Downside of fixed income annuity

[firemediceric]

I used the search function looking for information. The results returned were overwhelming but not helpful. I have read here often that if a F/A recommends an annuity, run.

A F/A I am consulting with is recommending a Nationwide fixed income annuity for the lion's share of my meager nest egg. What should I be looking for to determine if this is a wise course or if it is a terrible recommendation?

 

[TheWizard]

Compare the projected payout to what immediate annuities dot com says you can get nowadays, for the same guarantee period, etc...

 

[copyright1997reloaded]

I used the search function looking for information. The results returned were overwhelming but not helpful. I have read here often that if a F/A recommends an annuity, run.

A F/A I am consulting with is recommending a Nationwide fixed income annuity for the lion's share of my meager nest egg. What should I be looking for to determine if this is a wise course or if it is a terrible recommendation?

Emphasis added: I would be reluctant to lock in to any investment that was the "lion's share", especially a fixed rate non-inflation adjusted one.

 

[VanWinkle]

I used the search function looking for information. The results returned were overwhelming but not helpful. I have read here often that if a F/A recommends an annuity, run.

A F/A I am consulting with is recommending a Nationwide fixed income annuity for the lion's share of my meager nest egg. What should I be looking for to determine if this is a wise course or if it is a terrible recommendation?

If this is a multi year guaranteed annuity(fixed interest rate for a specified time) or a Immediate Annuity that pays you income each month for the rest of your life?

Each one could be appropriate, but how much you dedicate to these would be different.

If it is a fixed indexed annuity.......run.
The only one benefitting from a fixed indexed annuity is the F/A.

VW

 

[rmorris50]

I used the search function looking for information. The results returned were overwhelming but not helpful. I have read here often that if a F/A recommends an annuity, run.

A F/A I am consulting with is recommending a Nationwide fixed income annuity for the lion's share of my meager nest egg. What should I be looking for to determine if this is a wise course or if it is a terrible recommendation?

It's hard to say without knowing your entire financial picture. It's really more about a mortality play. Do you think you'll live longer than your life expectancy. For the American male it's 79, if you are a professional, healthy man then it's about 83. Add about 4 years to each for women. Yes you can live to 100, which financial advisors will scare you with, but the mortality variance is very high at the older ages. Also, you are locking up your money. Is that something you can afford to do?

BUT, on the flip side a fixed annuity can help level out your income over your lifetime. It can help avoid the situation where you spend/enjoy your money too little in your earlier retirement years (because you are scared to spend it) and instead leave a pile of gold to your beneficiaries

 

[Chuckanut]

Emphasis added: I would be reluctant to lock in to any investment that was the "lion's share", especially a fixed rate non-inflation adjusted one.

FWIW, the lion's share is everything. 100%. All of it.

The current usage seems to be a vaguely described majority of whatever is being divided up, but in the fable the lion takes it all.

No matter how one defines the term "lion's share" I would also hesitate investing in one financial item for a significant amount of my financial resources. IMO, diversity is a key factor in good retirement planning. We don't know what we don't know. It's those things that come out of nowhere to hammer us that are the most dangerous. Think Covid. In October of 2019 who thought a pandemic would hit us and shut down a lot of world-trade.

Diversity. Don't enter retirement without it.

 

[Sunset]

OP - one thing to keep in mind is the FA is probably making a nice commission off the sale.

This is going to influence the advice, I knew a FA and he certainly loved the free cruises and commissions. He didn't worry at all if the choices he steered people into were best for him.

 

[ShokWaveRider]

I think I would go with a MYGA with free 10% annual withdrawals.

 

[Al18]

It's hard to say without knowing your entire financial picture. It's really more about a mortality play. Do you think you'll live longer than your life expectancy. For the American male it's 79, if you are a professional, healthy man then it's about 83. Add about 4 years to each for women. Yes you can live to 100, which financial advisors will scare you with, but the mortality variance is very high at the older ages. Also, you are locking up your money. Is that something you can afford to do?

BUT, on the flip side a fixed annuity can help level out your income over your lifetime. It can help avoid the situation where you spend/enjoy your money too little in your earlier retirement years (because you are scared to spend it) and instead leave a pile of gold to your beneficiaries

Actually, the life expectancy rate in the U.S. is lower, according to CDC statistics released last year. At birth, U.S. life expectancy is 77.0 years. If you make it to age 65, you can expect to live until age 83 on average. You can view an interactive map, broken down by state, and download the data at https://www.cdc.gov/nchs/data-visualization/state-life-expectancy/index_2020.htm

 

[Jerry1]

Diversity. I have a pension, which is basically an annuity because I could have taken the lump sum. Not inflation adjusted. Then I have SS which is inflation adjusted, but my assumption is that it won’t fully keep up with inflation. Then I have my portfolio (brokerage account, IRA and Roth). I look for the portfolio to make enough to make up for the shortfall the other two vehicles have related to inflation.

