Should I Talk My Friend Out of Buying an Annuity?

[scrabbler1]

Last week, my friend met with a rep from Prudential who was trying to get him to use his Roth IRA to buy an annuity. My friend even called me on the phone and then put the rep on to give ME a sales pitch for it. (I was pretty pissed at my friend for doing this and scolded him for it.)

Aside from being pissed, I told my friend whatever he did he should NOT sign anything that day. Whatever the rep was selling would be available the next day, the next week, the next month, and let me do some research on annuities. From what I have seen in this forum (after doing some searches) and in Bogleheads (and elsewhere on the internet), the reviews are at best mixed. The reps and their companies do very well but the customers often get ripped off.

I don't have a lot of info about the exact type of annuity the Prudential rep was selling but there was something about a "guaranteed 5% return" which, after some more research, means little or nothing. And I know that there would be no tax benefit because he would be using his Roth IRA to fund it.

My friend will be coming over to my place tomorrow night (3/14) to visit and will bring anything the rep left with him. Like me, he is 48, single, and has no kids. Besides the Roth IRA, he is in a 457(b) through his employer, a local government he has worked for since ~1996. Not sure if he has a pension with them (probably does). Is there anything else I should look for before I report back here with more advice for him?

 

[pb4uski]

It has never made sense to me to buy a tax-deferred investment like an annuity inside a tax-deferred account like an IRA. To do it in a Roth makes even less sense.

I suspect the annuity in question is either an equity indexed annuity or a variable annuity. With the EIAs the returns are commonly constrained. VAs typically have high costs.

I don't see how either make sense in a Roth. The key question is how does this annuity fit in with your friend's overall AA?

 

[braumeister]

The simple answer:

 

[FinanceDude]

Last week, my friend met with a rep from Prudential who was trying to get him to use his Roth IRA to buy an annuity. My friend even called me on the phone and then put the rep on to give ME a sales pitch for it. (I was pretty pissed at my friend for doing this and scolded him for it.)

maybe he got lunch out of the rep for doing that..........

Aside from being pissed, I told my friend whatever he did he should NOT sign anything that day. Whatever the rep was selling would be available the next day, the next week, the next month, and let me do some research on annuities. From what I have seen in this forum (after doing some searches) and in Bogleheads (and elsewhere on the internet), the reviews are at best mixed. The reps and their companies do very well but the customers often get ripped off.

Good advice.

I don't have a lot of info about the exact type of annuity the Prudential rep was selling but there was something about a "guaranteed 5% return" which, after some more research, means little or nothing. And I know that there would be no tax benefit because he would be using his Roth IRA to fund it.

That "guaranteed" return is 5% growth on the income base (not a walkaway amount) regardless of market conditions. If he gets all the bells and whistles, his internal costs would be 4%! FINRA does allow VAs to be sold in Roth IRAs or other IRAs in general. They allow it because most VAs are sold as guaranteed income products, and FINRA thinks of Vas with living benefits as pension type products. Or, the lobbyists from the insurance industries are convincing.........

My friend will be coming over to my place tomorrow night (3/14) to visit and will bring anything the rep left with him. Like me, he is 48, single, and has no kids. Besides the Roth IRA, he is in a 457(b) through his employer, a local government he has worked for since ~1996. Not sure if he has a pension with them (probably does). Is there anything else I should look for before I report back here with more advice for him?

Have your friend ask the rep WHY he needs to buy a guaranteed income product and PAY for that expense for many years while he is STILL working. I would love to see the answer to that. Maybe you can report back to us on what the answer was??

 

[Independent]

I'd ask the sales rep for a sample policy. Not just printed sales material (which he should also have), but the actual contract with "SAMPLE" stamped on every page.

These things have too many moving parts to buy them without reading the contract first.

If the agent says he can't get a copy, that's a good reason to avoid that agent.

Note that these forms have to be filed with the state before they can be used. It looks like the state of Washington may even make filings available online https://fortress.wa.gov/oic/onlinefilingsearch/

 

[donheff]

Why is your friend so antsy about this? The best advice is that the annuity isn't going anywhere (which you already told him) and that he should take the time to learn some basics before leaping on the biased advice of a salesperson. If he isn't interested in doing that it's his life, his money. Get out of it.

