Downside of fixed income annuity

[firemediceric]

Perhaps good advice. What makes this situation a little more uncomfortable for me is that I sought this F/A out particularly because of recommendations from my peers who have retired over the past several years.

By all accounts from all of those retirees, this F/A has been phenomenal with how he has managed their money. I am not aware of any of them being recommended annuities, however. He has put them in preferred stocks as well as some other types of investments that are used by investment firms for which they get a return on their money. Some of the retirees I know were put into a Pershing investment product that this gentleman offered. They claim to be getting a return in the way of a significant dividend check each and every month. I was hoping for some of that magic, too.

 

[Jerry1]

Perhaps good advice. What makes this situation a little more uncomfortable for me is that I sought this F/A out particularly because of recommendations from my peers who have retired over the past several years.

By all accounts from all of those retirees, this F/A has been phenomenal with how he has managed their money. I am not aware of any of them being recommended annuities, however. He has put them in preferred stocks as well as some other types of investments that are used by investment firms for which they get a return on their money. Some of the retirees I know were put into a Pershing investment product that this gentleman offered. They claim to be getting a return in the way of a significant dividend check each and every month. I was hoping for some of that magic, too.

Everyone did well the last decade or so. Your F/A is likely not doing anything special. As for dividends, you can set up a dividend portfolio to get a check every month. It can be argued if that is the best way to get income, but it can be done.

No reason to have an uncomfortable conversation with your FA. Just talk to him (or not). You can always wear him down with questions, maybe he’ll come up with something that makes sense to you. One benefit of the doubt I’ll give the F/A is that if you went in there and told him you didn’t want to ever lose any money, it makes sense that he would recommend an annuity. If you talk to him, you should be open to discussing your risk tolerance and you should discuss inflation eating away at your purchasing power. Also, there’s nothing wrong with laying down a line in the sand - that if you don’t understand the investment, it’s not going to happen. I have a couple annuities and I understand them completely. They have their place in some portfolios. Just slow down and do not succumb to any high pressure sales tactics and you’ll be fine.

 

[Chuckanut]

My sister had an FA she really really liked. I can see why. She had little knowledge of financial markets and was earning bank interest rates on her savings and some CDs. So, in the long run the FA's recommendations probably out earned what she got from the bank. Good for both of them.

I am not a fan of FA's but if they can get a person like my sister to regularly invest in some stock mutual funds, even loaded high fee ones, she will probably do better than if she had continued to save a few dollars here and there and put them into a bank account.

IOW, the FA looked good because she had to clear a very low bar. Had my sister listened to her brother's advice (no brag, just fact) the bar would have been a lot higher. But, that gets into family dynamics which can be as scary as discussing religion and politics at a big family dinner with all the relatives.

 

[firemediceric]

Just slow down and do not succumb to any high pressure sales tactics and you’ll be fine.

That right there is certainly some good advice I’ll try to follow.

My plan had been before pulling the rip cord and giving notice, to first cement in the path for my finances post retirement. To that end, I’ve spoken with several F/A’s. I filled out a contact form on the Dave Ramsey site and was inundated with financial advisors reaching out to me.

After looking over what I have and where I’m at as well as my goals for the future, every single one of them, as well as this local F/A recommending the annuity, all say that there is no reason I need to delay my retirement and w*rk longer. My playing around with FIRECalc also shows 100% success rate.

Rather than making sure I have my investments right before official retirement, I will step back from that for a little bit. I’ll now focus on trying to decide on a mortgage broker and then a real estate agent to be my buyer’s representative as I strike out to find my retirement home out of state. I’m sure that’ll amplify my neurosis

 

[firemediceric]

My sister had an FA she really really liked. I can see why. She had little knowledge of financial markets and was earning bank interest rates on her savings and some CDs. So, in the long run the FA's recommendations probably out earned what she got from the bank. Good for both of them.

