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Need help with Parents Investment Strategy
Old 07-21-2009, 10:43 PM   #1
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Need help with Parents Investment Strategy

My parent's financial planner is trying to sell them a variable annuity. They have asked for my advice, and after a review of the information provided, I have some serious questions about this plan.

Facts: Parent's have $180,000 of investable assets. About 50% of that is in an IRA. Dad is 70 and in moderate health. Mom is 63 with many medical problems, but a long life expectancy.

My parent's need $12,000 extra a year on top of social security. They would like to have money left over for the kids ($100,000 is his dream).

Financial advisor is trying to sell them a variable annuity with a guaranteed income and death benefit. The fees are about 3% with a penalty for early withdrawal. I think this is very high and I don't understand why you would put IRA assets into a variable annuity because there is already tax deferral in the IRA.

Also, the advisor suggested they put ALL of their assets into the the variable annuity, which I think is crazy. What I am looking for from the group is advice/suggestions on the following two topics:

1) Arguments against the suggested all-in variable annuity strategy
2) Alternative suggestions to meet the above stated goals

I have a meeting with this advisor on Friday, July 24th, so the earlier feedback the better. Thanks in advance.
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Old 07-21-2009, 11:30 PM   #2
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The general advice you'll receive here is to fire the financial adviser, suggesting that someone put IRA money into any form of annuity is almost always a red flag that the financial planner is a shark.

There are several type of variable annuities, the most common is a combination stock mutual fund with an attached life insurance policy. They are almost always great deals for the financial planner because of upfront commission and on going fees. A fixed income annuity with a floating rate MAY be appropriate for you parents in some situations, but my general rule for annuities it is ok if you buy them by going direct to a firm like Vanguard but buying them from anybody trying to sell them to you is a bad idea.

Unfortunately, a $12,000 per year withdrawal on an investment of $180,000 is very difficult in today's interest rate environment.

What are there current investment in?
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Old 07-22-2009, 08:56 AM   #3
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Quote:
Originally Posted by ChiSaver View Post
I have a meeting with this advisor on Friday, July 24th, so the earlier feedback the better. Thanks in advance.
Reschedule or cancel. The 24th does not give you time to educate yourself on the pros/cons, and discuss these with your parents.

If this is a good deal (I doubt it), it will still be a good deal next week, next month. No rush.

These salespeople are often well trained with just the right things to say to people in this situation, and a tendency to overlook the negatives (to the extent that they can do so legally). It is what all salespeople do, so like anything else, you need to be an educated consumer.

-ERD50
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Old 07-22-2009, 09:25 AM   #4
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I agree that getting $12k out of $180k in investments will be pretty much impossible without dangerously (i.e. at an unsustainable rate) eating into principal.

Pssst, Wellesley? (VWINX) Current yield is 4.66%, throwing off $8388 in interest and dividends.
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Old 07-22-2009, 09:40 AM   #5
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I'm not a big annuity fan either but one possibility is a fixed immediate annuity. A guaranteed income stream for life as long as the company stays in business. Below is a calculator to play with.

Better tell your dad not to worry about leaving much to his kids. He's going to need every penny he has.

Immediate Annuities - Instant Annuity Quote Calculator.
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Old 07-22-2009, 09:50 AM   #6
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Quote:
Originally Posted by ChiSaver View Post
Facts: Parent's have $180,000 of investable assets. About 50% of that is in an IRA. Dad is 70 and in moderate health. Mom is 63 with many medical problems, but a long life expectancy.

My parent's need $12,000 extra a year on top of social security. They would like to have money left over for the kids ($100,000 is his dream).
They want to invest $180,000, draw $12,000 a year (6.67% withdrawal rate) and leave at least $100,000 of it to pass through their estate?

This math doesn't come remotely close to working. Plus, moving IRA money to a variable annuity is usually financial malpractice.
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Old 07-22-2009, 09:55 AM   #7
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I just realized I should have provided a bit more information as I don't think my parents are as bad off as it seems. My Mom is currently still working and pulls in about 20k a year, which after taxes, actually gets them the amount they need per month currently. Once they retire, Mom will have a small pension coming in and SS, which should cover nearly everything they need. What they are looking for is a way to lock in a set amount (100k) but live off the rest as play money.

