My Fidelity guy recommended an annuity

[Live And Learn]

I met with my FIDO guy for the first time yesterday (just moved my taxable account). The meeting lasted nearly 2 hours, which I deeply appreciated. He reviewed my FIDO RIP input with me, which was great - I wanted the second set of eyes on it.

He said it was rare for people to have more in their taxable account then they have in their 401k/IRAs. He asked the source of the funds - I told him hard work, LBYM, and putting bonuses into savings rather than toys.

Then we reviewed my discretionary / non-discretionary spending vs my sources of income. "Fidelity recommends that non-discretionary expenses be covered by guaranteed income once you retire". I said "your not really going to recommend an annuity, are you ". He said "I think you should look into it. You have 18 years before you want to start taking Social Security. And even if you started at 62, you have 10 years. If there is a market crash you could be in danger of early asset depletion". Another suggestion was that I find part-time w*rk !!!

My RIP results show a 95% success to age 92. I questioned his recommendations, asking if the 95% meant that there is only a 5% risk of the "early asset depletion" he was concerned about. He said the RIP tool excludes the top 20% of returns as well as the bottom 20% before running the Monte Carlo simulations. To me this implied the 95% success rate may not be "complete". I can't find anything about that in the RIP methodology documentation.

We also talked about tax loss harvesting and that if there were a market correction I should look into that. I told him if there is no correction that I planned to tax gain harvest and take gains off the table at 0% tax rate. He looked at me like I had two heads. I said "LTCG are taxed at 0% if you are in the 15% tax bracket or lower, right ". He said, "that would be SOME loophole". Can the forum members confirm that I am correct about that? I just modeled it in Taxcaster and believe I'm correct, but now I need reassurance.

The guy has been doing this for 9 years. He's very nice, but given the above, I think I need to find someone else. What do you folks think ?

Thanks

 

[Big_Hitter]

What are his credentials, if any?

 

[nwsteve]

Like all organizations, Fido has a mix of talent. Are you Private Client? Most of their reps for this level are CFPs in which case, if I got the answers you did, I would request a different rep.
Re: annuity, no sin in suggesting it be part of your portfolio IMHO. However, once you say "No Thanks", and he keeps pushing, then it is a different matter. My rep suggested and I told her not until interest rates got off the floor would I have an interest. She has not suggested since that conversation. Keep in mind, Wade Pfau recommends the annuity for the non-discretionary spending level as well.
For what it is worth, I have been with Fido for over 20 years and never had a rep with such a limited appreciate for the tax considerations. In fact, if you search on the Fido site, you will find quite a bit info related to tax brackets and harvesting cap gains/losses
Nwsteve

 

[RunningBum]

You are correct about LTCG and 0% tax rate, but not unlimited. Once LTCGs put your total income over the 15% bracket, those gains start being taxed at 15%. If you aren't going to fill up to the top of 15% with cap gains, look into doing partial Roth conversions to that limit.

Annuities may be for some but I wouldn't want to lock in at what would probably be a low interest rate. I'd ask him how well the annuity would protect you if inflation took off. I'm 54 with more in my taxable than IRAs, and am not considering an annuity at all at this point. If the market crashes, it would likely bounce back and not affect me all that much. Prolonged inflation seems more likely to me.

I don't think much of his advice or knowledge. Find someone else or do it yourself.

 

[gauss]

Of course he does (recommend an annuity)!

Don't confuse sales ability /people skills with in-depth knowledge of financial planning.

Do you think it is a coincidence that so many of the successful people here at ER.org, come from introvert dominated professions?

-gauss

 

[Ticker]

what a coincidence. my fido guy tried to talk me into an annuity also.
my plan was not to use my ira/401k funds until mrd time. he kept insisting
that an annuity was appropriate for me.

glad I didn't follow his advice. I would rather control any distributions that I might take than have them forced upon me by monthly payments.

 

[Options]

...

I think I need to find someone else. What do you folks think ?

Thanks

I think I'm interested in knowing why you need to "find" anyone, and why you don't trust yourself?

Rick Ferri:

"Successful investing hinges on three steps: the developement of a prudent investment plan, the implementation of that plan, and a commitment to follow the plan in good times and bad."

"Asset allocation is the cornerstone of a prudent investment plan and is the single most important decision that an investor will make in regard to a portfolio."

"Simply stated, asset allocation is a means of spreading your investment risk across many different types of securities, thus reducing overall portfolio risk and subsequently increasing portfolio return."

"Asset allocation eliminates the need to predict the future direction of the markets and eliminates the risk of being in the wrong market at the wrong time."

"In this age of do-it-yourself finance, many novice investors skip right over the boring asset allocation process and head straight for the sexy stuff: picking stocks, bonds, and mutual funds."

"The simplest, most direct approach to managing your portfolio is the best route."

"The starting point of a portfolio is its equity and fixed-income mix."

"An investment in a total U.S. stock market fund is a solid foundation on which to base a stock allocation."

