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Fixed index annuities
Looking for info on fixed index annuities. I know the bad on variable annuities but looking for the pros (if any) and cons on them.
What should some one look for when researching them? |
You should be looking for the nearest exit. Run.
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If you don't understand it, don't buy it. An indexed, deferred annuity (what the seller is probably pitching) is sold as an investment vehicle where you get the greater of a fixed return or some fraction of an index - typically equity such as S&P 500. The "some fraction of" is the rub. There is a wondrous array of methods of defining the fraction. The insurance company does not have a magic money tree. They can only give you returns available to them in the market, minus their expenses (which can be considerable). They use derivatives of some sort to get exactly what they need, however ... ... simply investing some money in a fixed asset like a CD and some in an index mutual fund will give you the same practical effect. You're probably already doing that. |
I don't fully understand them which is why I'm asking the question. From what I do understand is they pay what the index return is (S&P) up to a certain max and the insurance company gets the amount above that. But it is protected if the market goes down.
What I'm trying to understand is what the catch is where and act are the hidden costs that seem to be difficult to find . My portfolio does have cd and mutual funds but was looking to protect some of it when the market does make a downturn. |
I have researched and read that FIA pay about the same as a CD with the potential to pay slightly more (expect about 3.5% return if market is average+). For that slightly more you give up liquidity and increased risk over a FDIC insured CD.
Stan the Annuity Man has some pretty good videos on how they work and what they do and do not do, plus they are entertaining. They are sold to compete with CDs not the stock market. |
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"The opportunity to earn higher yields based on stock market performance with protection against market declines" is the typical marketing spiel used to push these products. Rewards with no risks is always a great selling point and makes for fat commission checks. |
Wahoo, how and when are the fees and commissions paid. From what I can gather they are paid from the expected gains above what the given annuity is set for.
So then in retirement years or approaching years is it best to tool into cd and more secure investments rather then lock up funds with FIA? |
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As I approached and entered retirement I simply moved to a more conservative asset allocation, going from 60/40 (stocks/bonds) to 40/50/10 (stocks/bonds/cash(CD's). Risk tolerance is a key factor in selecting an AA and posters here vary from 100% CD's to 100% stocks - and everything inbetween. |
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So when you hear that the S&P has returned 10% annualized over the long term, that (I believe) Includes dividends reinvested. Without any dividends, or reinvesting the dividends, you are not comparing it to a "10% annualized total return" that the salesperson keeps talking about. It's actually much less than a 10% annualized return. |
So if the S&P does 10% for the year and the annuity is FIA is 5% the annuity is taking the 5% . Is that where the fees and commission are coming from or is there some hidden print in the 50 pages that says they take it up front every year ? Also what is the average commission that is being paid to the so called advisor that is trying to sell them.
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The commission paid to the salesman varies on the FIA but can be 5%-10% dependent on the length of the contract (the longer the surrender period the more the commission). The commission on a FIA is supposedly paid out of the Insurance Company's profit from their products (FIAs, Life insurance, etc..) That is why sales people state no commission (i.e. if you put 100,000 in than 100,000 is what your account will start with). Fees are paid when you add Income Riders to a FIA or any annuity. The fees for Income Riders can be .75% to 2% per year and are paid from your accumulation value (i.e. you pay the fees from your account). Some have LTC riders, Death Benefit riders, etc... which all add fees typically. So very complicated as some FIAs are best for accumulation (i.e. slightly better than CD rates) or for income, just depends what you are trying to buy it for. Disclaimer: I am not a FA or salesman of any of these products, I work in pharma industry so these are just my thoughts ..... |
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Like my old grand pappy used to say "Thanks for the warning". |
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I can generalize and say commissions are paid out of the difference between what the ins company earns and what the ins co pays the policyowner - you don't see a separate charge for commissions. Identifying exactly where that margin is requires reading each specific contract and understanding all the moving parts, thinking about how the ins company invests to back the payouts (recognizing that some of those investments will be in derivatives), pricing the investments, and getting spreads. That really isn't necessary for a decision to buy or not buy. What is necessary is that the buyer understands what he/she will get for a variety of possible future market paths. That's what I meant by "understand before you buy". And, that requires looking at the very specific form that the buyer is considering, because each product is a little different from the others. And, of course, then the buyer should compare that to the simpler approach of having a traditional mutual fund (maybe plus CDs) portfolio that includes both bond and stock funds. That's a lot of work (or fun, it you enjoy techy numbers stuff). Someone here would probably talk through a specific product with you, if you have one. |
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He opened with an S&P graph (nominal S&P) covering 18 years (1998-2016) and asserting that the S&P had only returned 4% during the period. The real return, of course, was about 5.5% I haven't gone back to check but I'm sure the beginning point was cherry-picked. He was a very good huckster. His closer was a graph that claimed (for the same period) that the S&P would have returned $207K on $100K while his product would have returned $224K with a much smoother ride. Of course, had he shown total return instead of nominal return, the S&P return would have been $262K. For the OP: Read the wisdom in this thread until you absolutely understand this: Never, ever, buy anything you do not understand. |
Thanks for all the insight from everyone. So basically my so called "Friend/FA" is looking at his bottom line by telling me there are no up front fees or commissions but some where in the annuity they are costing me more then changing my AA.
This brings me to my next question with retirement hopefully within the next 5 years and trying to protect my nest egg what AA would be best. |
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I forgot to mention (Post #15) that I also checked the huckster out here: https://brokercheck.finra.org/ He had an astonishing 22 customer disputes, with a number of them settled in the customer's favor for six figures. I have never seen so many on a brokercheck. He must have been a helluva rainmaker to keep from getting fired for this. |
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+1 And make sure you can change it when you find you were wrong about your risk tolerance. Not ashamed to say my 80/20 was not realistic for me and a minor blip in the S&P taught me quick that 60/40 was better for my mental health. |
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For asset allocation I like Jane Bryant Quinn "How to make your Money Last and Bogleheads' guide to retirement. I should also state that annuity contract insurance may be appropriate if you understand them and have realistic expectations. The most straight forward is SPIA and Deferred income annuity. Compare them to CDs not the S&P 500. |
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