Shield Annuity Product?

[JustKickItForward]

We are thinking of putting some monies into this annuity product which caps gains at set certain rates in return for protection up to certain levels, and performance is pegged to one of three indexes such as the S&P500 (chosen by me). Funds are locked in for 3 or 6 year periods . WIthdrawals are subjected to the 59 1/2 years old rule on the earnings only.


We are considering this because our financial advisor states these monies will be shielded from FAFSA calculations (our kids are going to college in a couple of years).




What are people's experience and recommendations with these types products?


Is it against forum rules for me to post the name of the specific product I am thinking about so others can read the specific details before commenting?

 

[gauss]

It's all marketing. I looked into this several years ago. My conclusion was the capping of the gains will kill any real return because gains come in short bursty ways.

If you still want to explore this you should at least do your homework.
Here is an article from Kitces about how you can make your own synthetic indexed annuity.

I eventually learned this is not what I want in retirement (options were too hard to buy efficiently given the spreads) and have since moved to an all balanced fund portfolio.

That way the funds are automatically buying low and selling high so I won't have to worry about taking action.

-gauss

p.s. For your financial health I suggest that you look for a new financial adviser who is a Fiduciary (ie RIA etc.) who you pay by the hour usually for the advice. They are legally required to put your interests first (ie above theirs). This is not the type of legal relationship you have with your current adviser. The product being sold to you is very profitable for your adviser -- but could be financially devastating to you slowly over time. There is a PBS Frontline hour long documentary available online that you would likely benefit from watching.

 

[flintnational]

p.s. For your financial health I suggest that you look for a new financial adviser who is a Fiduciary (ie RIA etc.) who you pay by the hour usually for the advice. They are legally required to put your interests first (ie above theirs). This is not the type of legal relationship you have with your current adviser. The product being sold to you is very profitable for your adviser -- but could be financially devastating to you slowly over time. There is a PBS Frontline hour long documentary available online that you would likely benefit from watching.

+ 1 What gauss said. Unless this adviser is a fee only fiduciary, I would wonder if the product is being recommended for his benefit and not yours. Even if the strategy is sound, how would you know this particular product is the most efficient, cost effective vehicle.

 

[OldShooter]

...
p.s. For your financial health I suggest that you look for a new financial adviser who is a Fiduciary (ie RIA etc.) who you pay by the hour usually for the advice. They are legally required to put your interests first (ie above theirs). This is not the type of legal relationship you have with your current adviser. The product being sold to you is very profitable for your adviser -- but could be financially devastating to you slowly over time. There is a PBS Frontline hour long documentary available online that you would likely benefit from watching.

This. Run, don't walk. Try napfa.org if you don't have other ways to search for a fiduciary. If you want hands-on investment management, my favorite recommendation is to go to https://us.dimensional.com/individuals and shop a few of the advisors in your area. Though DW and I run our own money, I think the Dimensional story is very strong and their advisor screening process seems to be very good. I actually have an account with a DFA advisor just as an experiment and it is doing about as well, net of fees, as we are doing with the main portfolio. IMO that is quite an accomplishment for them.

Just for grins, here is one typical way the variable annuities folks cheat you:

You say: "... performance is pegged to one of three indexes such as the S&P500 (chosen by me)..." The usual scam is that the "peg" is not to the total return of the index, it is only to the nominal return. So if the selected index is at 1000 at the beginning of the year and at 1050 at the end of the year, they will say that the return of the index is 5% and that is what you will get paid on. In fact, the index has been throwing off dividends during the year and, with dividends, the return ("total return") is significantly higher than that 5% you get.
​

You say that "... Funds are locked in for 3 or 6 year periods..." The reason for this is that the salesman's commission is huge and the insurance company needs to hold your money profitably for a while before they are made whole on what they paid the salesman.

Bad stuff. Run away.

 

[JustKickItForward]

Good points.



The guy is fiduciary. He recommended this product mainly (aside from his commission) for shielding from FAFSA calculations, yet stay in the market. He stated if we did not have kids, this would be wrong product for us.

 

[CoolRich59]

I know 2 things about annuities.

First: They seem to be very unpopular here. I have great respect for the collective wisdom here and so I have never considered one.

Second: They seem to be very popular with the various "money hour" folks who frequent the local talk radio station on Saturdays. Anything these con artists like I take as a given I should avoid.

 

[gauss]

Good points.
The guy is fiduciary. He recommended this product mainly (aside from his commission) for shielding from FAFSA calculations, yet stay in the market. He stated if we did not have kids, this would be wrong product for us.

Okay - Perhaps too quick to judge.

So the loophole appears to be that retirement funds are not included on FAFSA and the consultants are interpreting this to mean that non-qualified annuities, ie those purchased with after-tax dollars, which are tied up until age 59 1/2 would thus qualify and these should not be disclosed.

Investments do not include the home you live in, the value of life
insurance, retirement plans (401[k] plans, pension funds, annuities, non-
education IRAs, Keogh plans, etc.) or cash, savings and checking accounts
already reported in questions 41 and 90.