"If you are going to add only one additional U.S. common stock mutual fund to a core position in a U.S. stock market fund, I recommend placing about 30% in a small-cap value index fund."

"Because of all the extra risks involved, diversification is the key to international equity investing."

"Since capital can flow freely to most developed nations, there is no reason to believe that one market or one industry within a market is going to produce higher returns for very long."

"A well-diversified fixed-income portfolio includes a broad range of investment-grade bonds with different maturities, quality, and issuers."

"Since there are no inflation-adjusted bonds in the Lehman Aggregate Bond Index, TIPS and I-Bonds can be added."

"As a rough rule of thumb, if your combined state and federal income tax rate is 30% or more, municipal bonds may be an appropriate choice for taxable accounts."

"The best way to build the fixed-income portion of a portfolio is through low-cost bond mutual funds-particularly bond index funds."

"Real estate is one of the few asset classes that have had a low correlation with stock and bonds."

"Although the allure of a diversification benefit is enticing, there are some major obstacles to adding alternative asset classes to a portfolio."

"Commodity total return indexes have a low correlation with other asset classes, but they also have historically low returns."

"For most individual investors the (hedge fund) disadvantages of high cost, low disclosure, lack of diversification, illiquidity of some funds, and poor consistancy of performance far outweight the benefits."

"A good rule of thumb for all alternative investments is, when in doubt, stay out."

"Each investor is unique, and that means that each portfolio will be different."

"A vast array of academic studies prove that market timing does not work."

"A large majority of investment advisors have an ulterior motive, namely, selling investment products that pay them commission and fees."

"It takes only one bad investment decision to wipe out years of prudent saving and investing."

"Over the long haul, abnormal returns are sustained only through abnormal exposure to risk." (quote from Allan Greenspan).

"I will warn you that there can be a tendency to overanalyze the data in an attempt to find the perfect asset allocation."

"Fight the urge to be perfect--no asset allocation plan can be perfect."

"Putting a good plan into action today is much better than searching for a perfect plan that cannot be known in advance."

"When it comes to making money, boring can be very profitable."

"The short-term performance of financial markets is unpredictible."

"On Friday, October 16, 1987, stocks unexpectidly fell by 9%. The following Monday, prices came crashing down another 23%."

"The 'free lunch' from rebalancing is the essence of Modern Portfolio Theory."

"Past correlations are not reliable indicator of future correlations."

"During a time of extreme volatility, when you want low correlation between asset classes, positive correlation can increase dramatically."

Emphasis Added

 

[Andre1969]

I had to talk to a Fidelity rep yesterday, to clean up some complications with moving an inherited IRA that I got from my grandmother, to an account I set up with Fidelity.

The rep did start sniffing around, asking what my investment goals and such were, and what other kinds of investments I had. She didn't try pushing annuities on me at least, but I might have pre-empted that with something I said. The IRA my grandmother had was in some kind of deferred variable annuity thingie, or something like that. I mentioned to the Fidelity rep that I didn't know much about annuities, other than I've heard mostly bad things about them, but I know old people tend to like them.

So I guess I came off sounding anti-annuity enough that she didn't try to push it.

 

[Options]

Back when VG was still providing free PF analysis, I had an adviser do an analysis for me. I was not at all impressed and wouldn't do it again, with any provider. OTOH, I'm a major self-service person so YMMV.

 

[Live And Learn]

I wouldn't say he "pushed" the annunity. I was just surprised that he thought it made sense at all given the high success rate in the tool, but given the replies I guess I should have expected it.

On the plus side, he didn't push me to move my 401k over (I told him I was moving that to a Vanguard IRA) and he didn't push me to invest my cash with him. I may do that with Vanguard also.

I've been DIY for 30 years and plan to stay that way, but it's nice to get different point of views and validation on my thoughts. Its why I love this forum, but I was hoping I could also use the FIDO rep.

 

[frayne]

Ten years ago when I retired and rolled over my 401K and lump sum pension payout into a FiDO IRA, my advisor wanted to set me up with about 15-20 managed mutual funds. I said, thanks but no thanks and I'll purchase what I think is best. In retrospect, glad I didn't listen to him.

 

[M Paquette]

"Your" Fidelity advisor has a fiduciary responsibility to:
A) you.
B) himself.
C) Fidelity.

Which one do you think is the correct answer?




Hint: It's not A...

 

[robertf57]

Fidelity and many other advisors have recommended guaranteed income for a portion of one's income needs. His suggestion to consider an annuity was not at all off-base and quite frankly should not have been objectionable to you. In my mind a SPIA offers at least one very tangible benefit. It helps keep the financially challenged from selling low and buying high with at least that portion of their assets ;-) . The fact that he brought it up shouldn't dissuade you from considering his other recommendations. Regarding capital gains up to 15% bracket, I have to believe there was some miscommunication in this conversation. Anyone who has passed the series 65/67 should know about this capital gains tax treatment.

With that said, I would not be in the market for a typical SPIA in my 50's or 60's.;

 

[Options]

...

