Should I Talk My Friend Out of Buying an Annuity?

[samclem]

Rule #1: Never do business with ANY financial planner or investment product salesperson unless their economic interests in your business are aligned with the growth of your portfolio.

And even this can be a problem. A salesperson/advisor who is compensated based on the growth of the portfolio has a built-in interest in recommending high beta products. If the portfolio zooms up, the advisor does very well. If it plummets in value, he loses nothing, but the client can lose his whole stash.
Better to compensate the advisor based on the value of the portfolio. Better still to pay them for their time and expertise. Best yet: Do it yourself, getting assistance when you run short of knowledge.

 

[ziggy29]

Better to compensate the advisor based on the value of the portfolio. Better still to pay them for their time and expertise. Best yet: Do it yourself, getting assistance when you run short of knowledge.

Maybe I wasn't clear. When I said growth what I meant *was* the change in value of the portfolio (including negative growth meaning less compensation for the advisor). In most cases, a fee-only basis is better still, but even one that takes a certain cut of portfolio value only gets paid more when you are worth more. That is miles ahead of someone who gets paid commissions to churn products which may or may not be good ones, and may or may not be appropriate for your circumstances.

 

[walkinwood]

A little too late, but this scott burns article seems to address just your question

A Roth IRA Is a Good Thing. Don

 

[scrabbler1]

My friend was here earlier tonight and spoke briefly about his decision not to buy into any annuities. His broker, the one I am not too crazy about, ahd also advised him not to buy any annuities (perhaps because his firm has his Roth IRA). My friend was concerned what to tell the Pruidenial agent if he asked why he was not going to buy. I told my friend he did not have to give a reason and to cut the guy off if he persisted. He doesn't owe the agent any explanation.

My friend did not bring any of the literature the agent gave him because he already knew he wasn't buying anything and did not need to spend any time showing it to me (which was all fine with me LOL!).

Another thanks to all of you who replied and helped out with the successful "intervention."

 

[samclem]

That is miles ahead of someone who gets paid commissions to churn products which may or may not be good ones, and may or may not be appropriate for your circumstances.

Yes, I agree 100%

The basics of saving/investing/money management should definitely be taught in school. It's been much more useful to me than the trig identities and diagramming sentences.

 

[Midpack]

My friend was here earlier tonight and spoke briefly about his decision not to buy into any annuities. His broker, the one I am not too crazy about, ahd also advised him not to buy any annuities (perhaps because his firm has his Roth IRA). My friend was concerned what to tell the Pruidenial agent if he asked why he was not going to buy. I told my friend he did not have to give a reason and to cut the guy off if he persisted. He doesn't owe the agent any explanation.

My friend did not bring any of the literature the agent gave him because he already knew he wasn't buying anything and did not need to spend any time showing it to me (which was all fine with me LOL!).

Another thanks to all of you who replied and helped out with the successful "intervention."

You did well by your friend, he/she owes you lunch...

 

[BigE]

Knowing the game

This topic feeds into a bigger picture of "knowing the game". Example: local Toyota dealership opens in a new location in town, complete with fancy new large bays for the cars to drive thru with 25ft plus ceilings and clearly very expensive location/facility costs. Wife takes the Sequoia in for electric window repair and low and behold, the sweet lady comes out with a list of things we really need to get repaired (about 12 items, including brakes, over 5 grand total). I thought we were going to burst out laughing as she went thru this diatribe of b.s. Bottom line, no one cares about your money but you, NO ONE. And no, we didn't help pay for the shiny new Toyota dealership that day. Once you train yourself to recognize the game, then it gets easier to keep your money. I don't give anyone selling anything the time of day (annuities, extended warranty, Amway scammers, donation to save Eskimos for Jesus, etc.). Good move for your friend to say no to the Annuity salesman, key word here is "salesman".

 

[scrabbler1]

Reviving this old thread I started 6 months ago.

