Another annuity question

[mathjak107]

many many banks are making a thrust into selling you an annuity with rates so low. i thought i would give you the heads up on it as it just happened to us saturday.
they all pretty much play out the same so being forewarned is to be forearmed as to just how these work. they all pretty much follow the same layout..

the fine print and pages and pages of stuff was very complex. i did my best to interpret it as best i could and i believe this is what it boiled down to so dont quote me. it is still making my hair hurt as to what that plan is. it takes an mba in finance to figure out that prospectus.

SOOOOOOOOOO yesterday we went to the bank to renew a cd and got pitched an annuity. they said rates are so low and since we had no time frame on the money would we like to see some better options.
i said sure and so the next guy went to work on us with their offering.

i have to say it sounded so good i almost bought it myself lol.

it started out with them promising me a minimum of 10% a year return for 10 years if the annuitywas on myself or 5% a year min if it extended to marilyn too.. if my variable investments were worth less they would increase me to either 5% or 10% min depending which i took. . if i died my wife gets to continue the plan and she gets the 5% minimum option.

thats where it got interesting.

i asked if i could take that money out and of course no you cant.

that 10% a year guarantee are only bonus bucks good towards an annuity conversion into a lifetime income stream..

however heres the catch. you pay expenses on your average yearly account value. those bonus bucks after 10 years have your expenses running double because they are based on that phantom value.

if you started with 100k had 3600.00 a year in expenses before the fund expenses those bonus bucks after 10 years have you paying 7200.00 a year plus fund expenses .

there were options everywhere to add to the plan each one increasing costs as well.

as best as i could tell here are the expenses,and keep in mind historically the return on a 50/50 mix is about 7% when not in an annuity

the expenses below are based on the total account value with the phantom bucks being included they give you.

mortality and expense risk charge 1.10%...

administrative fee .20%

combination enhanced death benefit .45%

beneficiary protector .35%

10% lifetime income option charge 1.2%

10% spousal continuation charge .30%

total 3.60% but we havent included the fund expense fees so tack on another .45 to 1.94% depending what funds you picked..


is that an amazing fee structure for the un-aware?.

 

[mathjak107]

You're talking about a variable annuity with a GMIB (Guaranteed Minimum Income Benefits) Rider. You don't have enough information to make a deciision. You shouldn't buy it, you need more information. Focus on the actual benefit to you more than the nuts and bolts. They will turn, the features of the contract will not. Also be sure to ask yourself, do you want single or joint life? Single may be 1%, Joint will be 1.5% expense, does your spouse need the income to continue, or will the death benefit be sufficient for her?

You could buy Vanguard Total Bond Market Index Fund and get 3.17% and just draw down on principal for the additional needed and cross your fingers and go for it. It's only lost money twice in 23 years. However it's never seen a rapidly rising rate environment so we don't know what happens then. Do you have a palate for cat food?

That said, there is no simple answer.

If I were retired I'd split my money into 3 buckets and fill each before I earmarked for the next:

Must Have: This is the money that must absolutely be there no matter what. Expenses for food, shelter, healthcare etc.
- Asset classes for this include social security, pension, and annuities

Want to Have: Extras in retirement.
- If I didn't understand individual stocks & fixed income, I would use a mutual fund asset allocation program. If I did do individual stocks & fixed income, I'd manage half, and farm out the other half

Legacy: Doesn't sound like you're concerned. Nothing further needed.

the problem using bonds is bonds had a 30 year bull run. they are at the bottom of the cycle and there is no way they will duplicate what they have done.

variable annuities suck but immeadiate annuities can be helpful to a portfolio.

with bonds you are still betting on the whims of interest rates and markets. there isnt much dependability there.
immeadiate annuities give you diversification you can never duplicate. they are betting on dead bodies not so much markets.

the idea is to get a pensionized income to support your portfolio in times its down .

in the old days if you fell 15% in a 50/50 mix with interest rates in the 6-7% range you were whole again in 2 years. today your are down a long long time.

we are actually living that failure rate firecalc and all the others speak of.

markets are peaks and valleys and pensionizing income to raise those valleys up can add a huge success rate to portfolio survival. death to retirement plans are selling when markets are down.

im looking into incorperating a 20-25% mix of immreadiate annuities and my bucket system. the idea is to shift some of the risk of that income stream to a 3rd party who will take the risk for some of that stream not in the same investments im taking that risk in namely equities and bonds.

those dead bodies add another level of diversification. heck maybe its the new asset class.