With that said, I would not be in the market for a typical SPIA in my 50's or 60's.;

Unless you needed the income before then, 70's or 80's, or some combination of laddered annuities at, say 75, and then 85, would be better due to increased mortality credits. Too many other variables to consider (and I'm too lazy to list them), to just run out and buy one.

See these:

The Retirement Café: Untangling Retirement Strategies: Life Annuities

The Retirement Café: Everybody Hates Annuities

 

[LOL!]

You are correct about LTCG and 0% tax rate, but not unlimited. Once LTCGs put your total income over the 15% bracket, those gains start being taxed at 15%. If you aren't going to fill up to the top of 15% with cap gains, look into doing partial Roth conversions to that limit.

Also watch out that by going just over the limit, your marginal income tax bracket becomes 30% and not just 15%. The reason is that some qualified dividends no longer get the 0% tax rate as well. So you pay the 15% LTCG tax on those long-term cap gains, but you also pay 15% tax on those qualified dividends hidden elsewhere on your tax return.

 

[friar1610]

There has recently been a thread running on the Bogleheads board about annuities. I put up a post there related my experience with a Fidelity annuity when a rep recommended one for me years ago. It may be of interest to you.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=169861

I use the same screen name/avatar on that site as I do here; my post is about 3/4 of the way toward the end of the thread. The short version is that I bought the annuity ( VA), now wish I hadn't but it hasn't really worked out that bad and now fills a spot in my financial plan.

 

[daylatedollarshort]

"Fidelity recommends that non-discretionary expenses be covered by guaranteed income once you retire".

I agree with that part. I personally would not feel comfortable having a RIP outcome of less than 100% with money to spare well past age 100. There are not a lot of jobs out there for 90 year olds and I don't want to have to worry about running out of money, especially when I'm too old to work.

I think covering non-discretionary expenses is best covered by a matching strategy for retirement income, and a non-inflation adjusted annuity does not do that well, unless offset with a non-inflation adjusted expense like a mortgage.

 

[bmcgonig]

I agree with that part. I personally would not feel comfortable having a RIP outcome of less than 100% with money to spare well past age 100. There are not a lot of jobs out there for 90 year olds and I don't want to have to worry about running out of money, especially when I'm too old to work. .

I think you need to know the inputs it uses for stocks and bonds etc. If the inputs are conservative e.g., Wade Pfaus latest numbers, then I'd say 100% might be pushing it. If they're using the averages of the last 30 years..then you're probably more than right!


Sent from my iPad using Early Retirement Forum

 

[daylatedollarshort]

I think you need to know the inputs it uses for stocks and bonds etc. If the inputs are conservative e.g., Wade Pfaus latest numbers, then I'd say 100% might be pushing it. If they're using the averages of the last 30 years..then you're probably more than right!

I use my own spreadsheet as well, with real returns and inflation as variables. My spreadsheet results are a bit lower than RIP, but they are both in the same ball park.

We're okay with leaving money to charity and the kids. We decided early on we would rather do that than ever have to worry about running out.

 

[Ready]

My Fidelity reps have always pushed annuities, where my Vanguard reps have always discouraged me from buying them. It may just be the specific individuals I've worked with, and not a reflection on the overall philosophy of the two companies.

But in general Vanguard has been pretty negative on annuities in all my conversations with them...including the reps that directly answer the annuity desk. My last conversation with them went something like "we'll sell you one if you really want it, but we don't recommend them in your situation..."

 

[mrfeh]

OP - I'm in a similar boat as you. Thinking about retiring next year at 50, no pensions. So, will be living off taxable accounts for 10+ years.

Was your Fido rep trying to make a sale? Probably. But, that doesn't mean he was necessarily wrong. Proponents of liability matching portfolios would want you to have a known, dependable source of income to cover basic expenses during phase 1 of your retirement.

Jim Otar (Unveiling the Retirement Myth) suggests annuities for folks in the Grey Zone. Not saying he's correct, but reading his material has caused me to pause when my initial reaction to annuities is "are you crazy?".

For some people, SPIAs may serve a purpose. Some links you may find interesting:

https://www.bogleheads.org/forum/viewtopic.php?t=110521
What Color Is Your Retirement Zone?

 

[Live And Learn]

Great links. Lots to learn about and lots to think about. The annuity laddering is something I hadn't really considered.

My mom lives on $1200 / month. Granted she doesn't spend anything on entertainment or travel, but I wouldn't say her life is "miserable" either. My theory is that ultimately if I needed to live on the $2k / month that I should get from SSI starting at age 70 that I'll be "ok". I won't be traveling the world (I don't even do that now!) and there is a risk I'd end up on Medicaid, but ultimately that risk is relative low.

Since my j*b is "personal investment manager" (of my own portfolio and no one elses) I'll have lots of time to read up and learn more. I'm still not overly impressed with my FIDO guy but he provided a starting point to help me figure out "what's next on the todo list".