Are all Annuities BAD?

[Rocky mtn high]

I have always thought so. My friend’s investment advisor is saying the market going to crash in the next year or two and is thinking they should get out of the market. My friend’s wife does not want to go through another crash. They are both late sixties. So are some annuities ok? Thanks in advance for the help.

 

[REWahoo]

I'll leave it to others to answer the thread question, but I want to know how your friend's investment advisor knows the market will crash in the next year or two?

FWIW, here is an annuity thread from a couple of years ago that might be informative: https://www.early-retirement.org/forums/f28/annuities-opinions-yay-or-nay-97637.html

 

[MichaelB]

Moved to the FIRE and Money forum where it will get more visibility.

 

[Aerides]

From reading these forums over the years, some annuities can work well as part of a portfolio for some people. But any advisor pushing them is usually a sign to run away, not only from the annuity but the advisor.

And any advisor playing to fears like this one sounds deserves to be avoided. Have you talked to your friend about more reasonable options?

 

[Rocky mtn high]

Yes I talked to him about smaller annuity or keeping for example 3 years of spending in something conservative. His wife is almost panicking about a crash.

 

[olyveoil]

I have always thought so. My friend’s investment advisor is saying the market going to crash in the next year or two and is thinking they should get out of the market. My friend’s wife does not want to go through another crash. They are both late sixties. So are some annuities ok? Thanks in advance for the help.

Best thing you can tell your friend: Find another advisor.

 

[Rocky mtn high]

I agree but they have used this person for twenty years.

 

[Midpack]

I really don't expect to need one, but I'd consider a SPIA as a last resort if we find ourselves in Otar's red zone for example - we're far into the green zone. Of course if we're in the red zone, it will most likely be due to some geopolitical catastrophe the likes of which the USA hasn't seen since 1871, in which case an annuity probably won't be available. I'd never consider any other type of annuity.

I do check our annuitization hurdle quarterly https://www.financialplanningassoci...w Strategy for Managing Retirement Income.pdf

 

[Dash man]

We have Flexible Retirement Annuities with USAA that are basically savings accounts at this point. They did have surrender fees that we didn’t care about knowing we didn’t need the money. Even then, 10% could be taken out each year without penalty. It has a 1% minimum interest rate for new money, which is where it’s at now. We’re getting an average of 2.35% effective rate on our funds.
I think most brokerages have similar products, but aren’t paying much these days.
None of our annuities have any fees at all.

 

[MichaelB]

I agree but they have used this person for twenty years.

If they trust this advisor there is probably little you can do to change their minds. If their mind is made and the relationship with their advisor is long standing, why get involved?

Perhaps the best move is to point them to a low cost annuity provider with a high reputation, such as Vanguard, so at least they can compare options.

 

[Texas Proud]

I agree that a long standing advisor is hard to have them move from... but bad advice is bad advice no matter who gives it...


My best suggestion is to have them look at the fees... if they are smart they can see that the fees are high and make at least a smarter decision...


As mentioned, the only annuity I would consider is a SPIA... and shop around, do not just buy what the advisor suggests...

 

[OldShooter]

... I want to know how your friend's investment advisor knows the market will crash in the next year or two? ...

I'd also like to know his track record for accurate predictions. Not cherry picked. The whole record.

Suggest that they ask the advisor what his commission payment will be if they snap on his bait. "The insurance company pays my commission" is the usual lie. If he answers the question honestly, that is a plus.

Then, as mentioned, help them to price shop the annuity. This might be one of the biggest single purchases they will ever make. To not price shop is crazy.

 

[pb4uski]

I have always thought so. My friend’s investment advisor is saying the market going to crash in the next year or two and is thinking they should get out of the market. My friend’s wife does not want to go through another crash. They are both late sixties. So are some annuities ok? Thanks in advance for the help.

Many think it is likely that the market will crash over the next year or two, but that doesn't make annuities a good idea. Most annuities are indeed bad. (ETA... for the purchaser).

There are only really two flavors of annuities that IMO are ok... SPIAs for those who want or need regular income (and SPIAs have some warts) and MYGAs aka SPDAs, which are the functional equivalent of a CD issued by an insurer rather than a bank. MYGAs/SPDAs offer reasonably good interest rate compared to CDs but if you need the money during the term the surrender penalties are much higher than CD early withdrawal penalties.

Most variable annuities are junk and should be avoided.

