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Scott Burns on the "magic" of annuities...
Old 11-04-2007, 07:14 PM   #1
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Scott Burns on the "magic" of annuities...

In his latest column, Scott Burns describes a variable annuity with "living benefits" offered by Prudential:

"In case you haven't heard about 'living benefits,' they are the newest wrinkle in variable annuities, magically providing income guarantees while you are living rather than a minimum value guarantee when you are dead."

No surprise, there's a catch - a very big one:

"...a portfolio expense of 1.20 percent, a charge of 1.65 percent for the variable annuity contract and an additional 0.60 percent for the lifetime income guarantee. That's a total of 3.45 percent a year that comes off the gross return."

Although I've seen some very high fees for some of these creative insurance products, this number seems amazing. I wonder if Prudential's 3.45% per year charge might set some sort of record.
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Old 11-04-2007, 08:36 PM   #2
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Although I've seen some very high fees for some of these creative insurance products, this number seems amazing. I wonder if Prudential's 3.45% per year charge might set some sort of record.
So essentially an agent has to sell one $1M contract to retire early at a 3.45% SWR.

OK, maybe two contracts. After that it would start to seem like a job or a career...
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Old 11-04-2007, 09:00 PM   #3
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So essentially an agent has to sell one $1M contract to retire early at a 3.45% SWR.
...
Interesting observation. My guess is that the agent gets a front loaded commission, and then maybe or maybe not some ongoing fees for a relatively short while. He really has no motivation to take care of this customer long term since the cusomer has already coughed up what he has and he can't withdraw the money.

Ongoing overrides are more common with whole life, variable annuities that can be withdrawn, and mutual funds, etc. - since that aligns the agent motivation with the company's goal of keeping the investment or policy in place.

Ha
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Old 11-04-2007, 09:03 PM   #4
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The upfront fee for the agent is very high, in the range of 6% or more. It is no coincidence that the forfeiture fees for annuities usually approximate the agent's commission. No way the company will let you loose without paying itself back for its agent commission out of your pocket.

My source is a personal acquaintence who used to sell these.
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Old 11-05-2007, 06:45 AM   #5
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I can't believe anyone would buy these things. An immediate annuity, maybe. The new lifetime income products offered by VG and Fidelity could be a good alternative. Time will tell.
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Old 11-05-2007, 11:32 AM   #6
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I entered $1,000,000 into my trusty HP and used 4% interest for 40 years. You get a payment of $50,523.49. Sounds like Prudential is just giving you your money back over time, and banking on you dying earlier!
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Old 11-05-2007, 12:29 PM   #7
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There is more to the living benefits than what Scott Burns implies. What you are buying is insurance against loss. You are buying peace of mind, and you're buying a potentially growing income stream with no chance of complete loss. Yes, insurance companies are betting against you living too long, but if you do happen to die too soon, you haven't annuitized and therefore your heirs still get the remainder of assets. I'm not sure why this would be seen as a bad thing?
BTW, Prudential doesn't have the market on this product and, in my opinion, there are better products available.
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Old 11-05-2007, 12:56 PM   #8
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His conclusion:

Quote:
Is there a better choice that offers the same lifetime income security?

You bet.

Divide your portfolio into two pieces, a life annuity and a diversified portfolio. In this example, you would put $620,000 into a life annuity. That would give you the same $50,000 a year that Prudential guarantees for life.

But you'll also have $380,000 "leftover" to invest in a portfolio that can grow without the stupefying drag of 3.45 percent a year in expenses.

Left to grow unimpeded for 20 years at 9.74 percent, less expenses of 0.50 percent, your $380,000 would grow to $2,225,000. With expenses of 1 percent, it would grow to $2,030,000.

Is Prudential just a "bad apple" in a wonderful crop of living benefits insurance products? Not at all. The agent made all the required disclosures. This product, and other living benefits offers, seems magical until you consider alternatives.
It's truly incredible to me that someone would sign up for something like this. Just some faint hope of principle growth AFTER the fees:

Quote:
Basically, every dime of dividend and interest income will be going to the insurance company, not you. Your income will come out of principal growth or, lacking that, principal. The gross return has to top 8.45 percent before there would be any possibility of growth since you may also be taking out 5 percent.
This is truly disgusting!

Hall of shame, anyone?

