selling sounds like a variable annuity or a equity indexed annuity. Both typically have high fees and enrich the agent selling them rather than the buyer.
Not variable or equity index. I don't pay fees.
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Old 09-07-2012, 10:17 PM   #5
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I don't know much about annuities but when you say no fees a red flag goes up. You don't really think that this company is selling you an annuity because they like you?
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Old 09-07-2012, 10:35 PM   #6
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I don't know much about annuities but when you say no fees a red flag goes up.
+1

If you are buying an annuity, you are paying fees. You need to look very carefully at the dozens and dozens of pages of fine print to find them but they are most certainly there.
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Old 09-07-2012, 11:12 PM   #7
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Not sure whether this helps - I live in Asia Pacific and my friends and I have bought annuities sold here. Whenever we ask whether there's any fees, the answer is always "no". But I don't believe that and despite reviewing the agreement/statements through the years, I find no fees mentioned and yet the returns (guaranteed annuity pyt and the non-guaranteed annuity pyt via dividend) are pretty consistent and satisfactory. I finally conclude (in my own opinion) that whatever fees (and am sure there are indeed fees) are in-built and accounted for before the guaranteed annuity pyt is determined and non-guaranteed annuity pyt is declared. I don't know how much it is but because the returns are satisfactory and meets my purpose, I have a few such annuities.
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Old 09-08-2012, 07:07 AM   #8
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Run.

The annuity they are selling sounds like a variable annuity or a equity indexed annuity. Both typically have high fees and enrich the agent selling them rather than the buyer.
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Not variable or equity index. I don't pay fees.
As others have suggested, you are paying fees either explicitly or implicitly. You say it is not a VA or EIA but it has returns based on the S&P (like and EIA) and guaranteed income (like a VA) so I'm confused as to what it really is. Be careful. Other than SPIAs, most annuities are not very consumer friendly.
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Old 09-08-2012, 07:29 AM   #9
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There are several issues here that make it hard to comment without knowing more detail, but here are a few thoughts:
1) another annutiy may not be in your best interest because you already have Social Security and pension income. Don't use up too much of your other assets on products that you can't easily reverse.
2) Yes, there are fees. Annuities are sold by insurance companies so there are mortality expenses, administrative expenses, the costs of the underlying funds, costs for riders (such as the guaranteed income benefit). Most lower cost variable annuities that have no frills at all are typically beteen 1.25% and 1.75% and I've seen others (those with various riders) that cost around 4%. Little is transparent because you aren't wriitng a check to the advisor for these fees. They come out of the net return.
3) A Guaranteed Income rider does have it's benefits but the timing might not be right for that. Older policies have offered more attractive deals but many of those I've seen lately are pretty lousy... and the fees aren't less than before.
4) To beat the insurance company on this deal you have to generally have to live a long time. If you plan to annuitize this and live off the income, you're basically getting your principal back for the first several years. If you live long enough, you begin to see a return. That said (I'm trying to be constructive here), insurance is just that, so you are buying some peace of mind I suppose.
5) Be very careful and read everything before you buy. I'm convinced that many of these salepeople don't really even know what they're selling. They certainly don't talk about the downside to these products in their sales meetings... only the benefits, including the awards for the most product sold... "first prize is a cadillac, second prize is a set of steak knives, third prize... you're fired." Anyone remember that line?? Glenn Gary, Glenn Ross. Love that movie!
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Old 09-08-2012, 08:18 AM   #10
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Panacea, thanks for the reply. Yours is what I was hoping for. You went to lengths and I do appreciate it. I still would like other alternatives that would add to my income stream.

As for costs, yes, I realize there are built in costs. The main one is that when the S&P goes up I only receive a % of that increase, the ins company keeps the rest. But, when the S&P goes down, my balance stays the same.
I've done quite a bit of research online and it seems that this is one of most recommended (or least hated).
ipb4uski, I'm making a one time payment.
Thanks also for the other replies also!