I guess the question is how much can be expected to be gained in financial aid vs how much is lost in running your after-tax money through the annuity machine.

It may be much more of a value for expensive schools, but it seems that these schools specifically include non-qualified annuities in their forms to address what I am calling a loop hole.


Could you invest your variable annuity in a plane-jane variable annuity for less fees and perhaps better results then going the index-linked annuity route?


aside: How things have changed over the years.

When I first applied for financial aid back in the 80s, I believe that my parents were told to sell the house!


-gauss

 

[Independent]

We are thinking of putting some monies into this annuity product which caps gains at set certain rates in return for protection up to certain levels, and performance is pegged to one of three indexes such as the S&P500

You are looking at an indexed annuity.

Don't buy it until you fully understand exactly how much cash you will get if the market repeats the any of the actual sequence of returns we've seen in the past. Be sure to include all fees in your calculation.

Then, compare that to what you would have gotten by a simple mix of equity mutual funds and and CDs (or individual bonds) in those same historic periods.

Then, compare to multi-year guarantee annuities and Vanguad's lower-than-average cost variable annuity (if you really want annuities, Google on annuities and CSS).

If that all sounds too confusing or too time consuming, you shouldn't be putting money in something as complicated as an indexed annuity.

OTOH, if you actually do the math, you'll probably find that the combination of simpler products provides a better return.

 

[Another Reader]

Some fiduciary.

I do not buy commission based financial products. Besides the commission bias, I think that the insurance companies pay someone to "sell" this product to you speaks volumes about the product.

 

[OldShooter]

... I guess the question is how much can be expected to be gained in financial aid vs how much is lost in running your after-tax money through the annuity machine. ...

Yes. This.

It is not uncommon for people looking to minimize taxes for the tax tail to wag the investment dog. For example, people in lower tax rates buy muni bonds to avoid tax but the net dollars in their pocket end up being less than if they bought a taxable bond and paid the taxes. This FAFSA game is a similar situation but the analysis is much harder and maybe more speculative. But you are talking thousands of dollars here, so even paying a CPA to do the analysis might be cost-effective.

And, as others have said, there are low-cost players in the annuity market these days -- a relatively new phenomenon. I have seen Vanguard and TIAA recommended. Given the competitive environment I'd be surprised if Fido, Schwab or both do not also have low cost products or easy access to them.

 

[ShokWaveRider]

Would a Multi Year Guaranteed Annuity (MYGA) achieve the same goal, without the indexing parts or high fees / commissions?

 

[Ready]

Good points.



The guy is fiduciary. He recommended this product mainly (aside from his commission) for shielding from FAFSA calculations, yet stay in the market. He stated if we did not have kids, this would be wrong product for us.

Wait a minute. How can he be both a fiduciary and a commissioned salesperson at the same time? I don't think that is possible. Fiduciaries are not supposed to have any financial interest in the products they recommend. Doing otherwise would make it very unlikely that they could really recommend the best possible product and just by coincidence have it happen to be one they represent and earn commissions on.

 

[CoolRich59]

Wait a minute. How can he be both a fiduciary and a commissioned salesperson at the same time? I don't think that is possible.

That's what I'm wondering.

Not trying to be a jerk, but how do you know he's a fiduciary?

Here is an excerpt from an explanation of fiduciaries from Investopedia: "Fiduciaries cannot profit from their position, according to an English High Court ruling, Keech vs. Sandford (1726), and in most cases, no profit is to be made from the relationship unless explicit consent is granted at the time the relationship begins."

 

[RetireBy90]

That's what I'm wondering.

Not trying to be a jerk, but how do you know he's a fiduciary?

Here is an excerpt from an explanation of fiduciaries from Investopedia: "Fiduciaries cannot profit from their position, according to an English High Court ruling, Keech vs. Sandford (1726), and in most cases, no profit is to be made from the relationship unless explicit consent is granted at the time the relationship begins."

My understanding is that a fiduciary is required to recommend the best investment(s) for you and not what is best for the FA. As I understand it there is no restriction against a commission if it is the best investment for your particular situation. Only that the he/she can't recommend the investment because it pays him the most.

 

[timo2]

It depends upon the reason one wants an annuity. IMO ,even with annuities, one size does not fit all. In my case I did pick up an indexed annuity similar to the OP's for DW after I'm dead. Ideally, we both will have lived long enough to have limited financial acuity at the time, and this product is simple for her to follow. Additionally, this is a hedge if the politicians mess in a negative way with social security.

Yes there are better more complicated DIY things to do. I reviewed some of the options with DW, asking what her potential 85 year old self would be able to deal with. A one stop indexed annuity worked for her.

 

[CaliKid]

Being a "fiduciary" does not mean they are automatically better for you as we don't know if they are honest. You people wait too much into one's title. I promise you there are people getting ripped off right and left by a "fiduciary" and people paying much less with a "commissioned" sales guy. Yes, on average the fiduciary is better but don't act like things are so absolute because they are not. People still need to be honest rather than dishonest.