The 24th is also just the day when I will be meeting with the advisor, not when they have to make a decision by. I am actually a bit impressed that Dad came to me before making the leap as this is a first.

My first reaction is the same as everyone on this board (fire the guy and run). However, Mom and Dad both like him, so I am willing to give him a chance at the end of this week. What I would like to get from this group is alternative methods to achieving similar results (i.e. a mix of Immediete Annuties and a 40/60 allocation with the rest, etc.). I want to pepper the advisor with alternatives and see what his arguments against them are.

After Friday, I'll post the results of that conversation as well. Thanks to all the advice thus far...keep it coming!!
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Old 07-22-2009, 10:18 AM   #8
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This is quite a change in your description of the scenario......... You go from your parents "needing" $12k/yr to they simply want to provide you with a $100k inheritance and the rest is "play money."

There are a number of threads discussing immediate and variable annuities I suggest you review. The prior extensive discussions make it somewhat tiresome to start at ground zero laying it all out again.

IMO, your #1 task needs to be eliminating any plan to reserve $100k for an estate. You may need to be a little tricky about this in selling it to your dad. In no way could I recommend your parents "lock in" $100k for this purpose. How can you or they predict what the next 2 - 3 decades will bring to their lives? "Locking in" an inheritance for the kiddies while possibly subjecting themselves to a money shortfall later in life just doesn't pass the common sense test.

Please don't be offended, I'm possibly reading too much into what you've said, but is the FA's plan to "lock in" $100k for an estate influencing you to lean towards going with this plan? That is, looking out for yourself in addition to your parents?
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Old 07-22-2009, 11:06 AM   #9
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Quote:
Originally Posted by ChiSaver View Post
I just realized I should have provided a bit more information as I don't think my parents are as bad off as it seems. My Mom is currently still working and pulls in about 20k a year, which after taxes, actually gets them the amount they need per month currently. Once they retire, Mom will have a small pension coming in and SS, which should cover nearly everything they need. What they are looking for is a way to lock in a set amount (100k) but live off the rest as play money.

The 24th is also just the day when I will be meeting with the advisor, not when they have to make a decision by. I am actually a bit impressed that Dad came to me before making the leap as this is a first.

My first reaction is the same as everyone on this board (fire the guy and run). However, Mom and Dad both like him, so I am willing to give him a chance at the end of this week. What I would like to get from this group is alternative methods to achieving similar results (i.e. a mix of Immediete Annuties and a 40/60 allocation with the rest, etc.). I want to pepper the advisor with alternatives and see what his arguments against them are.

After Friday, I'll post the results of that conversation as well. Thanks to all the advice thus far...keep it coming!!
Forget annuities then. If they will have all they need with the addition of your moms' SS and pension, just put half in cd's and half in something like VG's Wellesley fund. Both will give them some additional income and should preserve capital for end of life issues. I would fire the FP.
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Old 07-23-2009, 09:14 AM   #10
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Forget annuities then. If they will have all they need with the addition of your moms' SS and pension, just put half in cd's and half in something like VG's Wellesley fund. Both will give them some additional income and should preserve capital for end of life issues. I would fire the FP.
Hmmmmm...wonder if the FP knows that the parents have enough money with the pension coming in. Maybe he/she were only told that the client needed a 7% withdrawal rate. If the FP knows all the facts, then he/she is either stupid or greedy, or both........
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Old 07-24-2009, 10:23 AM   #11
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All the previous replies are expert and informed and you'd be well advised to listen closely. I only want to point out the obvious fact that jobs are not secure these days; neither are pensions. Having funds in a safe investment that is accessible (not an annuity) is a valuable asset these days.
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Old 07-24-2009, 11:24 AM   #12
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Here's the cost of a "cheap" annuity, with a discussion of why insurance companies feel obligated to charge so much for the privilege:
The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
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