It is hard to provide more advice absent more information on what kinof annuity their FA is pitching... but as a general rule be very cautious... what they pitch is usually better for the FA than it is for the buyer.

 

[cxr133]

Best thing you can tell your friend: Find another advisor.

It seems like the wife is reallllly risk adverse so that be one reason its being offered

 

[Chuckanut]

The best annuity is still the one Uncle Sam sells us for delaying social security past FRA. He will even sell you a reduced version if you decide to take SS before Full Retirement Age. What a guy!

I am not a fan of annuities overall. But, there is a psycohogical aspect to investing that can't be overlooked. Annuities provide an income floor that can be very comforting when the financial markets are negative or very volatile. If that prevents somebody from selling into the teeth of a Bear market that already has taken its 10, 20 or 30% bite out of one a person's wealth, it may be serving its most noble purpose.

I am always a bit astounded when I hear somebody say 10 years that after the 2008 crash or the 2001 tech bubble fiasco that they 'Lost all their retirement money'. They only lost if they sold at fire sale prices. An annuity income floor may keep some people from doing that. IMHO, that is their main benefit for many people.

 

[jazz4cash]

Many think it is likely that the market will crash over the next year or two, but that doesn't make annuities a good idea. Most annuities are indeed bad.

.

This!

 

[RetMD21]

Bad for who? The variables pay good commissions from what I hear.

 

[YVRRocketSurgery]

The Morningstar Longview Podcast had a guest (Kerry Pechter) discuss annuities a few weeks back. The site has a transcript too if you want to read instead of listen. The guest gets into the weeds but the overall discussion has a few good nuggets.

My key take aways from the podcast are:

• Annuities are just one tool in the toolbox that you can use to address a financial need. In their simplest form, you're paying for a means to transfer (longevity) risk to the insurance company which helps pool the risk.
• Because interest rates are so low, payouts are correspondingly low historically speaking. Insurance companies have reacted by coming out with more complex products, such as annuities tied to equity market performance but those are getting away from the original goal of annuities to help you de-risk.
• Indexed annuities are typically not worth it because you're essentially paying the insurance company more to also manage inflation risks. (Think high MER mutual funds vs low MER index ETF's.)
• One of the key attributes are mortality/survivorship credits which provide for a greater payout than trying to build and equivalent secure income stream at the same risk level on your own.

It's a personal decision how much risk you can tolerate and how much risk capacity your portfolio has built in and whether you need an annuity to move the needle.

 

[MRG]

In 2013 DF was in ill health and wanted someone to listen to his advisor, a "well respected Fidelity specialist". The guy was a normal 1%er but I'll always remember his advice that "interest rates will only go up from here".
Run away from any annuity salesman who starts "selling" They'd be right telling you they're not selling; it's lies.

 

[Which Roger]

It seems like the wife is reallllly risk adverse so that be one reason its being offered

I'm wondering what their current asset allocation is. I'm guessing it's way too aggressive for their risk tolerance, otherwise they wouldn't be so afraid of a potential crash.

 

[flintnational]

OP, since the friends have been with this advisor for 20 years and they are scared of a market downturn, I suspect there is little you can do. Financial products sold out of fear are rarely the right answer. But, I suspect that is were your friends are headed. If you have any influence, I might try and educate them. Recommend an investing book. I doubt you can stop the annuity sale.

 

[travelover]

I'd say tell them to go ahead and buy the annuity. The FA makes a fat commission, the wife is happy because "you can't lose money with an annuity" and when the market dips, which it will, you are not the monster that told them to stay the course in stocks. Giving financial advice to friends is a fool's errand.

 

[RunningBum]

Just saying "annuities are bad" aren't going to hold up against an annuity salesman, especially if they think they want them.

Suggest that they should understand how the annuity works, and how they will get paid in various market scenarios. And how much they are paying in fees.

 

[Rocky mtn high]

They have asked for my opinion because I have known them for many years and was in banking finance for many years. But as someone pointed out, if I say no way and the market crashes there’s going to be someone very upset with me. Very fine line here!

 

[Chuckanut]

Of course, people can and probably will lose with a fixed annuity thanks to inflation. They lose buying power. People need to think in terms of loaves of bread, not dollars or euros or whatever.

But...

My friend’s wife does not want to go through another crash. They are both late sixties.

if I say no way and the market crashes there’s going to be someone very upset with me.

Somehow I missed the significance of the above statements. Perhaps refer them to humbledollar.com and let them take responsibility for whatever they decide.