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Not so hypothetical question...
05-14-2022, 05:09 PM
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#1
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Recycles dryer sheets
Join Date: Sep 2018
Location: Philly Burbs
Posts: 155
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Not so hypothetical question...
A friend has developed some significant health issues and will be retiring as soon as he turns 62 on November 1. He can start his pension and SS, totaling about 3,500/mo. The lump sum for the pension is just over 400k. Due to his health issues he is inclined to take the lump, but doesn't know how invest it to start withdrawals.
He consulted a CFP who suggested he buy two separate annuities with 275k and put the remainder in an IRA. The fee for the annuities is 3.5% (I think, still waiting for the proposal in writing). I've attached a screen shot of the Pro Forma the CFP sent.
He will get subsidies through the ACA, but not exactly sure how much yet. I'm hoping someone is familiar with the proposed funds and can give me some feedback.
Thanks.
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05-14-2022, 05:35 PM
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#2
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Full time employment: Posting here.
Join Date: Jul 2014
Posts: 859
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Quote:
Originally Posted by Omega
A friend has developed some significant health issues and will be retiring as soon as he turns 62 on November 1. He can start his pension and SS, totaling about 3,500/mo. The lump sum for the pension is just over 400k. Due to his health issues he is inclined to take the lump, but doesn't know how invest it to start withdrawals.
He consulted a CFP who suggested he buy two separate annuities with 275k and put the remainder in an IRA. The fee for the annuities is 3.5%
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He should stop right there and cease business with the CFP. If he wants an annuity (it's not clear that an annuity would be good for him, but assuming he does want one) then he should check Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com for the costs without a 3.5% fee.
Need to know more about how his expected expenses compare to $3500/mo, and the size of his investments, to say more.
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05-14-2022, 05:39 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
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His pension is an annuity. To take a lump sum and then buy another annuity makes no sense for the same reason that he doesn't want to take the company pension annuity in the first place. He may not live long enough for the annuity to be beneficial.
The FA is pushing the two annuities because the commission payments on annuities are high. The American Funds IRA may involve a front end load; many of their funds do and then pay the FA a nice commission plus 12b-1 fees. You friend should find another FA who is legally a fiduciary and get that fact in writing.
Don't pay much attention to the CFP certificate. It is a nice credential but there are plenty of CFPs who are crooks.
__________________
Ignoramus et ignorabimus
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05-14-2022, 06:00 PM
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#4
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Recycles dryer sheets
Join Date: Sep 2018
Location: Philly Burbs
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Ugh! It's so hard to find someone. I thought this guy was honest, and he came highly recommended. Are you familiar with the funds he suggested? I thought the same thing about buying an annuity with a pension money.
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05-14-2022, 06:01 PM
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#5
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Moderator
Join Date: Nov 2014
Posts: 9,070
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Quote:
Originally Posted by OldShooter
His pension is an annuity. To take a lump sum and then buy another annuity makes no sense for the same reason that he doesn't want to take the company pension annuity in the first place.
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Just to add, the pension (instead of taking the lump sum) would probably be better AND it would likely be insured by PBGC. When I was given my pension numbers (a pension and the lump sum), the pension was way better than any annuity I could have bought on the market. This was confirmed by a guy who sells annuities. He said the closest he could come to the pension monthly payment would be to buy an annuity and then wait a number of years to start collecting.
Agree, time for a different FA. Or, you friend is not making his situation clear to the current FA. Either way, he needs to step back and regroup.
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05-14-2022, 06:02 PM
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#6
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Moderator Emeritus
Join Date: Apr 2011
Location: Conroe, Texas
Posts: 18,593
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SS is an annuity by itself. And it's COLA'd.
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05-14-2022, 06:13 PM
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#7
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Recycles dryer sheets
Join Date: Sep 2018
Location: Philly Burbs
Posts: 155
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Quote:
Originally Posted by Jerry1
Just to add, the pension (instead of taking the lump sum) would probably be better AND it would likely be insured by PBGC. When I was given my pension numbers (a pension and the lump sum), the pension was way better than any annuity I could have bought on the market. This was confirmed by a guy who sells annuities. He said the closest he could come to the pension monthly payment would be to buy an annuity and then wait a number of years to start collecting.