I am not a fan of FA's but if they can get a person like my sister to regularly invest in some stock mutual funds, even loaded high fee ones, she will probably do better than if she had continued to save a few dollars here and there and put them into a bank account.

IOW, the FA looked good because she had to clear a very low bar. Had my sister listened to her brother's advice (no brag, just fact) the bar would have been a lot higher. But, that gets into family dynamics which can be as scary as discussing religion and politics at a big family dinner with all the relatives.

I wish I had the knowledge to make these decisions soundly. As mentioned at the beginning of this thread, I am not savvy enough. It’s not due to not wanting to educate myself, but my ignorance persists. I very much wish I had a family member or close confidant to hold me by the hand and steer me towards right decisions while explaining the path. This forum is the closest thing that I have to that.

 

[pb4uski]

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

So then with a 3% COLA pension and SS you definitely don't need a sticking annuity.

 

[MarieIG]

When I was thinking about retirement, I was interested in a monthly payout. The company 401k charged $95 per each and every payout, which made that a no-go. I was put in touch with the company which managed that for the office - and they offered me an annuity. The literature was almost 70 pages, and BTW, I printed it out, got a highlighter, and read each and every page. It was ugly.

One thing I noticed was the hypothetical. It showed past returns, but did not give me an illustration of what would happen if the stock market immediately crashed. Hmmm

Secondly, the proposed investment was $300,000; and looking at the annuity value, it dropped $12,000 the first year. I wonder why. (Can you guess?) I thought about how long it took me to save my first $12,000. When I asked about their commission, I got a run-around about it being paid out the carrier's general funds. Yeah, but the carrier is not looking to lose money on those commissions.

And there was something like a ten year surrender penalty.

The fees buried in there were huge. Payments did not start until I was 67; hmmmm; no. I compared it to other annuities (a bit of apples to oranges there) but there were better, less costly products.

As far as telling the sales person no; come up with one sentence and repeat it. "I am not ready to purchase the product at this time."

Yep, he will try to exert pressure on you, after all it's a big fat commission for him. Refused to be rushed. I would capitalize that, but it would be considered cyber yelling, but I really can't emphasize it enough. He will stress that the deal will only be available for short. . .

(I didn't read through the attachments. The two I opened were sideways. But you should do so, and you should understand them. If you don't, it's not the product for you.)

 

[RunningBum]

Why would you put your Roth money into a variable annuity? Your Roth has more tax advantages than the variable annuity! ...

Plus the money you are considering moving to it is already tax advantaged! I’ll never understand putting one tax advantaged account inside another.

I don't think it's that big of a deal. An annuity only delays income, not avoid it. I bought my SPIA in a Roth. I didn't want the tax hit of raising the money in my taxable account. I hope to totally convert my tIRA, with me controlling when I take the conversion income rather than having it come automatically with the annuity payments. That leaves the Roth. I'd rather pull money from my Roth over selling highly appreciated funds in taxable anyway, so taking from a Roth early doesn't bother me.

 

[GravitySucks]

I very much wish I had a family member or close confidant to hold me by the hand and steer me towards right decisions while explaining the path. This forum is the closest thing that I have to that.

The advice I have gotten here has been better than any I have or would have received from family and is as good or better than the FIDO Advisor’s( though he usually gives me decent advice. ) advice.

Read one or two books on the recommended reading list that’s somewhere here as a sticky thread and you will see investing can be much less confusing than the annuity you were recommended.

 

[ERD50]

Perhaps good advice. What makes this situation a little more uncomfortable for me is that I sought this F/A out particularly because of recommendations from my peers who have retired over the past several years.

By all accounts from all of those retirees, this F/A has been phenomenal with how he has managed their money. ...

No disrespect to your peers, but I'd be surprised if any of them actually know how to evaluate the performance of an FA (few do).

