Annuity for cousin - asked for advice

[joesxm3]

My cousin has an advisor from UBS who is proposing that he take 50% of his IRA and buy an annuity from Jackson Insurance.

My cousin has asked me for advice and I have been talking with Grok about it, My cousin sent me the proposal sheet, but I have not yet read it.

My cousin is 80 years old, no wife, has a daughter who will be the heir. I don't know how much the IRA has in it.

The advisor currently has the IRA spread out with about 30% in several types of bonds, 15% in a category called "hedge funds" and the rest spread out in domestic and foreign equities. The advisor charges 1% AUM and my cousin has been happy since his balance has gone up.

The rough assessment from Grok is that for an 80 year old man buying an annuity even in an IRA is potentially a good idea.

I had Grok model a T-Bill ladder over 10 years and Grok said that to mimic the annuity would end up with an amount about 10% of the initial premium left for the heir compared to the annuity. If my cousin lives more than 10 years the annuity pulls ahead.

I think this is a single premium, fixed payout annuity with a limited period of reclaiming money or death benefit that runs out at 10 years.

One question that jumps to mind is what the advisor plans to do with the other 50% of the IRA. The other is will buying the annuity now mean selling equities during the start of a market drawdown? Is that bad or good?

One area we need to explore is whether this annuity has commissions or hidden fees that make it a bad annuity or a rip off. I suspect that since my cousin has had this advisor for 20 or 30 years and the advisor only now has mentioned the annuity that he is probably not a total crook.

Any thoughts in general on an annuity for an 80 year old man?

Any questions I should tell my cousin to ask when he meets with the advisor and the Jackson person on Thursday?

Thanks.

 

[SnowballCamper]

Need to know more info: current/projected spending level, other income streams (SS, pension, etc.), relative size of IRA to spending level, risk tolerance of cousin, how strong is the desire to leave something for the heir, etc.

Overall, from the fact that the IRA is in some "Hedge Funds" I say Run Away from this "advisor" er um snake oil salesman....

 

[MarieIG]

I recall from when I was employed reviewing a sample annuity contract from Jackson and recall there were quite high embedded fees.

One half sounds like way too much and l have a concern about the financial advisor receiving some type of remuneration on top of his AUM fee.

I would actually want to read it, do a price comparison to other annuities and consider something with a return of premium for the daughter. I would suggest doing a price comparisons on the immediate annuity website, the Stan the Annuity Man website, and Schwab - for a start.

I am not anti annuity but this could be a huge money drain benefiting the annuity sales person and the asset manager.

Also examine his other source of funds and reason for purchasing the annuity. One purpose of the SPIA is longevity insurance, and to add to his base income. Is this something he wants / needs? Does he intend to do this for tax purposes?

Yes, he would need to liquidate holdings in the account to purchase the annuity. Obviously the higher the price he can get for his holdings, the better, but it is hard to have a crystal ball with regard to the best time to sell.

 

[Exchme]

At least do a check with immediateannuities.com and stantheannuityman.com, they sell SPIAs very transparently.

 

[pb4uski]

A lot to unpack here but my thoughts are along two lines: 1) why an annuity and what problem is the annuity solving and 2) if an annuity in an IRA makes sense then is the proposed product decent.

I'll start with the second issue first. The proposed annuity sounds like a fixed life annuity with 10 years guaranteed. If that is the case then in exchange for a single premium he (or his DD as beneficiary) would receive x per month for his life or 10 years, whichever is longer. Is why I describe the case or is what is being proposed a different product? Is your cousin currently healthy? What is family longevity?

Knowing the single premium and monthly benefit one can easily calculate the internal rate of return assuming the minimum of 10 years of monthly payments. Of course, that irr would get higher if he gets more than 10 years worth of payments. If he lives to 100, then it's probably a very good deal I would suspect but you can test that hypothesis by calculating the irr to various attained ages.

You can also compare the monthly benefit proposed to a similar annuity on immediate annuities.com or with a major brokerage firm.

If the IRR is fair and competitive, then that is good. In my experience, JNL is a pretty solid company. They were previously owned by Prudential PLC who at one time was one of my clients.

I'll hold off comments on the first issue until there's more information available, but I think it prudent to be skeptical.

 

[Lorenzo]

My cousin is 80 years old, no wife, has a daughter who will be the heir.

I would think an important factor is what your cousin has in mind for the daughter. Is it a goal to bequeathe as much as possible to the daughter, or does he feel the daughter is doing fine, and her future needs are not a major factor.

 

[Kings over Queens]

Any thoughts in general on an annuity for an 80 year old man?

My first visceral knee jerk reaction without knowing anything else? It's elder abuse.

That said, I'm open to a discussion to prove me wrong.

As suggested earlier, questions that come up that need answering.

What problem or concern exists in his current portfolio that this annuity solves?

Is there another solution that makes better sense?

The investment mix he proposed doesn't sit well. I'd need to see the fee schedule and alternate investment options. Willing to wager that there are likely better one in terms of lower fees and better results.