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Old 11-05-2007, 01:22 PM   #9
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Geez Audrey, talk about your overreaction.
First off consider this, Scott Burns hates annuities. Hate's 'em! And if you read back a few of his articles you'll see that even he sees the advantage to them.
You've got to consider the alternatives. You've got CD's. Sure, your principal is protected, but you're going to settle for a very low (almost assuredly lower than the inflation rate) rate of return. So you can be sure if you live long enough, your money will shrink away to nothing. You can invest in stocks or mutual funds and live and die by the swings of the market. You retire in the wrong year and suddenly your hard earned portfolio in a three year period could well be cut in half. More than likely that person will then pull out of the market altogether, just in time to see a recovery and they're sitting on the side lines.
Orrrrr, you can invest in the market with a safety net. You mention "a faint hope of growth", but in truth, run a ten year hypothetical and you'll find even though the market was down for three of those years, your portfolio still rose in value, giving you a raise in income that then becomes your new locked in rate that can not drop no matter what.
Sure, there is an expense for the insurance, but who amongst us does not pay for insurance on their homes, cars, perhaps their lives? I've never understood why people have become so opposed to paying for financial help and yet will gladly pay for someone to change the oil in their car as opposed to doing it yourself? Audrey, you want to save that 3%? Quit going out to dinner when you can cook cheaper at home. Quit going to the doctor when you can use Google to research your maladies. Quit buying a new car when the old one will still drive just fine. For my money, I'd much rather have financial security for THE REST OF MY LIFE, than to be bothered by the fact that I can't watch Grey's Anatomy on a mere 40" TV screen when there are 65" screens calling my name.
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Old 11-05-2007, 01:33 PM   #10
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Art, you wouldn't be selling these things would you?

And, BTW, how do you answer Scott Burns contention that similar or better goals can be reached more cheaply by a combination of low cost funds and an immediate annuity?

Ha
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Old 11-05-2007, 01:40 PM   #11
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Audrey, you want to save that 3%? Quit going out to dinner when you can cook cheaper at home. Quit going to the doctor when you can use Google to research your maladies. Quit buying a new car when the old one will still drive just fine. For my money, I'd much rather have financial security for THE REST OF MY LIFE, than to be bothered by the fact that I can't watch Grey's Anatomy on a mere 40" TV screen when there are 65" screens calling my name.
No Thank You - LOL!!!

I don't have to give no middle man no stinkin' 3.45% for the privilege of ripping me off. I believe I already have financial security for THE REST OF MY LIFE for nothing more than the expenses charged by a good mix of no-load low-cost mutual funds and I get to KEEP all the upside of investment appreciation. And I don't even have to scrimp and limit my (rather outrageous) eating out habits!

Oh wait - you're pulling my leg, right? You little you!

Audrey
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Old 11-05-2007, 01:50 PM   #12
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Audrey, you want to save that 3%? Quit going out to dinner when you can cook cheaper at home. Quit going to the doctor when you can use Google to research your maladies. Quit buying a new car when the old one will still drive just fine. For my money, I'd much rather have financial security for THE REST OF MY LIFE, than to be bothered by the fact that I can't watch Grey's Anatomy on a mere 40" TV screen when there are 65" screens calling my name.

Sorry Art, none of those helpful hints you provided for Audrey could possibly save her as much as the outrageous fees quoted in the Burns article. If you invest $1,000,000, the fees are taking away $34,500/year from your returns! That is- even when the market earns nothing, you still have $34,500 taken away from your principle! I don't know about anybody else, but an extra $34,500/yr would DOUBLE my standard of living!
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Old 11-05-2007, 02:07 PM   #13
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BTW, Prudential doesn't have the market on this product and, in my opinion, there are better products available.
Yep. The "better product" being the total avoidance of anything resembling a variable annuity....
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Old 11-05-2007, 02:36 PM   #14
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Art, you wouldn't be selling these things would you?

And, BTW, how do you answer Scott Burns contention that similar or better goals can be reached more cheaply by a combination of low cost funds and an immediate annuity?