 

[TN_INVEST]

many many banks are making a thrust into selling you an annuity with rates so low. i thought i would give you the heads up on it as it just happened to us saturday.
they all pretty much play out the same so being forewarned is to be forearmed as to just how these work. they all pretty much follow the same layout..

the fine print and pages and pages of stuff was very complex. i did my best to interpret it as best i could and i believe this is what it boiled down to so dont quote me. it is still making my hair hurt as to what that plan is. it takes an mba in finance to figure out that prospectus.

SOOOOOOOOOO yesterday we went to the bank to renew a cd and got pitched an annuity. they said rates are so low and since we had no time frame on the money would we like to see some better options.
i said sure and so the next guy went to work on us with their offering.

i have to say it sounded so good i almost bought it myself lol.

it started out with them promising me a minimum of 10% a year return for 10 years if the annuitywas on myself or 5% a year min if it extended to marilyn too.. if my variable investments were worth less they would increase me to either 5% or 10% min depending which i took. . if i died my wife gets to continue the plan and she gets the 5% minimum option.

thats where it got interesting.

i asked if i could take that money out and of course no you cant.

that 10% a year guarantee are only bonus bucks good towards an annuity conversion into a lifetime income stream..

however heres the catch. you pay expenses on your average yearly account value. those bonus bucks after 10 years have your expenses running double because they are based on that phantom value.

if you started with 100k had 3600.00 a year in expenses before the fund expenses those bonus bucks after 10 years have you paying 7200.00 a year plus fund expenses .

there were options everywhere to add to the plan each one increasing costs as well.

as best as i could tell here are the expenses,and keep in mind historically the return on a 50/50 mix is about 7% when not in an annuity

the expenses below are based on the total account value with the phantom bucks being included they give you.

mortality and expense risk charge 1.10%...

administrative fee .20%

combination enhanced death benefit .45%

beneficiary protector .35%

10% lifetime income option charge 1.2%

10% spousal continuation charge .30%

total 3.60% but we havent included the fund expense fees so tack on another .45 to 1.94% depending what funds you picked..


is that an amazing fee structure for the un-aware?.

I've seen these too. Seems lots of investment companies have similar programs with their annuities. From the standpoint of a pure investment, they are expensive. From the standpoint of generating retirement income, they can have value (the main value issue I see is that they can limit panic and can guarantee future income).

 

[FinanceDude]

many many banks are making a thrust into selling you an annuity with rates so low. i thought i would give you the heads up on it as it just happened to us saturday.
they all pretty much play out the same so being forewarned is to be forearmed as to just how these work. they all pretty much follow the same layout..

the fine print and pages and pages of stuff was very complex. i did my best to interpret it as best i could and i believe this is what it boiled down to so dont quote me. it is still making my hair hurt as to what that plan is. it takes an mba in finance to figure out that prospectus.

SOOOOOOOOOO yesterday we went to the bank to renew a cd and got pitched an annuity. they said rates are so low and since we had no time frame on the money would we like to see some better options.
i said sure and so the next guy went to work on us with their offering.

i have to say it sounded so good i almost bought it myself lol.

it started out with them promising me a minimum of 10% a year return for 10 years if the annuitywas on myself or 5% a year min if it extended to marilyn too.. if my variable investments were worth less they would increase me to either 5% or 10% min depending which i took. . if i died my wife gets to continue the plan and she gets the 5% minimum option.

thats where it got interesting.

i asked if i could take that money out and of course no you cant.

that 10% a year guarantee are only bonus bucks good towards an annuity conversion into a lifetime income stream..

however heres the catch. you pay expenses on your average yearly account value. those bonus bucks after 10 years have your expenses running double because they are based on that phantom value.