 

[ziggy29]

Why is your friend so antsy about this? The best advice is that the annuity isn't going anywhere (which you already told him) and that he should take the time to learn some basics before leaping on the biased advice of a salesperson.

Yeah, it always makes me laugh when sales people act like they are offering a "one time deal" that requires us to act immediately if we want to get in on such a deal!

It's not so funny, on the other hand, when the people being solicited actually believe that and feel pressured to make the deal before they really understand the product and whether it's right for them.

 

[REWahoo]

You might suggest he take a look at this, especially page 2: Avoiding abusive variable-annuity sales practices - Robert Powell - MarketWatch

 

[scrabbler1]

Thank you for your replies so far. Like I learned from my working days, the key is not always in knowing the answers but to know what to ask. And not being overly familiar with annuities, I did not know all the good questions to ask. I will relay these questions to my friend.

But to answer some of the questions and comments posed here so far which I can answer....

I do not know the AA in my friend's Roth IRA. He has some savings in his taxable accounts but he sold off a decent chunk of them to meet the down payment for the apartment he just bought. He still has some individual stocks and some bonds and some bond funds.

The rep came to his place so there was no free food (I don't think the rep brought food with him LOL!).

Good questions in your last paragraph, FinanceDude. Also good questions from Independent and donheff.

Ziggy, what you wrote reminds me of similar tactics used by car salesmen to pressure car buyers.

My friend trusts my judgment on these things. I got him to buy into an intermediate-term muni bond fund back in 2003 (after the bond prices dropped from their June highs) and that fund did rather well over the last 8 years. (I am in the same fund.) He used the tax-free dividends and recent appreciated value to help make the down payment on his apartment a few months ago. His broker kept telling him over the years to get out of muni bond funds (because that money was NOT being used to buy more stuff from the broker himself) because of their "impending collapse." I told my friend to stay with it unless and until he needed the money for something else (like.....buying an apartment).

Please keep the questions and comments coming.

 

[natelee53]

[/QUOTE]Have your friend ask the rep WHY he needs to buy a guaranteed income product and PAY for that expense for many years while he is STILL working. I would love to see the answer to that. Maybe you can report back to us on what the answer was??[/QUOTE]


While annuities (Variable, Fixed, Indexed, SPIA, or MYGA) are neither good nor bad, they are sometimes misused or incorrectly represented by the advisor or agent. My first question would be WHY? Why this product? What benefits specifically does it provide that match your friend's financial goals?

Annuities can be the right answer for some people and usually only a portion of their assets. There are many products, both variable and fixed, that offer living benefits such as guaranteed lifetime income or guaranteed withdrawal amounts but one should always ask themselves...does this fit my liquidity needs, my time horizon, and my risk tolerance?

So before making a decision for or against ANY product or strategy your friend should ask him or herself.

1. What is the intended future use of this money?
2. How much access do I want/need to this money?
3. What type of return do I expect to receive?
4. How much can I afford to lose?
5. Do I want guarantees and if so, what am I willing to give up to receive those guarantees? (liquidity, return, fees, etc)

Best of luck!

 

[Midpack]

Like others have said, there is absolutely no reason to rush into this. I wouldn't buy from a sales rep who tried to put time pressure on me no matter what this annuity package is to begin with, wouldn't even meet with him/her. Wait until you know everything you need to know about it, even if that takes weeks, months or years. This is not an ideal time to buy an annuity anyway, though that doesn't mean no one should. And once your friend knows all there is to know, I'd guess he won't buy...

 

[Marita40]

I'm by no means an expert, but last year my financial advisor suggested a variable annunity--she didn't push it too hard but I told her I'd like to learn about them and see whether it would work for me (I'm 55 and single). Besides hearing mostly negative things about them on this site and others, the absolute deal breaker was the fact that, while I have a Ph.D., I could NOT get through the nearly 250 page prospectus and could NOT really make sense of the parts I did absorb. I had just researched and bought Long Term Care Insurance and the research for that was remarkably simple compared to this stuff. I may--may--be interested in an immediate annuity at some point, but my experience taught me to stay away from variable annuities. . .