Ha
Well Ha, I can answer Scott on a few different levels. First off, as soon as you do that immediate annuity you have given up control of that money. If you die tomorrow that money is gone. Kaput! Bupkis! Your heirs are now hating you for giving away their money. With the living benefit, the money is always yours. At least, unless there is that long term downturn in the market and then your money is gone, but you'd be thrilled to death (no pun intended)to know that you will still be getting your income, as opposed to that mutual fund where you were counting on that 9% return and instead have seen that money also dwindle away because in a long term down market, everything tends to be affected.
While we're on the subject, Scott tries to sell the point that low cost equates to good. There are plenty of no load funds out there with poor performance. Again, do you go to the cheapest doctor available?
Oh yeah, and one more thing, with that immediate annuity, it is impossible to ever get a raise. The money you get in the first year is the same as you'll get in the last year. Inflation is not your friend. At least in the living benefit product you have a chance for a raise in income.
Oh yeah, one more thing, Scott based his whole criteria on someone being 65. What if you wanted income at 50 instead? Or perhaps 70? Perhaps you don't really need the income, but it would be nice to have, but you still want to leave money after you're gone?
I'm sorry, but Scott tends to leave many holes in his theories. I've been reading him for years. Just a few months ago he had decided that living benefits weren't a bad thing. How'd you like your investment advisor to be this wishy washy when investing your money?
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Old 11-05-2007, 02:40 PM   #15
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No Thank You - LOL!!!

I don't have to give no middle man no stinkin' 3.45% for the privilege of ripping me off. I believe I already have financial security for THE REST OF MY LIFE for nothing more than the expenses charged by a good mix of no-load low-cost mutual funds and I get to KEEP all the upside of investment appreciation. And I don't even have to scrimp and limit my (rather outrageous) eating out habits!

Oh wait - you're pulling my leg, right? You little you!

Audrey
Audrey, you do realize that low cost funds still have fees, right? Why don't you just start your own mutual fund and avoid any costs? Oh, and are those mutual funds guaranteed? You mention the rest of your life....so in a downturn market what are you doing for safety? Just curious. What if the market drops 10%? How about 20%? What about 50%? What are you doing with your money?
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Old 11-05-2007, 02:44 PM   #16
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Sorry Art, none of those helpful hints you provided for Audrey could possibly save her as much as the outrageous fees quoted in the Burns article. If you invest $1,000,000, the fees are taking away $34,500/year from your returns! That is- even when the market earns nothing, you still have $34,500 taken away from your principle! I don't know about anybody else, but an extra $34,500/yr would DOUBLE my standard of living!
igsoy,

Sure, as I said before, if the market continues rocking along you've paid for insurance you didn't need. Again, do you have car insurance? What about fire insurance? Should you burn down your house to get your money's worth? IF you have $1 million (and by the way I am not a proponent of putting all your money into this annuity), but if you have $1 million and no more to come ever. Wouldn't you do what you could to keep it safe? Consider how many people who win the lottery take it as an annuity. Why, because 70% of all people who win a major lottery have spent it within 10 years.
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Old 11-05-2007, 02:51 PM   #17
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Uhoh, another annuity salescritter. Break out the buckets of hot tar and the bags of feathers. And get a rope.

These products are a tremendously huge rip-off for the consumer. And when the equity market crashes you get to worry about your insurer blowing up, too. What a "great" product!
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Old 11-05-2007, 03:01 PM   #18
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Uhoh, another annuity salescritter. Break out the buckets of hot tar and the bags of feathers. And get a rope.

These products are a tremendously huge rip-off for the consumer. And when the equity market crashes you get to worry about your insurer blowing up, too. What a "great" product!

Yeah, no need to post reasons why, just throw your opinion out there. Amazing, you'd think these guys were Communists or something. I once had a bad taco at a fast food restaurant, I think I'll slam all fast food restaurants.
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Old 11-05-2007, 03:06 PM   #19
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Yeah, no need to post reasons why, just throw your opinion out there. Amazing, you'd think these guys were Communists or something. I once had a bad taco at a fast food restaurant, I think I'll slam all fast food restaurants.
What more than a 350BP expense ratio do you need to know this is almost certainly a ripoff? Besides, we have been over this nonsense umpteen times before you got here and started marketing.
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Old 11-05-2007, 03:09 PM   #20
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if you have $1 million and no more to come ever. Wouldn't you do what you could to keep it safe? Consider how many people who win the lottery take it as an annuity. Why, because 70% of all people who win a major lottery have spent it within 10 years.
The problem, Art, is that perhaps you would get more dupesconverts if you were actually talking to people who would be likely to spend all their money away in 10 years rather than, in this case, people who are educating themselves about investing and motivated enough to figure out how to retire early?!!
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