When to get rid of FA?

[Art G]

I'll say it again, today's variable annuities, aren't the same animal as your father's variable annuities. They serve a completely different service. Just as you wouldn't compare a 1972 Datsun 1200 with a 2008 Infiniti G35.
I will say though, that as far as I can tell, the Index Annuity has completely worn out its' usefulness.

 

[saluki9]

Wow, how lucky for 99% of the population to have you to speak for them

Variable annuities are very complicated. Many times they are sold by people who don't fully understand them to people who understand even less about them. That is a problem. However, as an industry they have made some very notable enhancements to their products recently.

I think we're going to be seeing a growing percentage of the population who will benefit from using an annuity as part of their retirement strategy. You can get jaded on this forum and forget that much of American will never have enough to live on a 4% withdrawal. For somebody in that 60-70 range who wants to retire and CAN live on the 6,7, or 8% withdrawal an annuity provides these can be a godsend.

I'm weary anytime somebody declares an inanimate object evil which you seem to do on every possible occasion.

I've pointed out one advantage to buying an annuity that I'll repeat.

I own stocks in my index funds that derive a lot of income from [-]swindling[/-] selling people annuities. Even if they make Gworker poorer, my stocks should do better.

Seriously, I looked over the paperwork of my FIL's and my father's variable annuities. They are complicated beyond description. I think the only way you could ever really figure out the fees is to sit down with the [-]jerk[/-] FA that sold you the annuity. Even then, it would assume that they understood the fee structure.

Annuities, especially variable annuities, are not appropriate for 99% of the North American population.

 

[Art G]

Absolutely saluki! I predict that with people living longer than ever before, the cry of the middle class baby boomer will be, "do I have enough income to last until I die?"

 

[saluki9]

Absolutely saluki! I predict that with people living longer than ever before, the cry of the middle class baby boomer will be, "do I have enough income to last until I die?"

Go read any of the more notable academic financial journals. I promise at least once a quarter you will see an article that basically asks why more people don't buy annuities for at least part of their portfolio when it makes so much sense?

 

[Marquette]

One of the trade rags we get just had an interesting graph on AA and including a VA as part of that...

odd that an annuity company would get magazines about annuities and that magazine talks about how good annuities are.

maybe I'll post the graph later.

 

[Art G]

Go read any of the more notable academic financial journals. I promise at least once a quarter you will see an article that basically asks why more people don't buy annuities for at least part of their portfolio when it makes so much sense?

Even Scott Burns, who has written for years of the evils of annuities, is more and more writing about the benefits of the living benefits.

 

[FinanceDude]

I've pointed out one advantage to buying an annuity that I'll repeat.

I own stocks in my index funds that derive a lot of income from [-]swindling[/-] selling people annuities. Even if they make Gworker poorer, my stocks should do better.

Seriously, I looked over the paperwork of my FIL's and my father's variable annuities. They are complicated beyond description. I think the only way you could ever really figure out the fees is to sit down with the [-]jerk[/-] FA that sold you the annuity. Even then, it would assume that they understood the fee structure.

Annuities, especially variable annuities, are not appropriate for 99% of the North American population.

You keep beating a dead horse, we KNOW you hate annuities.........

However, saying they are not appropriate for 99% of North America is like saying NOONE should drive a Honda because the profits will find their way back to Japan..........

 

[Art G]

I'm also curious 2B, you say "especially variable annuities". Does this mean you see a value to fixed or index ones? I'd be curious as to why?

 

[youbet]

I don't think the "seasonal effect" has been noted yet. In summer, bodies decompose quickly and the smell can be horrific. Therefore, definitely have the grave prepared and everything ready before getting rid of the FA. In winter, you can simply dump the body outside and take care of disposal chores in the spring. Or, if you're lucky, carrion scavengers will handle the disposal chore for you.

 

[2B]

I'm also curious 2B, you say "especially variable annuities". Does this mean you see a value to fixed or index ones? I'd be curious as to why?