if you started with 100k had 3600.00 a year in expenses before the fund expenses those bonus bucks after 10 years have you paying 7200.00 a year plus fund expenses .

there were options everywhere to add to the plan each one increasing costs as well.

as best as i could tell here are the expenses,and keep in mind historically the return on a 50/50 mix is about 7% when not in an annuity

the expenses below are based on the total account value with the phantom bucks being included they give you.

mortality and expense risk charge 1.10%...

administrative fee .20%

combination enhanced death benefit .45%

beneficiary protector .35%

10% lifetime income option charge 1.2%

10% spousal continuation charge .30%

total 3.60% but we havent included the fund expense fees so tack on another .45 to 1.94% depending what funds you picked..


is that an amazing fee structure for the un-aware?.

Sounds like a Nationwide VA..........

 

[mathjak107]

well ill protect the names of the guilty but just curious how you arrived at nation wide?

 

[GregLee]

it started out with them promising me a minimum of 10% a year return for 10 years if the annuitywas on myself or ...

What a deal!

 

[FinanceDude]

well ill protect the names of the guilty but just curious how you arrived at nation wide?

10% growth on the income base for 10 years, not many others have that.......

 

[mathjak107]

nor fees on that phantom base ha ha ha.... according to what i could figure out in that complex prospectus it looks like the charges are based on the fact they are crediting you with those step up bonus's.


i all sounded like an amazing deal. 10 % guaranteed for 10 years.... thankfully i already had a clue where it was going.

 

[jdw_fire]

10% growth on the income base for 10 years, not many others have that.......

nor fees on that phantom base ha ha ha.... according to what i could figure out in that complex prospectus it looks like the charges are based on the fact they are crediting you with those step up bonus's.


i all sounded like an amazing deal. 10 % guaranteed for 10 years.... thankfully i already had a clue where it was going.

given the 3.6% fees you stated earlier doesnt that just mean that the actual guaranteed rate is 10%-3.6%=6.4%/yr? or am i missing something?

 

[mathjak107]

the 3.60 doesnt include the fund fees yet either.... depending what you pick the fund fees can run almost 2%.

again the 10% return isnt money you get now. its a credit you get decades later if and when you convert to an annuitized income. in the mean time put in 100k and those fees your paying now will double as they credit you with those phantom bucks. imagine paying 7200 bucks by year 10.

 

[jdw_fire]

the 3.60 doesnt include the fund fees yet either.... depending what you pick the fund fees can run almost 2%.

so you are saying that the return you get from the fund that the guarantee is applicable to is computed before the fees are removed from that fund? well isnt there a low fee fund in the mix?

again the 10% return isnt money you get now. its a credit you get decades later if and when you convert to an annuitized income. in the mean time put in 100k and those fees your paying now will double as they credit you with those phantom bucks. imagine paying 7200 bucks by year 10.

so if you use a low fee fund (or no fund at all, i am not clear on what options are available) and are using this as a way to create a pension like cash flow in the future, you are getting a >6%/yr guaranteed return on your money, right?

 

[mathjak107]

okay let me explain. there are two stages to a variable annuity.
the first part comes into play in your accumulation stage when you have decades to go before retirement.

you can buy all kinds of different mutual funds in the confines of that annuity.

unlike just buying a mutual fund on your own you pay slightly higher fund fees

you pay for insurance so if you die it goes to your wife. you pay fees to have any guarantees such as guaranteeing you a minimum return over to your spouse. you pay administrative fees , fees to give your heirs back money you put in if you died in the beginning years and there are a few more tacked on.


part ii of the annuity happens when you are ready to retire.

you can take the money and run in which case you get none of that money they promised you as your minimum returns the first 10 years.

or you can convert to an annuity and draw an income. if you do there are more fees and charges for it to extend to your spouse.

all the while you are paying fees in the accumulation stage on those step up bucks they added to your returns since your yearly charges are based on your account balance.

but your paying fees on money you will never even see if you take the money and run and dont annuitize. if you do you will pay more fees for converting .




they gotcha.


hope that explains it.

 

[FinanceDude]

again the 10% return isnt money you get now. its a credit you get decades later if and when you convert to an annuitized income. in the mean time put in 100k and those fees your paying now will double as they credit you with those phantom bucks. imagine paying 7200 bucks by year 10.