This same friend of mine tragically lost his mother in a car accident last month (his dad died 3 years ago). His parents were rather wealthy so he and his sister will be splitting an estate worth about $1M, not including the house which will fetch him at least another $200k.

He doesn't plan to stop working although he probably could, or at least reduce his hours worked. He has been asking me for advice as to how to invest this huge windfall. Among the ideas I have been floating are:

(1) Contribute more to his Roth IRA. He will turn 50 next year so he will be able to boost his contributions there. His wage income is in the low 50s so he is below the $58k limit for deductions.

(2) He just bought his apartment last December so he plans to pay off the mortgage which is about $100k now.

(3) He could contribute more to his 457(b) plan (he is a local government employee).

(4) He has some individual stock holdings with a broker/friend of his. If he invests into additional funds outside of the broker, I have been suggesting various investment such as a stock index fund and muni bond funds (he nearly emptied a muni bond fund to make the down payment on his apartment). The problem with both funds is that they have pretty high NAVs these days with the markets up.

With the election in a few months, I have also thrown out there to him the idea of putting his money into low-risk investments such as CDs or money markets until early next year so we can see what the dopes in Washington do.

He has so big of a windfall that he can do all of the above. Paying off his mortgage will lessen his monthly expenses and enable him to put more away into available tax-deferred accounts to keep his tax bill down.

This might be a better question for Bogleheads but I thought I'd try you folks first. Thank you in advance for your ideas.

 

[target2019]

Giving advice seems like a good idea. I'd be comfortable steering a friend to Vanguard, for instance. But I'd draw the line there. I wouldn't want to take credit or blame for what follows.

 

[frayne]

The real question is, how much do you like this friend ?

 

[panhead]

Reviving this old thread I started 6 months ago.


(1) Contribute more to his Roth IRA. He will turn 50 next year so he will be able to boost his contributions there. His wage income is in the low 50s so he is below the $58k limit for deductions.

(2) He just bought his apartment last December so he plans to pay off the mortgage which is about $100k now.

(3) He could contribute more to his 457(b) plan (he is a local government employee).

(4) He has some individual stock holdings with a broker/friend of his. If he invests into additional funds outside of the broker, I have been suggesting various investment such as a stock index fund and muni bond funds (he nearly emptied a muni bond fund to make the down payment on his apartment). The problem with both funds is that they have pretty high NAVs these days with the markets up.

With the election in a few months, I have also thrown out there to him the idea of putting his money into low-risk investments such as CDs or money markets until early next year so we can see what the dopes in Washington do.

This might be a better question for Bogleheads but I thought I'd try you folks first. Thank you in advance for your ideas.

If I was advising a good friend under these circumstances, I would take the very low risk approach:

1) Pay off apartment if he is planning on staying there a while, not everyone will agree here, but a very low risk move IMHO.
2) Be sure to put the max available into the ROTH, as each year you don't, you don't get back
3) Put the rest in low/no risk investment (No penalty CD or the like) at least until after the election and maybe longer.
4) Begin to dollar cost average amounts he is comfortable with each month/quarter after the election (or again, maybe later)

I always liked the idea to wait about a year after an event like this before making any big decisions, it gives you time to get your head straight. The above is, IMHO again, very low risk and should be in the best interest of your friend (or at least, shouldn't go horribly wrong). By the way, I am not versed in the 457b plan, so please include that as well if it falls into the very low risk spectrum or is a use it or lose it kinda thing (401k/IRA/ROTH, etc).

Give your friend my condolences, I've been where he is, and it is difficult.

Regards,

Pan

 

[pb4uski]

You are on the right track with your advice. He should max out his 457b, fully fund his Roth, and then invest any additional monies in taxable accounts. In all cases in low cost, index funds with bonds in the 457b, and stocks in other accounts to minimize taxes.

Once he has decided his ultimate AA he could put it in some on-line savings accounts (staying under the FDIC limit in each case) and then value average into investments over a couple years. If he chooses that course, then it would probably make sense ot pay off the mortgage.