For some people I can see a possible value in an immediate fixed annuity. The "positive indicators" would include current age over 65, excellent health with a family history of long life, limited financial skills and expenses beyond the 4% withdrawl rate. Even then the annuity purchase shouldn't be more then 50% of their net worth.

I don't think that very many people really qualify based on my list but some might find it helps their planning.

My basic dislike for annuities is something anyone thinking about buying either a fixed or variable annuity product should consider. And, that is fees and true rate of return. Annuity products are carefully designed to hide fees upon fees. The actual return is also confused in its description. They sound "market beating" but have so many "ifs" that they consistently underperform. VAs are especially good at this.

When I've looked at immediate fixed annuities, they could be replicated with a sinking fund based on CDs or bonds. The withdrawl could be continued for about a decade past your actuarial mortality. If you live past that, the immediate fixed annuity would have a higher NPV since the benefits would probably keep coming.

We consistently talk about the need for "low fee" investments on this forum. Somehow the horrible fees associated with annuities in the form of commissions and management fees seem to get a pass from some people here.

 

[Art G]

2B....So, if you like immediate annuities that pay 4%, why wouldn't you like a variable annuity with a life pay feature (could be joint life to include your wife if you like), that pays you at least 5% with a chance for raises? Forget for a moment that the company makes a money...more money in your pocket and a chance for a raise, ANDDDDD a good chance to leave money to your heirs.
So, what don't you like about this? Just curious.

 

[FinanceDude]

For some people I can see a possible value in an immediate fixed annuity. The "positive indicators" would include current age over 65, excellent health with a family history of long life, limited financial skills and expenses beyond the 4% withdrawl rate. Even then the annuity purchase shouldn't be more then 50% of their net worth.

To do that, folks have to ANNUITIZE their money, and there's NOT many folks who want to do that.........

My basic dislike for annuities is something anyone thinking about buying either a fixed or variable annuity product should consider. And, that is fees and true rate of return. Annuity products are carefully designed to hide fees upon fees. The actual return is also confused in its description. They sound "market beating" but have so many "ifs" that they consistently underperform. VAs are especially good at this.

Fixed anuities have very low fees, because there's no mortality and expense fees charged. The "fee" comes in the form of a holding period.......

The actual return is not hidden. If you go on any website for the VA, even Vanguards, those returns listed are NET of fees..........just pointing that out......

We consistently talk about the need for "low fee" investments on this forum. Somehow the horrible fees associated with annuities in the form of commissions and management fees seem to get a pass from some people here.

Noone's giving it a "pass". On this board, we talk about MANY things, but LONGEVITY risk is a real risk with advances in medicine. Not everyone in America is like folks on here, they can't live on a 4% SWR. According to Webster's Dictionary, a PENSION is defined as a "fixed sum paid regularly to a person", and an ANNUITY is "a sum of money payable yearly or at other regular intervals"..........tell me the difference?

I am not going to debate the costs of a VA with living benefit guarantees, etc, they ARE expensive. However, for folks who don't have a pension, want a guaranteed stream of income, AND control of their money, it COULD be an option. FWIW, SPIA's IMO, are NOT COLA'd, and therefore, carry HUGE purchasing power erosion risk.........

I DON'T have all the answers, but I can tell you I work with retirees everyday, and for the most part they are concerned with rising Medicare costs, rising energy costs, rising food costs, inflation, etc. The mantra torch carried by some on this board of "well, you're in this pickle because you didn't LBYM, you deserve it", is not reality...........

 

[Sarah in SC]

FD or Saluki, have you seen the exponential reciprocal gamma formula to predict probability of retirement ruin? With all of the talk about longevity risk, it is pretty interesting. My bosses were fiddling with it the other day; getting ready for a presentation. It is funny though, once they put it in a spreadsheet that the math-retarded could process, I ran my info through and what is the bottom line? 4.5% withdrawal rate will work.

