Fixed index annuities

[pb4uski]

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.

There typically is no upfront fee to you, but the issuer/insurer will pay the FA a commission. If you surrender early, there is a surrender penalty which reimburses them for what they paid to the FA. If you don't surrender, then they get back what they pay the FA through profits from the contract.

Also, they will talk about that you get a minimum of 3% even if the index goes down each year... what they don't tell you is that the 3% is based on only 90% of your premium. So if the index went down every year for 10 years after you paid your premium, then your account value would be $120 [$90*(1+3%)^10] for a 1.84% annual return.

 

[aja8888]

About a year ago, my ROMEO group was given a presentation by a guy who worked for Ameriprise and was pushing annuities. We have a retired insurance broker in out ROMEO group and most of the others are engineers and other professionals. We knew up front what to expect and it "all" was said, as noted above.

After he left, a few of us sat down with the 75 page prospectus and dissected it for hidden fees, and some not so hidden. It was a VA type product. Bottom line there were a potential of 3.5% fees (cumulative) scattered throughout the document, depending on what rider you selected. And we are sure we missed some.

 

[RunningBum]

+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.

OK, but try not to change it more than once, at least not in the direction of big swings. Just map out what happens if you go from 80/20 to 60/40 after a downswing, then back to 80/20 after an upswing, and back down to 60/40 after a downswing. Classic "buy high, sell low" recipe.

 

[pb4uski]

.... 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.

One thing to keep in mind is that success rates for 55/45 to 70/30 are pretty similar (about 96%), and even 40/60 to 90/10 are all good... albeit with different "rides" so to a large degree AA is personal preference and what allows you to best sleep at night.

Beyond that range AA does significantly impact success rates.

 

[mickeyd]

But being a friend and someone who I would have hoped would put my money to work best for me makes me second guess anything he reccommends.

Ask him if he is a fiduciary. Probably not one. Move on.

 

[aln1117]

What males a FA a fiduciary or not. Is there a different license or certification or is it something they decide on their own?

 

[FIRE'd@51]

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 .

To answer your specific questions, the fees are embedded in the interest rate you are guaranteed and your participation in an S&P 500 increase. You can create the same payoff pattern yourself by buying a CD that matches the maturity of the annuity and using the CD interest to purchase options (here it sound like it would be call spreads) on the S&P 500. If you look at market prices of the options and CD rates you can estimate what the fees are.

 

[pb4uski]

My understanding from many conversations with FAs/internet etc is that the Insurance company buys bonds and options on the S&P 500. If the S&P 500 goes up 10% they get the options on 10% and give you 5%, if the S&P goes down the options expire and you get Zero and the Insurance company is out the cost of options......

Its a little different from that... going from memory..... they buy bonds and buy a collar (an at the money call and a put at the level of the cap for that policy year)... the bonds protect them on the 3% (on 90% of premium) guarantee if the index is flat or down and the collar protects them if the index does well.

In reality, some companies use more exotic derivative strategies to achieve a similar result.

 

[mathjak107]

Yes. It is very easy for any of us to theorize about our tolerance. It may be quite different when tested though.

One of my favorite quotations:

“Art cannot convey to an inexperienced girl what it is to truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money you used to own.”

-- Fred Schwed, from "Where are the Customers' Yachts?"
​

as tyson said " everyone has a plan ,until they get punched in the face "

 

[OldShooter]

What males a FA a fiduciary or not. Is there a different license or certification or is it something they decide on their own?

Good question. Let me try to give a brief answer from a customer's point of view in an investment context:

1) In the investment world, the basic license is a Series 7, which is the sales rep (aka "registered representative") license. One of the responsibilities of a fiduciary is "loyalty" to his customer. A rep's loyalty is to his employer. His legal standard for products is "suitability" for the customer. So if he has two mutual funds that are otherwise equivalent, but one pays big sales commissions, he will sell the latter.

A legal fiduciary (Registered Investment Advisor) will have either a Series 65 or a Series 66 license.

There is also a kind of odd duck, a Series 7 broker working for an investment advisor: "Investment Advisor Representative." As I understand the idea, this guy sort of inherits a fiduciary responsibility from his employer. I am not as comfortable with this, though I am involved with an IAR through a nonprofit I work with and she is a solid citizen.