Not that it matters, but in most cases you do NOT have to annuitize to get the income base withdrawals, but it does come off the contract value.........

 

[FinanceDude]

okay let me explain. there are two stages to a variable annuity.
the first part comes into play in your accumulation stage when you have decades to go before retirement.

you can buy all kinds of different mutual funds in the confines of that annuity.

unlike just buying a mutual fund on your own you pay slightly higher fund fees

you pay for insurance so if you die it goes to your wife. you pay fees to have any guarantees such as guaranteeing you a minimum return over to your spouse. you pay administrative fees , fees to give your heirs back money you put in if you died in the beginning years and there are a few more tacked on.


part ii of the annuity happens when you are ready to retire.

you can take the money and run in which case you get none of that money they promised you as your minimum returns the first 10 years.

or you can convert to an annuity and draw an income. if you do there are more fees and charges for it to extend to your spouse.

all the while you are paying fees in the accumulation stage on those step up bucks they added to your returns since your yearly charges are based on your account balance.

but your paying fees on money you will never even see if you take the money and run and dont annuitize. if you do you will pay more fees for converting .




they gotcha.


hope that explains it.

Not quite, there are a few errors in your explanation, but not major ones..........

 

[mathjak107]

i had such a hard time figuring out the prospectus and the wording. can you correct me here and show me where i didnt grasp it .? im really trying to get a handle on this but it isnt easy .

 

[FinanceDude]

i had such a hard time figuring out the prospectus and the wording. can you correct me here and show me where i didnt grasp it .? im really trying to get a handle on this but it isnt easy .

You did really well. The prospectuses SUCK, very hard to understand, and I have a degree in finance!!

I am a little tired but will try to make a few helpful comments tomorrow.........

 

[jdw_fire]

okay let me explain. there are two stages to a variable annuity.
the first part comes into play in your accumulation stage when you have decades to go before retirement.

you can buy all kinds of different mutual funds in the confines of that annuity.

unlike just buying a mutual fund on your own you pay slightly higher fund fees

you pay for insurance so if you die it goes to your wife. you pay fees to have any guarantees such as guaranteeing you a minimum return over to your spouse. you pay administrative fees , fees to give your heirs back money you put in if you died in the beginning years and there are a few more tacked on.


part ii of the annuity happens when you are ready to retire.

you can take the money and run in which case you get none of that money they promised you as your minimum returns the first 10 years.

or you can convert to an annuity and draw an income. if you do there are more fees and charges for it to extend to your spouse.

all the while you are paying fees in the accumulation stage on those step up bucks they added to your returns since your yearly charges are based on your account balance.

but your paying fees on money you will never even see if you take the money and run and dont annuitize. if you do you will pay more fees for converting .




they gotcha.


hope that explains it.

actually i dont think you addressed any of my questions

so you are saying that the return you get from the fund that the guarantee is applicable to is computed before the fees are removed from that fund? well isnt there a low fee fund in the mix? all it takes is 1 "fund" with low or no fee to just sit back and collect the guaranteed return.



so if you use a low fee fund (or no fund at all, i am not clear on what options are available) and are using this as a way to create a pension like cash flow in the future, you are getting a >6%/yr guaranteed return on your money, right?

 

[mathjak107]

no there are no low fund fee choices....

finance dude will confirm but the way it looks that 10% they guarantee you vanishes awfully quick in fees.

lets say you give them 100k and pick some stock funds. your fees look like 3600 a year for the annuity plus 1.90% for fund fees. the lower fees are bond funds. thats almost 5600 the first year in costs. the historical average is about 9% for the markets and your paying 5.6 right out of the box.

next year you get stepped up by that 10% guarantee and fees are now 6160 a year. the kicker is you pay more in fees now.

by year 10 you can be paying over 10k a year in fees. but the money they bumped you up with to make up that 10% vs your actual return isnt money you can take out . no way... that money gets credited to your account if and when you take the money as a pensionized annuity. thats decades down the road.

ill let finance dude explain that process.

now the guarantee stops after 10 years and you are left paying for decades yearly fees that are outragious. worst part is if you decide to take the money in a lump sum and run after those decades. you get none of those bucks they stepped you up with but you paid all those fees on it all those years.