 

[FinanceDude]

FD or Saluki, have you seen the exponential reciprocal gamma formula to predict probability of retirement ruin? With all of the talk about longevity risk, it is pretty interesting. My bosses were fiddling with it the other day; getting ready for a presentation. It is funny though, once they put it in a spreadsheet that the math-retarded could process, I ran my info through and what is the bottom line? 4.5% withdrawal rate will work.

Is it like Monte Carlo? I have a software program that does Monte Carlo, and I run about 50,000 different scenarios for each portfolio I suggest for a client.

I can make due on a 3.5% SWR for my portfolio based on my conservative projections. I can drop it to 2.5% SWR if I have the advantage of a good bull market leading up to FIRE.........

 

[Sarah in SC]

Nah, they're all anti-Monte Carlo.
This is some large elaborate formula, can't remember where boss found it originally. It is gamma ruin. My boss found it in this book, called the Calculus of Retirement Income: Financial Models for Pension Annuities you can see it on page 193 in the search inside the book feature.

 

[Gworker]

The "deal" comes at a price. I would need to know the name of the VA before I could comment on all the vagareties of it.............

I have looked through past statements that are online and tried to read through the prospectus. This VA is through Pacific Life. Like 2B says it is not easy to figure out all the fees and costs for withdrawals. I received a one time "credit enhancement" as they call it.

It looks like I would have a 5% withdrawal charge if I did it right now. There is approximately $280,000 in that VA, so that would be a $14,000 hit. Maybe it would be worth it for that much. Now that I sit down and type it out and figure it, it seems like it might be worth doing.

I have another VA that I am taking the RMDs out of that didn't get the enhancement and it doesn't have a surrender charge.

I think I'll play with some spreadsheets and see how I would have done with Vanguard after the surrender charge and see if it would be worth it to take it out now.

Thanks everyone. I see there are quite varied opinions on annuities. For my age and since it is an inherited IRA, I think it was a bum deal.

 

[Art G]

Gworker, I wouldn't take it out now if it were me. Perhaps, if the market goes on a run, you might want to consider a 1035 Exchange to avoid having to pay taxes and to lock in the value and get a living benefit, but other than that, Pac Life is a decent company and taking a $14k hit seems silly. JMO.

 

[FinanceDude]

I have looked through past statements that are online and tried to read through the prospectus. This VA is through Pacific Life. Like 2B says it is not easy to figure out all the fees and costs for withdrawals. I received a one time "credit enhancement" as they call it.

It's called an "extra credit" product. Because they "gave" you some extra money, those contracts typically run up to 8-9 years as far as a holding period.

It looks like I would have a 5% withdrawal charge if I did it right now. There is approximately $280,000 in that VA, so that would be a $14,000 hit. Maybe it would be worth it for that much. Now that I sit down and type it out and figure it, it seems like it might be worth doing.

Is the Pacific Life VA qualified or non-qualified money? Either way, $14,000 is a LOT of money........

I have another VA that I am taking the RMDs out of that didn't get the enhancement and it doesn't have a surrender charge.

Many VAs have a non-surrender option that clients can purchase. It depends on if the FA told you about that feature or if it was available on that contract.

I think I'll play with some spreadsheets and see how I would have done with Vanguard after the surrender charge and see if it would be worth it to take it out now.

After today's performance, might be a good idea to hold off............

Thanks everyone. I see there are quite varied opinions on annuities. For my age and since it is an inherited IRA, I think it was a bum deal.

My late sister's 403B was in TIAA-Cref. My kids are the beneficiaries, so I have to take RMD's on them. TIAA-Cref would not allow me to transfer those assets out unless I spent a lot of money setting up a guardianship for them. So, until they are of age, they both own annuities too. It happens.........

 

[2B]

I was about to make a rude reply to someone that didn't read my post before replying but I decided that driving 12 hours today doesn't make it likely my response would have been considered "positive" in any way.

I will summarize my opinion of the various comments to my comments with a few points.