Another odd duck is the CFP, "Certified Financial Planner." I think that holding a CFP is probably A Good Thing, but despite some advertising you may see, holding a CFP does not make the person a fiduciary. It is more like the Good Housekeeping Seal of Approval: a designation bestowed by a business, having no legal teeth.

If you go to https://brokercheck.finra.org/ you can check any brokers credentials. And you should.

2) This is actually more important: A fiduciary is someone you can trust. Credentials aside, you need to do a smell test. Brokercheck will show you any customer disputes or disciplinary actions. These are big red flags. Brokercheck will also tell you how long the person has been licensed and who they have worked for. Unless you want to trust your money to a trainee, I would look for lots of experience at respected firms.

In theory, someone could assume fiduciary duty to you by simply signing a civil contract. But without FINRA backing, you would have to go to the civil court system for any redress. No fun and not cheap.

Finally, just to muddy the water further, the Department of Labor's "fiduciary rule" says that any advisor involved with retirement investments must act as a fiduciary -- even the Series 7 guys. BUT if you have non-retirement accounts with the same person, he/she is not held to a fiduciary standard for those. Further, IMO tigers aren't going to change their stripes just because of the DOL rule, so I would still avoid the Series 7 people just on general principles.

Here is a view from inside the industry: https://www.kitces.com/blog/the-4-different-types-of-financial-advisor-fiduciaries/

 

[Ready]

Your friend is either lying to you, or he just doesn't understand how fixed index annuities work. The devil is in the details. In theory you might capture some of the upside, but the calculations are so complex that I truly believe most insurance salespeople don't really understand how they work.

Most of the annuities will give you something like 25% of the upside, but when there is down side you take 100% of the hit. So for you to ever see any upside, there would have to be a 12 month period where you virtually never had a decline.

Ask for a 20 year history of returns on the product he is selling you and you will find out how things really work with this product. You will see CD like returns in the 2-3% range, most likely.

 

[aln1117]

Shooter, thanks for the links. I will check his credentials for sure. Mathjak, I've heard the quote and lived it a few times.
This is why I've asked the questions. Trying to have a pretty good plan before I step into the ring.
My biggest fear is getting hit with a big market downturn so close to the end. I know it a fools game trying to time the market , just looking for as much advice and info I can.
But thanks for yours.

 

[aln1117]

Ready, I don't think he is lying to me I just think he's looking out for he's best interest and not mine. Your statement about the down market does not match what I've read about the Fixed Index annuities but I may be wrong. Also where are there cd making 2-3% now.

 

[Sunset]

First place I looked:

https://www.ally.com/bank/high-yield-cd/

 

[jzajzz]

Fixed index annuities .. .are not popular because of the crediting method. Unfortunately, most non insurance financial advisors are clueless about it ..and far too many insurance agents or insurance focused FA's focus on the wrong thing.. It's not a stock market alternative.. It's not sold as a CD alternative. It's sold more as a Deferred Annuity alternative because of the income riders.

The best case of FIA is to have the need for guaranteed income. if the FA or insurance agent goes through your expenses , that you will need during your retirement and allocate that to an annuity that would offer you a guaranteed income stream. The cash value is there just in case you need to surrender but most likely if the insurance agent and the client plan correctly, they should make sure that there is a separate emergency fund so that the client won't have to surrender the annuity. Once you take care of the guaranteed income and emergency fund , you can be more aggressive with the rest of your investments and that will take care of the inflation issues.

 

[jazz4cash]

Here's 2.25 apy for 49 months.......

https://www.nasafcu.com/HighYield/?...org_DEVICE=c&gclid=CKbD0_mI8NYCFdaNswodiL8Ofg

 

[aln1117]

Thank you all for the info and eye opening advice. Please keep it coming.

 

[OldShooter]

Fixed index annuities .. .are not popular because of the crediting method. ...

I disagree. I think they are not popular because anyone who investigates discovers that the vast majority are ripoffs. As confirmation, all one needs to do is to review the plethora of consumer protection lawsuits brought by various states' attorneys-general against bad actors like Prudential, Allianz, etc.