I've found through my research that now is not a good time to buy annuities. Since the rates are so low the ins companies don't offer much. I worry that if I purchase this I will be committed for many years. I will be able to remove my principal but not my gains or so I have been told. I would love to wait a few years for better rates (currently it is 4%).
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Old 09-08-2012, 08:34 AM   #11
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Bruce:

I'm no expert on annuities, but other than what has already been said, keep in mind the guarantee is only as good as the company that is offering it. It's not like it is FDIC insured. I'm saying don't put all your eggs in one basket. If it is a fairly small portion of your portfolio, it may be OK. Having said that, if it will make you sleep easier knowing you have this income stream coming in, that's a factor also. There are many pros and cons you just have to weigh. Good luck with your decision!
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Old 09-08-2012, 08:41 AM   #12
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Thanks David. It is about 60% of my portfolio. Annuities are guaranteed by each state. NWL is rated A (excellent) by Ambest and a (strong) by Std & Poors.
You're right about sleeping! I may not be able to sleep thinking I may not be making the right choice.
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Old 09-08-2012, 08:45 AM   #13
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most if not all states only guarantee your contract up to a limit not all your payments.

the only annuity i would ever consider is an immeadiate annuity.

there are no extra fees or commissions. if you like the rate then thats the deal.

they can pay out more than you can get safely and reliably on your own.

they have something you cant to invest in.

a stream of reliable dead bodies is what allows them to pay out more than markets may allow.

http://www.annuityadvantage.com/stateguarantee.htm
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Old 09-08-2012, 08:46 AM   #14
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Tax implication is another question as my funds will come from a cash account, two ROTHS and two IRAs.
I found this (pertains to SPIAs though):
Tax-Favored Income
Under current IRS rules use of after-tax funds to purchase an SPIA results in payments that are only partially subject to federal income taxes. The non-taxable portion of each payment represents the return of your original investment over the life of the annuity.

At the other extreme, if you purchase your SPIA with funds from a tax-qualified plan (IRA, TSA, 401(k) etc.), the payments you receive are generally fully taxable as they represent funds that have not yet been taxed.

However, as SPIA payments are made to you over time, taxes will be payable over time. Therefore, even if you purchase an SPIA with pre-tax funds from a tax-qualified plan, you increase your tax-deferral benefit relative to a lump sum distribution, where the entire amount is taxed in the year of receipt.

One other downside that I found through research is that payments (excluding above) are reported as ordinary income, not long term capital gains.
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Old 09-08-2012, 08:49 AM   #15
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most if not all states only guarantee your principal up to 100k not all your payments.
Georgia is $100,000/$300,000
$100,000 is the death bene and $300,000 is payments I believe. Which makes me think that I could loose everything over $300k.
Thanks mathjak107
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Old 09-08-2012, 08:50 AM   #16
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Hi Bruce, I am 62 also. A friend bought that type of annuity a couple years ago. His guaranteed rate at that time was 6%, so indeed now is not a good time to buy. If you wait another 5 years or so you might prefer to get a SPIA instead. This friend now wishes he still had access to his money. He is forced to sell his boat/lifestyle due to having all his cash tied up. At two years in the penalties to getting any money out are prohibitive. My wife retired in October of 2008 (bad timing). Every advisor we talked to only pushed variable annuities. They loved the Great Recession, as it made them rich. Use caution
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Old 09-08-2012, 08:55 AM   #17
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Georgia is $100,000/$300,000
$100,000 is the death bene and $300,000 is payments I believe. Which makes me think that I could loose everything over $300k.
Thanks mathjak107

georgia is 100k on the annuity and 300k on all insurance you may have in total
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Old 09-08-2012, 09:15 AM   #18
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georgia is 100k on the annuity and 300k on all insurance you may have in total
I was incorrect. $300K in death bene and $100k cash value.
Here's the link:
State Guarantee Funds

That should be enough for me to look for other options.
Any suggestions? Should I just keep my $ in ETFs and sell some periodically?
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Old 09-08-2012, 09:38 AM   #19
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Bruce, the product you are considering is an equity indexed annuity with an income rider and it is very expensive for what it is. If you like the idea of limited equity market upside with little or no downside, that strategy is pretty easy to replicate on your own as detailed here: Life, Investments & Everything: Rolling Your Own

You should also seriously rethink dumping so much into one product. Would you buy a bond issued by a corporation with 60% of your portfolio? That is what you would effectively be doing.

Start reading about investing, modern portfolio theory, etc. If you'd like to consider annuities for an income stream, you may wish to do a bit of research. There is a professor in Toronto whose name escapes me at the moment who has made a specialty of studying what happens when you add a payout annuity to your portfolio in retirement.
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Old 09-08-2012, 09:39 AM   #20
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Most insurance companies that run into trouble are taken over by healthier ones.

Insurance boards usually have as a provision the fact that you might be asked to take over the client base in order to sell insurance in that state.

Its usually transparent to you and nothing changes.

More important is what purpose is Ithis annuitized income going to serve.

I usually like 20 to 25% annuitized income when someone has no pension, a portfolio less than 40% stock and they are looking to pull a full 4%
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