 

[TN_INVEST]

given the 3.6% fees you stated earlier doesnt that just mean that the actual guaranteed rate is 10%-3.6%=6.4%/yr? or am i missing something?

You're missing something.

There are fees, for sure, but it doesn't work quite like that. Annuities are for income, so it helps to think of them primarily as income vehicles rather than traditional investments.

Best way to think about it is for every $100,000 you deposit, you will be guaranteed at least $10,500 income per year beginning in 10 years. And that does NOT assume annuitization. Check my math, but I used their 5.25% income payout and doubled the $100K.

Folks that want to maximize their returns and/or maximize their lump sum investments, ought to look at something different. Annuities can help with guaranteed retirement income and there are lots of reports out there that suggest they can help a lot of folks in retirement (mainly because we all know that most folks are terrible at managing their own money and make lousy investors).

 

[obgyn65]

I would assume people putting their money in annuities (or, like me, considering them) are aware they won't get their capital back at maturity like they do with a CD or bond. Annuities may make sense for people who do not have heirs or do not want to leave anything.

That's where most people go wrong in their thinking.

 

[mathjak107]

You have to think of annuities as buying a pension. when you buy in at work as an example you dont try to compute a return. you buy an income for you and your spouse for as long as you live.

same with an annuity. your buying a pension

 

[obgyn65]

Yes - I agree with this.

You have to think of annuities as buying a pension.

 

[rescueme]

I would assume people putting their money in annuities (or, like me, considering them) are aware they won't get their capital back at maturity like they do with a CD or bond.

Of course not - they have different uses in retirement planning.

Folks keep forgeting that an annuity is an income vehicle. It's not an investment nor is it designed to retain a specific value for use later in life, as a CD would do. Speaking of an SPIA (not a delayed or a VA annuity, which I would not consider - based upon my research and personal situation), it would be like a CD, but being able to withdraw a part of the CD value, along with accrued interest. You can't equate both vehicles (SPIA/CD) and a lot of folks get confused with that use.

As for my/DW's SPIA, purchased with a life term minimum payout we (or our estate) will have a minimum defined payout over our calculated joint-life, at the time of purchase (28 years). BTW, if either/both are still alive after our calculated terminal date, payments continue (at 100%) until we both pass.

Yes, the monthly payment is a few dollars less due to this option, but we don't have to worry (even though we'll be dead ) that our "remaining income" will go to the insurance company, but rather to our estate - for the benefits of others still living.

So in essence, we do get the value of our "CD" (e.g. preimum), but we get it back as we age with an option to pay it to our estate (or others) if we're not around to collect.

Different products - different goal - different use...

 

[chinaco]

If you are considering VAs... take a look at Milevsky's articles on Advisor One.

He explains how he analyzes them and grades specific products.

Moshe A. Milevsky

I think it is useful to read his description to see his take on these types of products. In his articles he does not focus on analyzing the viability of the company so much (i.e., strong company vs weak company.. although this is important too)... instead he focuses on the products cost and features that might be able to be leverage to give one a hedge (floor) and at the same time take more risk (than might otherwise be taken) and use a step-up feature to lock in gains and attempt to get a better outcome.

 

[TN_INVEST]

I would assume people putting their money in annuities (or, like me, considering them) are aware they won't get their capital back at maturity like they do with a CD or bond. Annuities may make sense for people who do not have heirs or do not want to leave anything.

Sorta.

Annuities are very much sorta designed to be a personal pension plan.

However, there is the possibility to have something left in the account for yourself or your heirs. In other words, you do have more options than a traditional pension plan. Pension decisions are often irrevocable. That's not often the case with annuities.

But, for a lot of people, it's often better to compare them to pensions than to compare them to investments. That's why when folks get way bogged down in all the fees (there are a lot of fees, for sure) they are sort missing the point.

They aren't for everybody. But it is very rare to find black n white rules when it comes to personal finance stuff.