There’s no way I’d put over 1/3 of my nest egg in something that is not inflation adjusted. Ask your FA what his plan is for you to cover inflation if you lock the lion’s share of your nest egg up in an annuity. My guess is that you won’t like his answer (spend less as you get older).

 

[jazz4cash]

I think I would go with a MYGA with free 10% annual withdrawals.

You’d be giving up a significant amount of income derived from mortality credits. If one’s nest egg is meager as OP stated, the best way to stretch the amount of income is to buy an immediate or deferred income annuity. Even a meager nest egg could exceed the State Guaranty limits so maybe choose two providers. The commissions can be reasonable which is why they are not pitched aggressively. It’s easy to compare rates on sites like Blueprint Income, immediateannuities, annuity steakhouse or even Vanguard and Fidelity. There is a fair amount of rhetoric that “all” annuities are bad but if you read this forum carefully you will see that many of us believe SPIAs and MYGAs are ok, generally. These stand for Single Premium Immediate Annuity and Muti Year Guaranteed Annuity. I am starting to see value in Deferred Income Annuities (DIA) as well since interest rates are more reasonable.
I am actually a big MYGA fan but frustrated that it’s been 30 days and counting since I submitted my most recent application. These same guys somehow “forgot” to send my 10% free withdrawal.

 

[rmorris50]

So what is the risk here your F/A is trying to protect you from? It’s probably the risk of outliving your “meager savings”. You can share that risk with other annuitants, where those that die “early” pay for those that live “too long”. If you think you’re at risk of outliving your savings, the income annuity might be a good idea. You probably don’t want a COLA adjustment, it’s too expensive and you’d have to live really long to make it worthwhile. The goal here is to make sure you have a BASIC level of income for the rest of your life, in conjunction with social security. It sounds like your retirement savings isn’t large enough for you to self insure that risk.

If the idea of handing most of your life savings over makes you nervous, think about getting a cash refund annuity, which will pay the premium balance to your beneficiaries. So for example, if you hand over $100k to Nationwide; and they’ve only paid you 40k in annuity benefits before you die, your beneficiaries get $60k. If Nationwide has paid more than 100k to you by the time you die, your beneficiaries get nothing.

Income annuities are actually the one kind of annuity I will actually consider. Most others I won’t, too fee laden.

 

[pb4uski]

I used the search function looking for information. The results returned were overwhelming but not helpful. I have read here often that if a F/A recommends an annuity, run.

A F/A I am consulting with is recommending a Nationwide fixed income annuity for the lion's share of my meager nest egg. What should I be looking for to determine if this is a wise course or if it is a terrible recommendation?

It is hard to know whether the FA is giving you good advice without more details, but if history is any guide it's probably closer to terrible and to wise.

The issues that I have with them are that they end up tying up your money, in your case the lion's share of your money.... what if stuff happens and you need that money... you're SOL or you sell you remaining annuity payments to J.G. Wentworth for at a big discount.

Also, the annuity benefits do not increase due to inflation so if today the benefit is $1,000/month, in 10 years if inflation is 3% then the buying power is $744/month and in 20 years is $554/month.

I prefer a CD ladder. The returns are similar and you have control over your money. The only downside being that if you live really long you might run out of money.

IIRC you have a very nice pension, so why would you need more regular income if your nestegg is "meager" as you state? Not sure that it makes sense.

One thing that you can be sure of is that the Nationwide annuity is good for your FA. A guess is that he'll get 5% or more of what you pay for the annuity.

 

[firemediceric]

Thank you all for the input. Despite how I try to educate myself here and elsewhere, I do not speak the financial language you are all so fluent in. As you all speak of the details I should be ferreting out, I look at the 25 pages of information and really cannot make heads nor tails of it.


I have attached the proposal to this post for anyone who may care to look at it. I had to do multiple attachments and even with that I removed some superfluous pages to get the attachments to the size they needed to be for the forum,


You'll see that it calls for me to invest $240,000. That is the sum of my Roth IRA and 457 accounts combined. I cannot access my 457 funds until I separate employment. I don't have a hard date on that happening, yet. My own dithering in that regard is the delay. Considering now moving the $87,000 I have in my Roth, which I can access, and investing just that in the annuity at this time to start the clock running. That obviously has me committing less of my funds, with obviously less benefit.