 

[ERD50]

Paying off his mortgage will lessen his monthly expenses and enable him to put more away into available tax-deferred accounts to keep his tax bill down.

That particular line sounds like pretzel logic to me. Take $100,000 (that probably has no taxable gain associated with it if it was inherited) to pay off a mortgage so that he can invest more in tax-deferred accounts? Seems like a round-a-bout way of robbing Peter to pay Paul, with no apparent advantage. Why not just use some of the $100,000 to cover expenses if he needs cash flow to max out tax deferred options? Then the majority of the $100,000 is still available in case the liquidity is needed.

Paying off the mortgage might be reasonable, I just don't think the above reason is a valid one.

-ERD50

 

[nun]

Reviving this old thread I started 6 months ago.

This same friend of mine tragically lost his mother in a car accident last month (his dad died 3 years ago). His parents were rather wealthy so he and his sister will be splitting an estate worth about $1M, not including the house which will fetch him at least another $200k.

He doesn't plan to stop working although he probably could, or at least reduce his hours worked. He has been asking me for advice as to how to invest this huge windfall. Among the ideas I have been floating are:

(1) Contribute more to his Roth IRA. He will turn 50 next year so he will be able to boost his contributions there. His wage income is in the low 50s so he is below the $58k limit for deductions.

(2) He just bought his apartment last December so he plans to pay off the mortgage which is about $100k now.

(3) He could contribute more to his 457(b) plan (he is a local government employee).

(4) He has some individual stock holdings with a broker/friend of his. If he invests into additional funds outside of the broker, I have been suggesting various investment such as a stock index fund and muni bond funds (he nearly emptied a muni bond fund to make the down payment on his apartment). The problem with both funds is that they have pretty high NAVs these days with the markets up.

With the election in a few months, I have also thrown out there to him the idea of putting his money into low-risk investments such as CDs or money markets until early next year so we can see what the dopes in Washington do.

He has so big of a windfall that he can do all of the above. Paying off his mortgage will lessen his monthly expenses and enable him to put more away into available tax-deferred accounts to keep his tax bill down.

This might be a better question for Bogleheads but I thought I'd try you folks first. Thank you in advance for your ideas.

A call to Vanguard or Fidelity would be a good start, they'd offer some free advice if you friend was thinking about opening a $600k account.

Your advice sounds pretty good to me.

Paying off the mortgage with $100k is a debatable thing, some love the idea some don't like to tie up the capital, but I wouldn't analyse that decision too much. If you friend feels good about doing it then it's a good thing to do. If he wants to invest the money and keep paying the mortgage than that's the way to go.

I'd put a years worth of expenses in cash/MM/or short term bonds. The I'd put the rest is some broad index funds. If you need income the tax exempt munis would be good for some of this after tax money.

If he will keep working I'd definitely max out his tax deferred investment opportunities.

So I basically think your advice is spot on

 

[nun]

I

By the way, I am not versed in the 457b plan, so please include that as well if it falls into the very low risk spectrum or is a use it or lose it kinda thing (401k/IRA/ROTH, etc).

Give your friend my condolences, I've been where he is, and it is difficult.

Regards,

Pan

+1 on the sadness of your friend's situation and that it's best to wait a while before making big financial decisions.

FYI the 457 is a great retirement plan......it's actually a deferred compensation, non-qualified retirement plan. That means that it grows tax deferred until you take money out of it. The best part is that you can do that when you leave the job, there is no 10% penalty for withdrawal before 59.5. Most plans will offer a range of investments just like a 401k plan. You don't use a W-4P to set withholding from income from it because it's defined as compensation, there's a 20% mandatory withholding tax on any income.

 

[rodi]

If any of the money is in tax defered accounts (IRA) have him roll it to a beneficiary account. Otherwise taxes have to paid when it's cashed out.

Too many people get hit with a big tax bill because they don't realize the generational aspect of an IRA inheritance.