Recently, I understand that TIAA and Vanguard are offering annuities that are not ripoffs. That is A Good Thing, but unfortunately it also means that the hucksters will not be selling them. The hucksters will stick to selling the ripoffs.

 

[mickeyd]

Regarding the issue of what makes a FA a fiduciary, here it is in a nutshell~ If he looks after himself first, he is not a fiduciary. If he looks after your benefit before his benefit, he is a fiduciary.


Never assume he is a fiduciary.

 

[OldShooter]

Regarding the issue of what makes a FA a fiduciary, here it is in a nutshell~ If he looks after himself first, he is not a fiduciary. If he looks after your benefit before his benefit, he is a fiduciary.

Never assume he is a fiduciary.

Absolutely true. The problem is that if a customer is smart enough to discern the difference, he probably doesn't need an FA in the first place. For example, I have a very intelligent friend who has been sold "4 or 5" annuities by an FA at Eddie Jones. Until he and I discussed it, he had no idea that Eddie was "looking after himself first." He is now in the process of moving everything from Eddie to a more reputable broker with Series 65/66 FAs that he can hopefully trust.

 

[aln1117]

What makes a Vanguard FIA better then some other FIA.

 

[OldShooter]

What makes a Vanguard FIA better then some other FIA.

I have read/heard that Vanguard and TIAA are offering annuities with much lower fees than have been typical. I am not an annuity guy, though, so I have never followed up to get details. Certainly the reputations of those firms would lead me to expect white hats. And if they are doing low cost annuities, probably Fido is too.

 

[mathjak107]

no one should buy any annuity product without delaying social security first or no matter what you buy you shot yourself in the foot .

for what it costs to delay and lay out the money from yourself while waiting you cannot buy any commercially available annuity that gives you so much for so little

 

[jzajzz]

I disagree. I think they are not popular because anyone who investigates discovers that the vast majority are ripoffs. As confirmation, all one needs to do is to review the plethora of consumer protection lawsuits brought by various states' attorneys-general against bad actors like Prudential, Allianz, etc.

Recently, I understand that TIAA and Vanguard are offering annuities that are not ripoffs. That is A Good Thing, but unfortunately it also means that the hucksters will not be selling them. The hucksters will stick to selling the ripoffs.

YOu misunderstood what I was saying
FIA's are popular.. I was saying the reason they're popular is NOT because of index credits but because of the Guaranteed income rider. FIA is just a label.. the Income benefit is what retirees are seeking.

TIAA and Vanguard annuities are considered "not bad" because they don't market it to insurance agents.. they market it to "fee only" advisors.. but at the end of the day .. the marketing money has to be paid to someone. Who cares if TIAA or Vanguard pay commission .. Your job as someone seeking a guaranteed income stream is to see who offers you the best benefit. if an agent gets paid a higher commission and your benefit is better .. why do you care? As long as the company's financials are in order and they have a great surplus, you should be fine. A company who is selling annuities but insurance its not its focus is a negative in my book, they might not want to beef up their surplus. I don't know that to be the case for TIAA or Vanguard but I'd want to investigate that before giving them my money. Those companies are focused on the investment side.

 

[pb4uski]

.... A company who is selling annuities but insurance its not its focus is a negative in my book, they might not want to beef up their surplus. I don't know that to be the case for TIAA or Vanguard but I'd want to investigate that before giving them my money. Those companies are focused on the investment side.

You obviously are a bit clueless on this. Legally, only licensed life, accident and health insurance companies can issue annuities.... annuities are a subset of life insurance since they need to have elements of mortality risk to qualify as annuities for tax purposes... yes, even your plain vanilla fixed rate SPDA that looks like a CD has mortality risk because of annuitization options in the contract that rarely get utilized... that is what makes the inside build-up tax deferred.

TIAA is a huge, very well known insurance company that sells a wide variety of insurance and annuity products.

Vanguard is an investment company and is an agent when it sells annuities.... the fixed annuities that Vanguard sells through a relationship with Hueler Investment Services are issued by insurance companies like AIG, Integrity, Symetra, Lincoln and Mutual of Omaha... the variable annuity that Vanguard sells is issued by Transamerica and administed by Vanguard (much like Vanguard administers 401ks).