As has been commented on, I will still be receiving my pension on day one of retirement. I hope to live within the means of my pension amount for some time to come. The money which may go into the annuity does not touch the $250K I have earmarked for home purchase nor does it touch the money I recently started accruing in DROP.

 

[pb4uski]

Run. This is a variable annuity. They are god-awfully complex and have high fees.

 

[Jerry1]

Point of clarification. If you have a pension and $250K set aside for a house and $87K in your Roth, the $240K isn’t really “the lions share” of your nest egg. Still, it’s too much to put into an annuity even if you think the annuity is a good option.

If your pension is not adjusted for inflation you’re going to need something that can cover inflation. An annuity will only compound the problem.

 

[jazz4cash]

Run. This is a variable annuity. They are god-awfully complex and have high fees.

+1
This is not one of the the fixed income type annuities mentioned above.

 

[RunningBum]

Run. This is a variable annuity. They are god-awfully complex and have high fees.

I'm not a fan either. I tried to understand the ones my father bought and they are complex. I gave up trying to figure out if it was a good deal for him because it was purchased years ago so it really doesn't matter.

If you really like the idea of transferring investment risk to an insurance income for guaranteed income, look into an SPIA, which has much lower commission and expenses. ImmediateAnnuities.com and StanTheAnnuityMan.com are two reputable sites that sell them. From my experience they quote the same rates. I watched some of Stan's videos and read his literature and made a small SPIA investment with him, and there were no surprises.

My question for firemediceric is, what are you trying to accomplish here? You are getting a pension that you say covers your expenses, at least your basic one. Why do you need more guaranteed income? It sounds like you went to an F/A, and he's got something to sell you, but is it really right for you?

I agree with Jerry and pb4, I would not commit that much of a percentage of your assets to an annuity. It could leave you cash short in an emergency or unexpected expenses.

Is your pension inflation adjusted? If not, and this is without knowing your full financial situation and risk profile, I might look at splitting your money between TIPS (treasury inflation protection securities) and a stock index fund like VTSAX/VTI, depending whether you like traditional mutual funds or ETFs. If your pension is inflation adjusted perhaps CDs could be used instead of TIPS.

 

[RunningBum]

Another thought. Vanguard offers advisory services for 0.3% of your invested assets. You could have them manage your $240K, and hopefully it will be straightforward and clear enough for you to take over after a year and only have a one-time charge of $720.

 

[rmorris50]

Why would you put your Roth money into a variable annuity? Your Roth has more tax advantages than the variable annuity! And your only about 6 years from being 59.5! I would just let the Roth grow as much as possible, it should be the last retirement money you touch (generally speaking).

Please run as fast you can from variable annuities. Just roll your pre-tax retirement accounts to IRAs and invest in low expense market index funds. Why is this financial advisor recommending a VA? Cause of the commission!

Again, the only annuity I would ever consider is an immediate payout annuity. They are simple and relatively low cost for an annuity. Run as fast as you can from this VA garbage. Tons of fees, very complex, and too many rules to get at your money. Plus the money you are considering moving to it is already tax advantaged! I’ll never understand putting one tax advantaged account inside another.

 

[Sunset]

OP - Are you eligible for SS ?

What is your plan about SS, which is the best "annuity" in town, and gets better the longer you delay until collecting it. Meaning waiting until age 70 for SS gets you the largest SS "annuity" payments per month.

 

[Chuckanut]

OP - Are you eligible for SS ?

What is your plan about SS, which is the best "annuity" in town, and gets better the longer you delay until collecting it. Meaning waiting until age 70 for SS gets you the largest SS "annuity" payments per month.

+1

An excellent idea. A fully COLA'd annuity guaranteed by the guys who own the money printing press. I am doing SS at 70 myself. After two years of high inflation, it's a nice feeling to have that COLA.

 

[firemediceric]

The consensus is in, and I thank all of you for your direction. Looks like I will be having an uncomfortable conversation with this F/A in the very near future.

To answer the question about whether my pension is inflation adjusted, at year six and every year there after I get a 3% COLA

Thank you all again. I think this dead horse has been beat enough. Had you not weighed in, though, I probably would’ve gone this route.

 

[firemediceric]

OP - Are you eligible for SS ? .

Yes. Projected social security…
Age 62 = $2210
Age 67 = $3255
Age 70 = $4107

 

[braumeister]

The consensus is in, and I thank all of you for your direction. Looks like I will be having an uncomfortable conversation with this F/A in the very near future.

My guess is that he will have a set of canned responses to your objections, which will muddy the waters even farther. Might be better to just put him on ignore.