Scott Burns on the "magic" of annuities...

[REWahoo]

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.

[Nords]

Quote:

Originally Posted by REWahoo 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...

[haha]

Quote:

Originally Posted by Nords 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Ongoing overrides are more common with whole life, variable annuities that can be withdrawn, and mutual funds, etc.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

[Rich_in_Tampa]

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.

[Dawg52]

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.

[Rustic23]

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!

[Art G]

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.

[REWahoo]

Quote:

Originally Posted by Art G 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....

[audreyh1]

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?

Audrey

[Art G]

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.

[haha]

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

[Art G]

Quote:

Originally Posted by haha 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?

[rs0460a]

Quote:

Originally Posted by Art G 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.

Nope - I have an immediate annuity (coverers both my DW/me) with a 28-year guarantee period.

As far as my heirs hating me after my death, I'm ahead of the game, since they hate me while I'm living ...

Seriously though, if me and/or my DW die before the end of the guarantee period the remaining payments go to our estate, which is going to charity.

- Ron

[Art G]

Quote:

Originally Posted by rs0460a Nope - I have an immediate annuity (coverers both my DW/me) with a 28-year guarantee period. As far as my heirs hating me after my death, I'm ahead of the game, since they hate me while I'm living ... Seriously though, if me and/or my DW die before the end of the guarantee period the remaining payments go to our estate, which is going to charity. - Ron

OK, if the immediate annuity has a period certain then they are covered for some length of time, but that only means they'll receive monthly payments and then it will stop. There isn't a lump sum going to your charity. However, I do admire you're donation. Of course, in that case, the immediate annuity with mutual fund more than likely underperformed the results of the annuity with living benefit.
BTW, as opposed to Prudential, Allianz, AXA and ING all have some very good products. Someone mentioned the quality of the insurance company issuing the contract. I would agree that you would be best served picking a larger more secure company like the one's I have listed.

[FinanceDude]

Quote:

Originally Posted by haha 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

Different strokes for different folks. However, we have a lot of folks on here that think that even SPIA's are the "devil's work"...........

[audreyh1]

Quote:

Originally Posted by Art G 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

[Art G]

Quote:

Originally Posted by audreyh1 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?

[audreyh1]

Quote:

Originally Posted by Art G 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?

Wow - I guess you weren't pulling my leg!

Yep - the low-cost mutual fund fees I'm happy to pay as I don't care to run my own. I've got a fun retired life to live instead. Plenty of good quality low-cost funds to choose out there. It's easy to keep expense ratios well, well under 1%

"Safety" is having a big enough nest egg (and small enough withdrawal needs) to ride out the downturns and survive 50 years, inflation included. What if market drops - 10%, 20%? - been there, done that. 2000-2002.

I don't need to pay outrageous fees for any "guarantees". A reasonably conservative asset allocation will do well enough.

Audrey

[TickTock]

Quote:

Originally Posted by Art G 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?

Art G,

I realize you were addressing audreyh1, but I'll give you my answers.

1. Yes, low-cost funds still have fees. They also tend to do better than high-cost fees by the difference in fees.

2. If I could set up a diversified mutual fund with less costs and not significantly more hassle than investing with, say, Vanguard, then I would. I can't.

3. Are mutual funds guaranteed? Well... sort of. They're 'guaranteed' (and here I'm speaking of index funds) to closely track the return of their target market. No guarantee on what the market will do short or long term. However, I consider that a US Wilshire 5000 fund is more guaranteed than the 'guarantee' backed by only a single company, no matter how strong it looks at the moment. That's a risk I don't think enough folks consider (this board being an exception!).

4. If the market drops at this point (since I'm still in the savings phase), I mentally go 'Yippee! A chance to buy at bargain prices!', and rebalance at the end of the year as ususal. If I were in the disbursement phase, I'd gulp, take some deep breaths, look at cutting back on some discretionary expenses, and remind myself of the reasons and research that drove me to implement the plan.

[Art G]

Quote:

Originally Posted by TickTock Art G, I realize you were addressing audreyh1, but I'll give you my answers. 1. Yes, low-cost funds still have fees. They also tend to do better than high-cost fees by the difference in fees. 2. If I could set up a diversified mutual fund with less costs and not significantly more hassle than investing with, say, Vanguard, then I would. I can't. 3. Are mutual funds guaranteed? Well... sort of. They're 'guaranteed' (and here I'm speaking of index funds) to closely track the return of their target market. No guarantee on what the market will do short or long term. However, I consider that a US Wilshire 5000 fund is more guaranteed than the 'guarantee' backed by only a single company, no matter how strong it looks at the moment. That's a risk I don't think enough folks consider (this board being an exception!). 4. If the market drops at this point (since I'm still in the savings phase), I mentally go 'Yippee! A chance to buy at bargain prices!', and rebalance at the end of the year as ususal. If I were in the disbursement phase, I'd gulp, take some deep breaths, look at cutting back on some discretionary expenses, and remind myself of the reasons and research that drove me to implement the plan.

Ticktock, I'll respond to you because you seem sincere and truly interested in discussing this vs. looking to start a lynch mob. It's funny how mob mentality can take over, especially when discussing things so dear as your own money. So allow me to respond in order....

1. I'm sorry, but I challenge anyone to find a family of funds that has performed over good times and bad for a long period of time as the American Funds have. Granted, as far as managed funds go, they are relatively inexpensive, however, cheap does not equate with good. It's just that there are so many no load funds in existence that the bad ones are glossed over for the few good ones. This is known as chasing results. Check out the entire family of American Funds during up and down markets and find me any flaws.

2. Well your key word here is "hassle". You are willing to pay someone to do something for your for convenience sake. With that said, cost is just relative to results. If you go to a bad restaurant you don't return, the same thing can be true for investing. There are bad doctors and bad lawyers also. The key in anything in life is finding someone you are happy with. Personally, I'm not a Walmart kind of guy. I'll pay a little more to get quality. I don't worry that my car salesman made too much on me if I bought the car for the price I wanted to pay. And I wouldn't worry that my investment advisor made money if he achieved my goals. (BTW, to those he keep mentioning it, annuity commissions are now much lower than ever before. You just may not have been aware of them in the past.)

3. The only guarantee you have with an index fund is that it is guaranteed to underperform that index. It has no choice with the return being index minus fees. As for me, what's so great about "average"? Why would I want to buy a product based solely on it using the largest companies? I'd much rather have the human element of someone at least attempting to outperform the average. Again, compare American Funds to the averages, not even close.

4. Great, so you're still in an accumulation phase. Dollar cost averaging is king. However, first off, it's still tough for the very steadfast investor to keep adding money and watching their values drop, to a market declining by 50%. I recall when Intel started falling, the stock was around $60 and people asked me where I thought it would fall to, I told them I thought around $9, and they scoffed. Well eventually those people panicked, not right away, but when you are watching your money disappearing, it becomes very personal and nerve racking.
However, what we were talking about was not that person in accumulation phase. A living benefit if obviously far from that person's mind. What we are talking about is the person in the distribution phase of their lives. They have a set sum of money and it has to last them the rest of their lives. Go ask a majority of those people if they wouldn't be willing to give up some amount of their return for the guarantee that they never run out of money. What we are talking about realistically is about an additional 1.5% over the average mutual fund. Are you really willing to say you wouldn't pay someone 1.5% to sleep at night? Hey, if people want to slam index annuities, I can give you many reasons why that product has holes in it, however, I have reviewed these living benefits quite extensively, and for certain people they are a great source of comfort.
BTW, this is all just my own opinion. I'm certainly not trying to sell anyone anything here.