Agree, time for a different FA. Or, you friend is not making his situation clear to the current FA. Either way, he needs to step back and regroup.
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I think he wants the lump sum because of his health issues. You may be right about not giving the advisor good direction. I think he assumed the advisor would know that he was taking the lump to have access to his money if needed.
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05-14-2022, 06:24 PM
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#8
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Recycles dryer sheets
Join Date: Dec 2021
Posts: 131
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Does your friend have a wife and/or kids?
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Some say nothing is impossible, I do nothing every day.
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05-14-2022, 06:27 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,671
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That CFP sounds like a WEASEL...
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05-14-2022, 07:39 PM
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#10
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Recycles dryer sheets
Join Date: Sep 2018
Location: Philly Burbs
Posts: 155
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Quote:
Originally Posted by HarryHawk
Does your friend have a wife and/or kids?
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No wife, no kids.
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05-14-2022, 10:33 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 16,972
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Are these significant health issues terminal, or just make it too hard to work ?
This is important because the plan is different between 5 years to live and normal lifespan.
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Fortune favors the prepared mind. ... Louis Pasteur
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05-15-2022, 05:27 AM
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#12
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Full time employment: Posting here.
Join Date: Jan 2008
Posts: 838
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Quote:
Originally Posted by Omega
He will get subsidies through the ACA, but not exactly sure how much yet. I'm hoping someone is familiar with the proposed funds and can give me some feedback.
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Your friend can get a very good estimate of the ACA subsidy at https://www.healthsherpa.com/
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05-15-2022, 06:14 AM
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#13
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Recycles dryer sheets
Join Date: Sep 2006
Location: clearwater
Posts: 439
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Quote:
Originally Posted by Omega
I think he wants the lump sum because of his health issues. You may be right about not giving the advisor good direction. I think he assumed the advisor would know that he was taking the lump to have access to his money if needed.
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possible that the advisor is thinking more flexible withdrawal options with his annuity rather than the lifetime company one. , thinking in terms of liquidating the one annuity over 10 years.
Not that this is the best option, I think he should take the lump sum and make withdrawals as needed and wanted.
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05-15-2022, 06:51 AM
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#14
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Recycles dryer sheets
Join Date: Apr 2022
Posts: 212
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Quote:
Originally Posted by Omega
Ugh! It's so hard to find someone. I thought this guy was honest, and he came highly recommended. Are you familiar with the funds he suggested? I thought the same thing about buying an annuity with a pension money.
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Omega, I would be slow to assume you know someone's intentions. We can't know that. Making (or listening to) assumptions about intentions is counterproductive. The best thing to do is to sit down with the CFP, ask them a lot of questions, and figure out WHY this is the best choice versus something else. Maybe they are trying to screw your friend. Maybe not. Ask, listen, and then decide.
As far as the investment choices go: I've never met an indexed annuity I liked. And I've looked deep into dozens of them. Generally the more complicated the investment, the worse they are. And these can be pretty complicated.
American Funds is the only fund company I really believe in. Every single one of their domestic (and maybe international?) equity funds have beat their indexes since inception. Regarding those fees - you're not really paying the fee to buy the product, you're paying the fee to use that CFP and get their guidance and experience. You can buy American Funds from him and pay the load of 1-5.75%. Or you can buy it through someone like Fidelity and pay nothing with no professional advice. I don't think either are bad choices, but people usually find they're more comfortable with one over the other.
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05-15-2022, 07:07 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: On a hill in the Pine Barrens
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Omega,
The chart was pretty, and he seemed honest, but as you can tell from the range of comments there is more to uncover.
With a monthly annuity, he should consider what he might end up pulling from the product before death. And then is there a guaranteed payout period?
It really depends on the assumed longevity what looks better.
If he takes the lump sum and pulls 4%, it will last 25 years with no growth. And the buying power keeps slipping with inflation.
If he doesn't care about a legacy, then the calcualtions are simpler. My gut tells me he needs some growth to offset inflation. So you'd look at investing a lump sum with a certain asset allocation that generates the income he wants.