I get (small) annual RMDs from it - but can start drawing down (and paying taxes as I withdraw) to help cover the period between retirement and 59.5 when I can tap my own IRA/401k funds.

It's a nice way to spread the taxes out into lower income years rather than having a big chunk taxed at the max amount.

 

[scrabbler1]

Thank you for the replies and advice. I also need to ask my friend what his 457(b) account is invested in to get a better idea of what his overall AA is. (His record-kepping is a littl spotty, so I hope he has a recent account statement.)

 

[mickeyd]

Reminds me of a scene from one of my favorite business-related movies~Glengarry Glen Ross.

ABC~Get them to sign..

You drove a Hyundai to get here. I drove an eighty-thousand dollar BMW. THAT'S my name. And your name is you're wanting. You can't play in the man's game, you can't close them - go home and tell your wife your troubles. Because only one thing counts in this life: Get them to sign on the line which is dotted. You hear me you f**king faggots? A-B-C. A-Always, Be, C-Closing. Always be closing. ALWAYS BE CLOSING. A-I-D-A. Attention, Interest, Decision, Action. Attention - Do I have you attention? Interest - Are you interested? I know you are, because it's f**k or walk. You close or you hit the bricks. Decision - Have you made your decision, for Christ? And Action. A-I-D-A. Get out there - you got the prospects coming in. You think they came in to get out of the rain? A guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money. Are you gonna take it? Are you man enough to take it? What's the problem, pal?

Glengarry Glen Ross speech Alec Baldwin - YouTube

 

[fanmail]

3rd prize is you're fired!

 

[scrabbler1]

An update on my friend's inheritance.

His mom's brokerage accounts and IRA contain alot of corporate bonds and shares of stock in addition to a large blob of cash, presumably from the interest and dividends the bonds and cash spun off over the years.

He and his sister agreed to a split of the stocks and bonds (and some other smaller assets such as mutual funds and CDs) to minimize his sister's husband's issues with obtaining individual stocks (he works in financial servies so he needs approval ot own such shares) so he should have his share in an account in his name in a week or so.

From there, he and I will visit our local Fidelity rep to open a brokerage account and an IRA, directly transferring the stocks and bonds to these new accounts. With the brokerage account's cash, he will use it to pay off his mortgage and have a little cash left over.

I don't think my friend should allow any large cash buildup of the interest and dividends coming from the stocks and bonds (in both the brokerage and IRA accounts), instead investing at least some of that into something mroe flexible such as mutual funds (stock or bond, not sure). I agree that he should set aside some of this new income stream into something safe and liquid (CDs?) but also remember that he will have more of his wage income available to invest elsewhere once the mortgage gets paid off (which I think was ERD50's point in an earlier post).

I was looking at Fidelity's Cash Management service (for him) which acts as a hub for other Fidelity investments as well as his own bank's checking account. Has anyone here used that service and what do you think of that?

 

[Animorph]

I use the Fidelity cash management account as my main checking account. The connected BillPay is used to pay all the bills that I can, automatically if possible. I can transfer cash from brokerage accounts as needed to fund spending. I can transfer to our local banks if needed (cashier's check), or from our banks to Fidelity. Any ATM fees are refunded quickly and automatically, so I can use the grocery store's ATM. I can make large charges to the checking account and let the automatic overflow and minimum balance transfers restore my checking balance. It's pretty cool, and free.

On the flip side, if your account number ends up in the wrong hands, it potentially exposes brokerage assets as well as the checking account.

 

[NW-Bound]

The basics of saving/investing/money management should definitely be taught in school. It's been much more useful to me than the trig identities and diagramming sentences.

Eh! For me, without those trig identities (which I still remember and use) and other "math stuff", I would not have much money to invest and to manage. There are different ways to make money, but it is the only way I know. How did a fool and his money get together in the first place? People do not talk about a fool who never has any money.

I'll say we need to learn both to make money and to keep it.