If they haven't measured him against a suitable benchmark, after fees, expenses and taxes, then they don't know. "Phenomenal" has to be measured against the simple, easy, anyone can do them passive portfolio. A few broad based index funds, and that's it. I doubt their FA has beat that. Do they have any idea what their total return is (not just their dividend check)? A dividend, in many ways is just a return of your own money. I could set up an account for someone, with $1M of their own money, and have a check sent every quarter for $25,000. Impressive, right! Not if the account shrinks by $25,000 every quarter, it's just a return of your own money.

The dividend stocks may be growing as well, this is just to illustrate the issue. You need to look at TOTAL RETURN.

And remember, "phenomenal" performance might mean losing 7% in a year - if the market lost 25%. You need a benchmark.

-ERD50

 

[ERD50]

I wish I had the knowledge to make these decisions soundly. As mentioned at the beginning of this thread, I am not savvy enough. It’s not due to not wanting to educate myself, but my ignorance persists. ...

But you can get there easily. It has been commonly said on this forum, "The hardest part of personal investing is to understand how simple/easy it is".

For the vast majority (I expect this includes you, as you also have SS/pension income), any asset allocation (the % blend of stocks and fixed income like bonds, CDs, etc) between ~ 45/55 (stocks/fixed) and 95/5 has provided the same safety historically. It's just not that sensitive.

Then invest in a broad based stock index fund and a broad based bond fund. Throw in some international if you think it matters. You're good. That's it.

All the tweaking and complexity thrown at that will be unlikely to improve the performance, and likely to hurt it.

-ERD50

 

[Danalyst]

Don’t forget about the QLAC (Qualified Longevity Annuity Contract), which is a fixed annuity you purchase within your IRA and which pays the contracted amount for the rest of your life, beginning at any age up to 85. The amount you buy (not invest) is deducted from your IRA for RMD calculation purposes. When the payment flow begins, those distributions (not sure this is the right word) count towards your RMD.

I paid $125K for $1235/month beginning at age 75, and given my family history and generally excellent health, I’m planning for 20 years of payout, or $296,400. No inflation adjustment, so there’s some value decay, but you can buy a COLA rider that significantly reduces the initial payout. (The math on that didn’t work for me.) You can also opt to pass on the payment stream to a beneficiary, but this also drops the initial level.

Finally, there were none of the hidden fees and commissions that plague other types of immunities. And quite a range of quotes from different insurers. Mine was $200 more than the next highest quote, so it’s worth working with a broker or otherwise soliciting multiple quotes.

 

[earlyretirement]

Check out stantheannuityman.com, lots of useful info on FIA, SPIA, MYGA, DIA, and QLAC's.

 

[Danalyst]

I bought my QLAC from one of Stan’s people after a conversation with him. He’s a little brash but knows his stuff and doesn’t try to “close the sale.” Overall a positive experience.

 

[jldavid47]

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

And "life expectancy" is only relevant to actuaries. It tells you nothing about how long you are going to live.

 

[braumeister]

And "life expectancy" is only relevant to actuaries. It tells you nothing about how long you are going to live.

Very true. And those charts are usually just referring to life expectancy "at birth" which is pretty meaningless for those of us who are already aging.

This site is a bit more useful, but still only applies to populations on average:

Actuaries Longevity Illustrator

 

[CRLLS]

I use a rather simplistic view of evaluating an annuity sales proposal, or any financial propasal, for that matter. I skip over or even cross out any piece of data, chart, or graph that says "projected" or "historical" "most recent" or "assumed". I look for terms like "minimum" or "guaranteed". It minimizes the overwhelming data the is meaningless and serves to be make it more difficult to understand what the vehicle actually offers. Smoke and mirrors with no real meat.

 

[cnocmmz]

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.

Most annuity fees are not paid by the client, but rather paid by the issuing company with their advertising budgets. Annuities have come a long way than in the early 70’s-90’s. We purchased a few annuities from security benefit, one being a Roth version after the 08 crash, and now at 62 instead of drawing SS we are drawing from them. Bottom line, a diversified mix of investments are important . Just my two cents.