You also have the annuity site which was recommended, and I would go that route before paying an FP extra.
He could also go online or to a local office of Fidelity or Schwab to get free advice.
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05-15-2022, 07:26 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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Take the lump sum and roll it into an IRA at Vanguard. Invest the ~$400k in Wellseley Income Fund. Set up an automatic monthly redemption for $3,000/month from the IRA to his checking account.
Then move on to more important things in life like getting a handle on health issues, family, etc.
Wellesley is quick and easy, but it could be STAR fund or a combination. Life Strategy Moderate Growth would not be a bad option either.
If $3,000/month is going to be bad from an ACA perspective then he can shave it down as necessary to optimize ACA given his spending needs.
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05-15-2022, 07:31 AM
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#17
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Full time employment: Posting here.
Join Date: Oct 2021
Posts: 554
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Quote:
Originally Posted by OldShooter
His pension is an annuity. To take a lump sum and then buy another annuity makes no sense for the same reason that he doesn't want to take the company pension annuity in the first place. He may not live long enough for the annuity to be beneficial.
The FA is pushing the two annuities because the commission payments on annuities are high. The American Funds IRA may involve a front end load; many of their funds do and then pay the FA a nice commission plus 12b-1 fees. You friend should find another FA who is legally a fiduciary and get that fact in writing.
Don't pay much attention to the CFP certificate. It is a nice credential but there are plenty of CFPs who are crooks.
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Exactly - why would you sell an annuity (pension) and use those proceeds to buy another one? American funds indeed pay Financial advisors a lot to push money their way. My parents got taken with them years ago by a similar CFP.
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05-15-2022, 08:54 AM
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#18
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Thinks s/he gets paid by the post
Join Date: Feb 2021
Location: Puget Sound
Posts: 3,190
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OP, I am glad you posted your questions up and elicited these responses. IANA eXpert, but what you laid out there did not pass the basic smell test. Hopefully you can divert him from making that mistake.
If he feels he has to cash it out, I liked Pb4Ski's thoughts. Unless his health concerns are very short term survival, I would advise to keep the annuity as-is. If he cashes it out, it is now exposed in many ways. If he needs long term care, it is exposed as a lump.
I'd rather expose it piecemeal as a monthly payment. I think it makes a difference when getting medicaid to help with long term care.
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Not so hypothetical question...
05-15-2022, 08:54 AM
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#19
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Recycles dryer sheets
Join Date: Jan 2022
Posts: 494
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Not so hypothetical question...
How much of the $3,500 is the pension? Is it COLA?
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05-15-2022, 09:12 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
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Quote:
Originally Posted by arcyallen
... American Funds is the only fund company I really believe in. Every single one of their domestic (and maybe international?) equity funds have beat their indexes since inception.
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I found that statement to be close to unbelievable, and it appears to be. I plugged what I think is their flagship fund, American Mutual Fund, into Portfolio Visualizer. There is about 35 years of history for the Class A shares showing a return of 10.58% against VG 500 Index return of 11.32. That does not account for the load haircut that the victims take -- considering the load the return would be worse. I also ran the Class C shares. PV gave me a 20 year history on that one, 7.27% vs VG 500 at 8.49%. QED.
Quote:
Originally Posted by arcyallen
... Regarding those fees - you're not really paying the fee to buy the product, you're paying the fee to use that CFP and get their guidance and experience. You can buy American Funds from him and pay the load of 1-5.75%. Or you can buy it through someone like Fidelity and pay nothing with no professional advice. ...
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Well, there is also the 12b-1 fee, which is the gift that keeps giving to the FA, coming right out of the victim's pocket every year and well hidden. And, at least at Fast Eddie's shop, every dividend reinvestment also gets trimmed by the amount of the front end load. My guess is that this is common practice.
I think as a group, American funds are sold, not bought. It would be interesting to know the percentage of shares that are Class A. I am too lazy, however, to dig through the SEC filings to see if this is disclosed.
Now returning to our regular programming, @Omega, I think @pb4's advice is both sound and easy to implement. I suggest that you pass it along to your friend.
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