• Annuities are masterfully constructed with many pages of small print that are designed to hide fees and penalties. Everyone I've looked at is a byzantine work of art.
• Fixed annuities are only worthwhile for those incapable of managing their own affairs that have no competent person available to do it for them (IMHO).
• The best deals in fixed annuities are available only to those able to sort through the options available to find the lower fee options. If you just let yourself be "sold," you'll be skinned and gutted.
• Variable annuities never "give" you anything. What may be an increase in value at the time of purchase is taken away in fees during the life of the contract. If the contract is terminated, all of the "gifts" are more than fully recovered.
• VAs are very lucrative to the person that sells them. That's why they are pushed so hard. If you ever want to stop someone from selling you a VA ask about their commissions and fees. Force them to be specific. They won't be but they will go away.
• My opinions are based on numerous examples I have seen that have "proven" (to me at least) my prior statements.

I know there are numerous FAs that are contributors to this forum. Some may mean well. I hope they do and aren't just salesman justifying their line of work. I can assure everyone I don't make any money if you don't buy a fixed or variable annuity. Also, I do own companies in my index funds that make lots of money when someone buys an annuity so I'm here telling you to not buy something that would increase my personal wealth (an infintesimal amount).

 

[FinanceDude]

Annuities are masterfully constructed with many pages of small print that are designed to hide fees and penalties. Everyone I've looked at is a byzantine work of art.

Can't argue with you there, I have a finance degree and struggle to read them at times.........

• Fixed annuities are only worthwhile for those incapable of managing their own affairs that have no competent person available to do it for them (IMHO).

I disagree, people buy them when the rates on them are quite a bit higher than CD's. They are still quite popular. You must not know a lot of older retired folks like I do. Many of them own them, and although I don't sell them, and you and I never would own them, it doesn't mean they are a)incompetent, or b)too lazy to find someone competent to help them.

• The best deals in fixed annuities are available only to those able to sort through the options available to find the lower fee options. If you just let yourself be "sold," you'll be skinned and gutted.

Show me the "fee structure" in a fixed annuity,and we can talk. The only "fees" are the fact they have to be held for a certain number of years and some companies pay more than others. There is NO M&E charged, and no "ER expense". You give the annuity company money, and they keep it for a number of years........

• Variable annuities never "give" you anything. What may be an increase in value at the time of purchase is taken away in fees during the life of the contract. If the contract is terminated, all of the "gifts" are more than fully recovered.

The reasons VA's are "bigger than they have ever been" are the following:

1)Virtual elimination of all defined benefit plans.
2)Development of living benefits that guarantee income streams to the owner.
3)Uncertainty about Social Security going forward.

Like I always say, the REALITY on this forum is NOT the reality with the general populace. Here's an example: Just because the folks on here are able to manage their own affairs and that of their older family members, doesn't mean average Joe American does. I'm sure Scott Burns and Clark Howard and others have radio audiences of 2 million or so. However, there are about 170 million adults in the USA, so I don't think the message is being received by the masses........

• VAs are very lucrative to the person that sells them. That's why they are pushed so hard. If you ever want to stop someone from selling you a VA ask about their commissions and fees. Force them to be specific. They won't be but they will go away.

I see Fidelity is offering a "low cost"living benefit VA, there's always that option....... I for one agree that they are not cheap. The "cheapest" one I know of is 2.5% all inclusive, most are around 3%..........

• there are numerous FAs that are contributors to this forum. Some may mean well. I hope they do and aren't just salesman justifying their line of work. I can assure everyone I don't make any money if you don't buy a fixed or variable annuity. Also, I do own companies in my index funds that make lots of money when someone buys an annuity so I'm here telling you to not buy something that would increase my personal wealth (an infintesimal amount).

I appreciate your opinion. I find a lot of what I do on here is provide additional info on financial topics. or instance, there was a LONG thread last month about "loads" on mutual funds. A fair number of folks on here were CONVINCED that whether you invested $1000 or $1,000,000 into "load" mutual funds, you paid 5.75%. That is simply NOT the case. I don't mind folks on here being critical of my industry, it comes with the territory. However, there is a lot of misinformation out there, and I try to provide clarity, whether folks on here believe that or not...........