Am I the sucker?

[Thomas3857]

Hi all. Enjoy reading the posts and am learning every day though I still consider myself to be an unsophisticated investor.

I have approx. $325K sitting in cash earning .50 percent and, like most, looking for alternatives. I'm 55 married with two adult kids and the money is already in a tax deferred account. Total net worth around $2.5m. Financial advisor at mid-size regional bank said look at Pacific Life Choice deferred variable annuity. I read the 30 page prospectus and gleaned the following:

Fees: 0.25 expense and mortality risk; 0.95 investment protection rider; 1.15 admin fee so approx. 2.35% fees overall.

5-year Term: After 5-years, the max loss is 10% and the “rider” drops off. This will also lower the fee to 1.20%. I then have the option to add the rider back on after 5-years.

W/D fees range from 7% in year one to 0% at end of year 5.

The death benefit is a standard benefit that my beneficiary would get back no less than I put in (minus withdrawals), should I pass away when the account is down.

I already have a sufficient term life policy.

So am I basically paying 2.35% to insure the most I will lose is 10% of my investment over 5 years with no cap on the gains?

He seems eager to sell me this so my spider senses are tingling. What am I missing? Thanks!

 

[Ready]

Nothing. He is just hoping that most people don’t actually read the prospectus because he knows that if they do they would never invest in this product.

 

[REWahoo]

That tingle you feel from your spider sense is serving you well. Listen to what it is telling you and walk away from making this financial adviser's boat payments for him.

 

[pb4uski]

Your spider senses are smarter than the average [-]bear[/-]sucker. While I like Pacific Life, I abhor VAs of any ilk.

But the key question is why are you in cash and what is your risk tolerance. Actually, 0.5% for cash isn't bad these days but even 10 year treasuries are close to 1.5%. Is this a taxable account?

If you're more conservative, you might want to scroll through these threads:

https://www.early-retirement.org/fo...ead-2021-please-post-updates-here-107187.html

https://www.early-retirement.org/forums/f28/non-fdic-deposit-account-programs-105827.html

https://www.early-retirement.org/fo...the-bad-and-the-in-between-2021-a-107188.html

 

[Aerides]

If you didn't buy it you're not a sucker. But do stop talking to (or, at least paying) FAs at regional banks. His job is to sell you products.

Few of us are sophisticated investors. But stick around and keep reading, and you'll find you don't have to be, to beat most anything your current FA proposes.

 

[OldShooter]

I have found it useful to text search that type of prospectus for words like "fee," "charge," etc. Very amusing. If you want more amusement, ask the salesman whether he is a fiduciary in this relationship. More amusement yet, ask him how much his sales commission will be on the product he is pitching. In other threads, @pb4 has said that commissions can exceed $100K on a big sale. (100% the sucker's money, of course. That is one reason why there are surrender charges.)

Then break off contact. This guy is financially your enemy.

 

[easysurfer]

Better to be an almost sucker than a sucker! Should be proud of yourself.

 

[OldShooter]

... So am I basically paying 2.35% to insure the most I will lose is 10% of my investment over 5 years with no cap on the gains? ...

I am not an expert but the ones I have seen are based on the nominal value of the base index, not the total return. So gains are "capped" to the extent that you don't get any of the dividends. The predator keeps those.

 

[Palmtree]

The only annunity I would consider is a SPIA. They are simple contracts that you buy. You give them X, they give you Y, for the rest of your life(s). All the the others, liked indexed annuities, you don't buy; they are sold to you. The boilerplate contracts go on for many mind-numbing pages and are peppered with things not in your favor.

 

[MRG]

He seems eager to sell me this so my spider senses are tingling. What am I missing? Thanks!

You aren't missing anything he's missing his paycheck. I'd suggest your FA is trying to make your money his.

 

[Dtail]

The only annunity I would consider is a SPIA. They are simple contracts that you buy. You give them X, they give you Y, for the rest of your life(s). All the the others, liked indexed annuities, you don't buy; they are sold to you. The boilerplate contracts go on for many mind-numbing pages and are peppered with things not in your favor.