Does his risk tolerance align with the proposed funds?

I'd also want percentage of his entire nest is comprised of this one investment.

Looking at it differently, perhaps your cousin is loaded and wants to buy this annuity because his rep makes a commission.

This brings us back to "why do you want or need to buy an annuity?"

 

[mrfeh]

Overall, from the fact that the IRA is in some "Hedge Funds" I say Run Away from this "advisor" er um snake oil salesman....

+1

Not gonna comment on whether an annuity may be a good idea or not, 'cuz that's not my wheelhouse.

But it's clear the client is getting ripped off. The fact that s/he's happy just because balances are increasing indicates s/he's being taken advantage of.

 

[Al18]

I would have you cousin ask why they are invested in hedge funds at all. I don't think this is appropriate. I would think a conservative balanced fund, such as Vanguard Wesslley Income fund VWINX is more appropriate. On the annuity, have your cousin ask what happens to it when they pass away. Will his daughter inherit the annuity?

I'm not a fan of SPIA, and would think 25% is a more appropriate amount, considering it's locked-up. Investing 25% in a SPIA and 25% in a MYGA from a different insurance company sounds like a better idea. According to blueprintincome.com, an 80 year old could get a 7 year MYGA paying 5% per year from Mutual of Omaha, an A+ rated company and could withdraw up to 10% per year.

 

[Aggie1999]

It's probably a great deal for his advisor. That 1% AUM is not going to buy him a gold plated shark tank bar beside his pool. Gotta up those commissions!

 

[sakowitzm]

+1

Not gonna comment on whether an annuity may be a good idea or not, 'cuz that's not my wheelhouse.

But it's clear the client is getting ripped off. The fact that s/he's happy just because balances are increasing indicates s/he's being taken advantage of.

"because balances are increasing" reminds me of the time a friend of mine recommended his investment guy because the guy had done well for him. So I asked him a few questions about length of time and % increase, and they guy was WAY underperforming the S&P 500 and even industry benchmarks.

 

[pb4uski]

...According to blueprintincome.com, an 80 year old could get a 7 year MYGA paying 5% per year from Mutual of Omaha, an A+ rated company and could withdraw up to 10% per year.

To be clear, with MYGAs age doesn't matter... a 20 year-old or 40 year-old could get the same deal.

 

[Lorenzo]

I'm not a fan of SPIA, and would think 25% is a more appropriate amount, considering it's locked-up.

The argument I have heard is that a SPIA is a good option for a person nearing the end-of-life phase who doesn't care that much about leaving a legacy. Put a big chunk of what they have left into the SPIA and be assured they have an income stream that will support them for the rest of their lives. As one enters their 80s, and assuming they don't care about a legacy, does it matter anymore whether the bulk of their remaining nest egg is "locked up"? They can't take it with them. Maybe at that point peace of mind is everything.

 

[Al18]

To be clear, with MYGAs age doesn't matter... a 20 year-old or 40 year-old could get the same deal.

Blueprintincome says the maximum age for that MYGA is 88

 

[joesxm3]

I looked over the documentation and it is an annuity with an SP500 index kicker that can accumulate until you want to annuitize it. But my cousin seems to think he will annuitize it immediately, so the kicker probably does not matter although I thought I saw something about having to wait a year but I could not find it again.

I asked my cousin the reason that the annuity was being proposed and he seemed to think that the advisor felt that at his age and with the market so high he wanted to de-risk the portfolio. Of course that does not explain why an annuity rather than T-Bills other than perhaps wanting to lock a fixed interest rate.

The simplistic view is whether my cousin is happy to trade off fees and better results for a guaranteed monthly check for the rest of his life.

The amount of the check seems to be calculated as the principle + 30% times a guaranteed annual withdrawal rate percentage, shown in the sample as 8.16%.

My cousin was tricked into thinking that this meant he was making 10% on his money but I explained that the Annual Withdrawal Amount includes return of premium.

I asked Grok to compare the annuity to a T-Bill ladder and to the premium invested in SP500 (average return over past 10 years). As expected, Grok said that the longer my cousin lived the better the annuity was and investing in SP500 would leave a bigger amount for the daughter unless the market bounced the wrong way.

Looking at the documentation I can see why people do not like annuities. I felt like my head was spinning and someone was moving the walnut shells around.

It also reminded me why I don't poke my nose into people who are happy with their financial advisor. Although at times I wonder if earlier in my life I would have had better returns if I used one.

My cousin is not a dummy or a demented senior citizen. He still works part time designing computer chips and circuits. Recently an analog to digital converter circuit for one of the quantum computer companies. But I guess he likes to outsource his money management and has done so all his life.

Thanks for all the replies.

I will let him stew about things over night, talk once more tomorrow, the forget this ever happened

 

[pb4uski]

Blueprintincome says the maximum age for that MYGA is 88

That may be true, so if you're 88 or younger you get the same deal, right?