 

[Marita40]

I meant to add to the above: the Annuities for Dummies book was one of the most helpful resources I found in understanding annuities. You might want to refer your friend to it.

 

[walkinwood]

Maybe if you share some thing a rather well known financial writer has to say

Variable Annuities: A Product That Doesn

If you look on the page, there are other articles on VAs

 

[FreeAtLast]

We had dinner with my late wife's uncle and his daughter both of whom work for an insurance company that sells annuities. There is now always a period of time that they feel they must talk about how great their company is and how they like going to work every day to help people who need financial investment advice. Annuities always come up.

I have learned to just grin and bear it as it only lasts about 5-10 minutes. They are really nice people otherwise. I feel like they are members of some annuity sales cult.

 

[Texas Proud]

Answer to the OP question....


YES

 

[scrabbler1]

After I relayed some of the first comments to my friend last night, he wrote me back to tell me he was not going to buy any annuities. He did not elaborate in his email but I will still see him tonight.

Looks like we saved him LOL! Thank you for your help in asking the right questions.

 

[ziggy29]

After I relayed some of the first comments to my friend last night, he wrote me back to tell me he was not going to buy any annuities. He did not elaborate in his email but I will still see him tonight.

Looks like we saved him LOL! Thank you for your help in asking the right questions.

Another intervention in the books...

 

[MichaelB]

After I relayed some of the first comments to my friend last night, he wrote me back to tell me he was not going to buy any annuities. He did not elaborate in his email but I will still see him tonight.

Looks like we saved him LOL! Thank you for your help in asking the right questions.

You've earned a merit badge in annuity prevention. Job well done.

 

[Chuckanut]

I do not like giving advice. There is too much risk of being blamed if things do not turn out well. Rather, in a situation like yours, I would simply tell the person my reasons for how I deal with annuties or any other investment in my personal investing. They can take what they want and leave the rest.

 

[FinanceDude]

We had dinner with my late wife's uncle and his daughter both of whom work for an insurance company that sells annuities. There is now always a period of time that they feel they must talk about how great their company is and how they like going to work every day to help people who need financial investment advice. Annuities always come up.

Yeah those corporate types do have a great life, no stress of pressuring people to buy, no complaints, etc. It is one of the cushiest jobs around. I have met plenty of people who are like that too. It's like they live in a parallel universe. I know a guy from Allianz who is convinced that EIAs are the greatest financial product known to man.........

 

[ziggy29]

I know a guy from Allianz who is convinced that EIAs are the greatest financial product known to man.........

If someone tried to sell me an EIA saying this stuff -- assuming I wanted to toy with him/her and not just cast them away -- I'd ask them to show me their personal financial statements so I can see they have most of their portfolio in EIAs. If they are so great, I would expect them to be almost "all in" for them. If they're not, you know they are just blowing hot air.

 

[FinanceDude]

If someone tried to sell me an EIA saying this stuff -- assuming I wanted to toy with him/her and not just cast them away -- I'd ask them to show me their personal financial statements so I can see they have most of their portfolio in EIAs. If they are so great, I would expect them to be almost "all in" for them. If they're not, you know they are just blowing hot air.

They have a profit sharing plan, and the amount Allianz kicks in for the employees is directly related to growth in the annuity product.......

I have been an advisor for almost 15 years, and have yet to justify an EIA for ANYBODY, although I did disrupt a few sales for others under the "free look" period..........

 

[ziggy29]

They have a profit sharing plan, and the amount Allianz kicks in for the employees is directly related to growth in the annuity product.......

Rule #1: Never do business with ANY financial planner or investment product salesperson unless their economic interests in your business are aligned with the growth of your portfolio.

 

[Finance Dave]

Wow, you folks are all so good...not much to add that has not been said. I agree that one needs to see the overall portfolio and life situation to see where this fits, although all my research has shown that the only annuity I would consider is a SPIA.

I may have missed this question from someone, but a fair question for any agent is to explain EXACTLY how they are paid. Edward Jones, to their credit, has posted somewhere online (I read it once, don't have it now) every single way their advisors make money...so that the customer can understand where there may be conflicts.

It's good of you to advise him...just remember that somtimes even friends and family will go against your advice, and there's not much you can do to stop them once you've said your piece.