 

[Sunset]

Most annuity fees are not paid by the client, but rather paid by the issuing company with their advertising budgets. Annuities have come a long way than in the early 70’s-90’s. We purchased a few annuities from security benefit, one being a Roth version after the 08 crash, and now at 62 instead of drawing SS we are drawing from them. Bottom line, a diversified mix of investments are important . Just my two cents.

The client is paying the cost as it's built into the annuity output (decreases what the client gets over the years). The issuing company advertising budget is funded by the issuing companies overall revenue, and they are not providing annuities for free.

I was just warning the OP that the advisor suggesting an annuity might not simply have the clients best interest at heart. Some are salesmen driven by maximizing their own income.

Annuities can be good for certain purposes and people, but there are lots of times when they are sold to people and it's only good for the salesman.

Example: Some FA salesman sold my FIL at age 87, a 10 year annuity locking up his money for years (or pay penalty).

 

[jazz4cash]

Most annuity fees are not paid by the client, but rather paid by the issuing company with their advertising budgets. Annuities have come a long way than in the early 70’s-90’s. We purchased a few annuities from security benefit, one being a Roth version after the 08 crash, and now at 62 instead of drawing SS we are drawing from them. Bottom line, a diversified mix of investments are important . Just my two cents.

But Sunset’s point had nothing to do with whose pocket the fees come out of. The customer ultimately pays all the fees. Where else would a company get the money for their advertising budget? The point was that an FA might be influenced to recommend a product with a higher commission.

 

[mickeyd]

Run Away. Run Away. This FA is looking for a big payday that you will finance for him/her.

 

[firemediceric]

Run Away. Run Away. This FA is looking for a big payday that you will finance for him/her.

Thank you. Others have already convinced me that my doubts are well founded.
Curious though if you’re making your recommendation based on knowledge of annuities in general or if you looked at the details in the attachments I posted and if there’s something in particular you see as being a negative?

 

[bada bing]

My perspective from going through a similar mental calculus: Income annuities are not investments or at least poor investments. They are insurance products. They insure against running out of income should you live "too long". A SPIA is very much just an inverse term life insurance policy.

Like all insurance, you only need to cover risks you can't or don't want to bear yourself. In my case, I want my annual budget past age 70 covered by guaranteed income sources. But I don't want to spend anymore on the insurance of an annuity beyond that - because annuities are insurance, but poor investments. In my case, my age 70 SS and annuitizing my employer cash balance plan combined will cover my income needs. Those are insuring longevity risks I'd rather not take. Especially in my case since my family history is to live a long time, but loose quite a bit of cognition over the time span.

From what you've said, it looks like you have your necessary income guaranteed by SS and pension, although you didn't include your proposed ongoing retirement budget. Just from that assumption, I would say you are not a candidate for purchasing any more annuity, even a simple common sense one like a SPIA. Simple investment portfolios like a 60/40 indexed portfolio or a indexed target date fund and likely to be much better investments for your portfolio.

 

[HI Bill]

...Income annuities are not investments or at least poor investments. They are insurance products. They insure against running out of income should you live "too long". A SPIA is very much just an inverse term life insurance policy...

I once had an employee who was going to retire early, moving from HI to TX for a lower cost of living. He was dead-set on buying an annuity, as during a recent market downturn, he had panicked and sold, making his losses permanent, and losing more than half of his 401(k).

For those prone to do this, an annuity (the 'right' type) MAY be an okay idea. For most, not.

 

[ERD50]

Thank you. Others have already convinced me that my doubts are well founded.
Curious though if you’re making your recommendation based on knowledge of annuities in general or if you looked at the details in the attachments I posted and if there’s something in particular you see as being a negative?

It doesn't matter. Those are details, they are of the same cloth.

It's like asking if that's a 1,200 pound Grizzly Bear chasing me, or just an 1,175 pound Grizzly Bear chasing me.? RUN!

-ERD50