 

[pb4uski]

I looked over the documentation and it is an annuity with an SP500 index kicker that can accumulate until you want to annuitize it. ...

Not what I was thinking it was. It's a fixed index annuity. I'm very familiar with the product and not a fan. It doesn't sound like there's a compelling reason to invest those IRA funds in a fixed index annuity so I'd stay away.

It's probably being recommended to him because the issuing broker receives a pretty good commission on it.

 

[joesxm3]

Thanks.

I asked Grok to explain the difference between SPIA and FIA and it pointed out that people rarely annuitize the FIA immediately because the payout is lower than an SPIA.

Maybe the advisor thinks he should delay annuitization and my cousin misunderstood.

Learning my lesson about getting involved . . .

 

[ERhoosier]

The fact that s/he's happy just because balances are increasing indicates s/he's being taken advantage of.

I'll bet that describes MOST folks who blindly use Financial Advisors, including many of my otherwise intelligent (often highly educated) relatives & friends. VERY few seem to ask if their FA account performance is consistently better than indexing with a similar risk profile (e.g. FA's 50/50 equity/bond portfolio returning better than 50/50 SP500/bond fund MINUS FAs fee). Since I retired I've been to a number of FA 'presentations' and have yet to hear one that convinces me they are worth their $$$$$ (FAs advisor fee PLUS loads, commissions, & other overhead).

Regarding an annuity- The 1st question I would ask is what 'problem' the annuity is solving. I agree with prior comment that if the goal is to lock in some market gains, then putting those funds into laddered short-term Treasuries/IG bonds or a good Money Market fund could be a cogent answer for an octogenarian. Second thing I would ask for is details of the FA's commission (both direct AND indirect, like other 'considerations' from the annuity company). Only then check for a competitive IRR, because often the answers to the first 2 questions torpedo the issue. It is very common for annuity pushers (inc. FAs who should know better) to trick folks into thinking the payout (withdrawal) rate is their 'profit' return on the 'investment'. I even hear that slick-worded garbage in TV/radio ads (they would never put those words in writing for folks to re-read!).

That said, one very valid reason for putting some funds into an annuity is to control potential 'binge spending'....whether intended or via being forgetful (or scammed). I have one big-hearted relative that was constantly writing checks to every charity that sent something in the mail, often forgetting they had already contributed their intended amount for that month/year. Not legally incompetent but was seriously depleting their living expense nest egg. Finally another family member offered to 'help' with the checkbook. Having that nest egg in an annuity would have limited the financial consequences.

 

[Al18]

That may be true, so if you're 88 or younger you get the same deal, right?

I believe so. I did not enter an age when viewing the details of the MYGA.

 

[RetiredHappy]

TLDR. At that age, if money is in IRA, QLAC (annuity) is one way to ensure that there is a guaranteed income for life. The oldest that one can buy is at 85 and the maximum amount allowable by law is $210K in 2026. Although we won't run out of money, it is tempting for me at some point to buy a QLAC because my 2 term annuities stop at 85. It will depend on my health at the point in time if I decide to spend that money to buy a QLAC.

 

[Midpack]

asked my cousin the reason that the annuity was being proposed and he seemed to think that the advisor felt that at his age and with the market so high he wanted to de-risk the portfolio. Of course that does not explain why an annuity rather than T-Bills other than perhaps wanting to lock a fixed interest rate.

That's simple. Someone has probably said it already. Financial advisors earn a commission for selling annuities. This commission can be substantial and provides a significant incentive for advisors to recommend annuities as part of their clients’ investment portfolios. While this compensation structure may incentivize advisors to recommend annuities, it’s essential for clients to be aware of the potential conflict of interest.

 

[rk911]

Methinks the advisor smells an easy commission. Hard pass and i'd shop around for another advisor.

 

[pb4uski]

Thanks.

I asked Grok to explain the difference between SPIA and FIA and it pointed out that people rarely annuitize the FIA immediately because the payout is lower than an SPIA.

Maybe the advisor thinks he should delay annuitization and my cousin misunderstood.

Learning my lesson about getting involved . . .

FWIW, I think SPIAs are generally fine... once entered into there are no moving parts.

FIAs have many moving parts like participation rates and caps, which means numerous levers for the insurer to meet their profit goals. Another thing to keep in mind is that even where FIAs provide index return it is only the price change and not increases due to dividends.

 

[jazz4cash]

That's simple. Someone has probably said it already. Financial advisors earn a commission for selling annuities. This commission can be substantial and provides a significant incentive for advisors to recommend annuities as part of their clients’ investment portfolios. While this compensation structure may incentivize advisors to recommend annuities, it’s essential for clients to be aware of the potential conflict of interest.

I think it would be interesting to compare the annuity commission and fees to FA’s AUM fees. With annuity does FA
earn a quick commission with no ongoing management responsibility? I expect the AUM fees are more in the long run but FA has to actually perform and client could leave or die.