 

[gauss]

^ If they legally agree to be a fiduciary and violate the terms of the agreement, you could bring a civil action against them. It is more than just a title, but rather a civil contract.

That all being said, it is better to work with a good apple than a bad apple.

 

[Jerry1]

Maybe the FA is a fiduciary and the recommendation to buy an annuity requires the OP to go to another party and purchase it.

 

[MI-Roger]

This post reads as if timo2 and I are the only posters who feel an annuity product can provide a positive benefit to the investor in certain situations. Although they are obviously not for everyone.

With that in mind, I would not recommend an annuity as a tool to attempt to secure a lower EFC value on the FAFSA if that is your only reason for purchasing. If you also want to establish long term secure income in retirement, with minimal or no effort on your part as you age, then maybe it is a route to accomplish both.

 

[RetireBy90]

This post reads as if timo2 and I are the only posters who feel an annuity product can provide a positive benefit to the investor in certain situations. Although they are obviously not for everyone.

With that in mind, I would not recommend an annuity as a tool to attempt to secure a lower EFC value on the FAFSA if that is your only reason for purchasing. If you also want to establish long term secure income in retirement, with minimal or no effort on your part as you age, then maybe it is a route to accomplish both.

I don't think an annuity is a good idea in most situations, but I agree that there are situations where they can be a good solution to provide a base income to be supplemented by earnings from your pile. We have 2 military pensions and DW has a small check from years in school kitchen, so our basic needs are met for the most part. If we didn't have any monthly income I would put some $$ into an annuity but would stick to the basic product not an indexed one. There is a risk for the company and you have to pay for that.

I looked at a product like the OP described several years ago. It is a good sales job. 90% of upside and no downside ? Sounds too much like scams you hear about every day. Just enough truth to get your interest. This was years ago and I left the FA that was pushing it.

 

[Ready]

I was pitched a similar annuity several years ago. Participate in the gains but protect against the losses. The devil is in the details. When the market went up I got 25% of the gains but when the market went down I absorbed 100% of the losses against any of the gains within a given year. So it was virtually impossible to achieve any real market gains unless you had 12 months in a row without losses. So while the formula technically could have achieved the promised gains, in reality it was very unlikely to do so.

We don't know the details on this annuity so it's hard to give any specific comments. If the OP wants to post a link to it we can see how it's written.

 

[ncbill]

FAFSA is only for public schools.

If their kid picks a private school OP will be filling out CSS Profile, where they include nearly everything (including any annuities) as parental assets available to pay for undergrad.

IMHO a false economy...as others note, index-linked annuities have the gains capped & the annuity issuer keeps any dividends.

 

[Independent]

This post reads as if timo2 and I are the only posters who feel an annuity product can provide a positive benefit to the investor in certain situations. Although they are obviously not for everyone.

With that in mind, I would not recommend an annuity as a tool to attempt to secure a lower EFC value on the FAFSA if that is your only reason for purchasing. If you also want to establish long term secure income in retirement, with minimal or no effort on your part as you age, then maybe it is a route to accomplish both.

As always with annuity threads, we get muddled in the different types of annuities.

I have no problems with simple to understand SPIAs to provide a lifetime income (assuming you've already deferred SS).

Or, a simple multi-year guarantee if the interest rate looks good vs. CDs and you understand the tax differences.

The problem here is the complexity of the indexed annuity. That complexity makes it too likely that the "bold print giveth and the fine print taketh away".

My advice is don't buy until you're absolutely certain you understand the formula. And, once you've figured it out, don't be surprised if a couple simpler products turn out to provide a better value.

 

[JustKickItForward]

Here is a link to the one I am looking at:

https://www.brighthousefinancial.com/products/annuities/shield-annuities/


To reiterate, this product was chosen because:
-it helps reduce exposure of our assets to my kids' college FAFSA (they will be applying for public schools, not private)
- it allows us to continue having some exposure to the market
- it offers a little downside protection, but in return for a cap on potential gains.



Once the kids are out of school and we are 59 1/2 (avoiding the 10% early withdrawal penalty), we will take out the funds, pay income tax only on the gains, and redeploy to appropriate investments at that time.


The advisor informed us he gets paid from the issuer if we utilize this product, which is acceptable for us since he does not charge us for anything for the other financial planning advice he provides us.

 

[samclem]

What are people's experience and recommendations with these types products?

These types of equity-indexed annuities are high-expense products that few people need (especially those less than 70 years old). The industry has changed the labels used for these equity-indexed products because they got such a bad reputation, but, as Shakespeare would say, poop by any other name would smell as sweet. The guy selling this is making a lot of money on it, and that should tell you plenty.

If you don't >really< need an annuity already, plunking money into one just to improve the FAFSA calculations seems extreme--don't let the FAFSA tail wag the dog. Crunch the numbers and see how much this will actually change your Expected Family Contribution, and then look at how much this product is going to cost you. I think you'll decide against it, and your "advisor" will be very weepy.

Is it against forum rules for me to post the name of the specific product I am thinking about so others can read the specific details before commenting?

No, it is okay, provided you aren't selling anything, it's not your brother's web site, etc.