Multi Year Guaranteed Annuities (MYGA) can also fit the bill.

 

[pb4uski]

Multi Year Guaranteed Annuities (MYGA) can also fit the bill.

+1. MYGAs, aka SPDAs are the insurance industry's answer to bank CDs.... pretty simple product.

 

[Thomas3857]

Thanks guys. Pretty much confirmed what I thought about this product and the "advisor" in general. If you look around the poker table and can't pick out the sucker, it's probably you.

 

[RunningBum]

Like others have said, you sniffed it out, so you aren't the sucker.

 

[flintnational]

........I still consider myself to be an unsophisticated investor........

NW of $2.5M and the good sense to read, understand and walk away from this annuity puts you in the "sophisticated" group. Well done.

 

[VanWinkle]

Great way to check your spidey senses, congrats on avoiding what would have been a big mistake. When there are over 60 pages to explain an investment, it's likely an insurance product that is being sold with a large commission for the advisor/boat purchaser.

VW

 

[Ncc1701]

Thomas, I am a former financial advisor and am insurance licensed. If there is one thing you take away from this conversation it's this: Transfer everything out of the bank and move it to Vanguard, Schwab or Fidelity.

After you've done that and you need advice, each of those firms have low cost advisory solutions available. Or come back here and I'm sure many here can provide some basic allocation advice that doesn't involve rip off annuity products. Good Luck.

 

[racy]

OP,

You said it! Warren Buffett Quote: “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

Now just substitute "talking to a bank FA" for "playing poker".

 

[OldShooter]

... I still consider myself to be an unsophisticated investor. ...

There is a fascinating psychological finding called the Dunning-Kruger effect: https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

The gist of it is that the more one knows about a subject, the less certain they are about their knowledge. It is the ignorant who think they know everything.

I am not flying any more, but with 1,000+ hours, Commercial and Instrument ratings and 130+ airports in my logbook, I was always careful to see myself as a student pilot.

With your attitude and analytical skills, you'll do well as a member of our student investors' club. Welcome.

 

[Finance Dave]

Good job catching this. I have never seen a variable annuity that benefits the buyer more than the seller.

As for cash, depends on your risk tolerance. If you can go without the cash for 3 years and have at least $100k to invest, look for a "private placement" deferred single premium annuity ...I recently got one through FIDO that pays 1.7%. Risk is based on the insurer, so do your homework.

 

[sergio]

I was in a similar situation (lots of excess cash making nothing) so I threw some extra money at the mortgage. My rate is 3.25% and I take the standard deduction, so the guaranteed "return" is not bad.

 

[Souschef]

There is a fascinating psychological finding called the Dunning-Kruger effect: https://en.wikipedia.org/wiki/Dunning–Kruger_effect

The gist of it is that the more one knows about a subject, the less certain they are about their knowledge. It is the ignorant who think they know everything.

I am not flying any more, but with 1,000+ hours, Commercial and Instrument ratings and 130+ airports in my logbook, I was always careful to see myself as a student pilot.

With your attitude and analytical skills, you'll do well as a member of our student investors' club. Welcome.

I have the same ratings and hours as you, and you are right-There are old pilots and bold pilots, but NO old bold pilots.

 

[Montecfo]

I was in a similar situation (lots of excess cash making nothing) so I threw some extra money at the mortgage. My rate is 3.25% and I take the standard deduction, so the guaranteed "return" is not bad.

Definitely seems a good no risk "bond alternative".

 

[Thomas3857]

Thanks everyone for your replies. Had my doubts about this advisor for awhile but trying to put me into this annuity was the last straw. Was paying him .75% and I'm now going to move my $ to Schwab and make a run at doing it myself. I'm currently in over 20 different funds! I've got some homework to do but I think I'm going to find two or three index funds allocated appropriately and keep learning. My timeline is approx. 3-5 years.

 

[Souschef]

Good move! I checked into DW's funds that Paine Webber put her in before UBS acquired them. The expense ratios were ridiculous.
I moved her to Fido, and switched her funds to similar ones with much lower expense ratios.