Annuity for cousin - asked for advice

[RetiredHappy]

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.

It depends on the type of annuities. For period certain annuities, deferred period certain annuities and SPIA, the broker is paid by the insurance company a fixed commission at the point of sale, around 5% of the value of the principal. For variable annuities, the broker is paid the commission every year, hence variable annuities are horrible, with fees of about 3% per year, and some of that goes to the broker.

 

[joesxm3]

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.

So if he gets the FIA and immediately annuitizes it he turns it into a SPIA? Grok said that the payout from the SPIA would be greater since the FIA was planning on the market growth.

I wonder if this Jackson contract was picked because it is IRA friendly and blends in the RMD from the other half of the IRA. [edit] Grok says that there are IRA-friendly features that might make one recommend the FIA.

I simulated doing the annuity with interest on principle in Excel.

At 3.5% interest the $100,000 ran out of money after 11 payments of $10,608. At 3.0% it almost finished 11 payments. At 2.0% it made about 9.25 payments.

So, based on this, it would seem that if my cousin thinks he is likely to live 11 more years or he is willing to pay a little for some perceived certainty and thinks he might live 9 more years then the annuity might be OK.

Assuming that immediately annuitizing the FIA is a virtual SPIA?

 

[Al18]

With some SPIA, once he passes away, the heir gets nothing.

 

[joesxm3]

With some SPIA, once he passes away, the heir gets nothing.

The documentation for this seems to say that there is a drawdown on death benefit. Roughly half the premium at 5 years and nothing at 10 years. Working its way down on the in between years.

 

[pb4uski]

So if he gets the FIA and immediately annuitizes it he turns it into a SPIA? Grok said that the payout from the SPIA would be greater since the FIA was planning on the market growth.

I wonder if this Jackson contract was picked because it is IRA friendly and blends in the RMD from the other half of the IRA. [edit] Grok says that there are IRA-friendly features that might make one recommend the FIA.

I simulated doing the annuity with interest on principle in Excel.

At 3.5% interest the $100,000 ran out of money after 11 payments of $10,608. At 3.0% it almost finished 11 payments. At 2.0% it made about 9.25 payments.

So, based on this, it would seem that if my cousin thinks he is likely to live 11 more years or he is willing to pay a little for some perceived certainty and thinks he might live 9 more years then the annuity might be OK.

Assuming that immediately annuitizing the FIA is a virtual SPIA?

It would make no sense at all to buy a FIA and immediately annuitize it unless by some quirk the monthly benefit was higher than a SPIA of equal premium. I'm not even sure if it is possible to immediately annuitize a FIA.

Accordingly to immediateannuities.com, a $100,000 premium would generate a monthly benefit for an 80 yo male of $877/month or $10,524 a year with 10 years of payments guaranteed. That's only a 1% annual rate for the first 10 years.

I would pass and stick with a bond ladder. A 10 year ladder of target maturity corporate bond ETFs would yield 4.27% and if you make that Treasuries then it is 3.60%.

 

[joesxm3]

You are correct. I found the section that says "any time after the first contract period up to the 95th birthday you can activate the annuity payments."

 

[pb4uski]

So does that mean anytime after the first year or the first term (whatever it is)? Either way, hard pass.

 

[joesxm3]

So does that mean anytime after the first year or the first term (whatever it is)? Either way, hard pass.

Yes. He has to wait one year, then he can turn it into an annuity.

That was different than my cousin explained it to me. And was only mentioned once on the last of 19 pages.

I understand the hard pass advice and will pass it along to my cousin.

One thing I was wondering this morning. The proposal has the thing being 100% invested in the SP500 with an upside cap (not clear on the exact percentage, maybe 4.5%) and a no loss floor.

With some saying that the expected return of the market over the next 10 years being expected to be sub par or less than what we have seen for the previous 10 years, might the FA's motivation be, from the point of view of the SP500 index with downside protection, be trying to hedge the market risk on half the portfolio? That would seem to explain the choice of FIA over SPIA.

I wish I could ask these questions to the FA, but I don't want to get in the middle of this. I was minding my own business, but my cousin did bring up the subject out of the blue and ask my opinion.

I guess the best i can do is give my cousin questions to ask.

 

[VanWinkle]

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 . . .

If he accepts the Advisor's recommendation for a Fixed Indexed Annuity he will join millions of other people that helped their advisor win that vacation to Ireland, a 28 foot cruiser, and a beautiful smile full of dental veneers. Commissions are 6-10% of the purchase price for the advisor. That's 6,000 to 10,000 for each 100,000 invested in the annuity. No wonder the advisor thinks it is appropriate. If the advisor was a fiduciary, he would only recommend a single premium immediate annuity for your cousin, although the reason to have any annuity is still the question.

 

[pb4uski]

... With some saying that the expected return of the market over the next 10 years being expected to be sub par or less than what we have seen for the previous 10 years, might the FA's motivation be, from the point of view of the SP500 index with downside protection, be trying to hedge the market risk on half the portfolio? That would seem to explain the choice of FIA over SPIA. ...

That might be logical thinking if the FA planned on holding it for 10 years but makes no sense if it's going to be a notarized after a year if it is going to be a note ties after a year, SPIA makes a hell of a lot more sense than an FIA.

I have two concerns. First it's hard to understand why your cousin would be buying an annuity at this stage of life. Second, I'm very familiar with the FIA product and it's just not a good product.

 

[joesxm3]

That might be logical thinking if the FA planned on holding it for 10 years but makes no sense if it's going to be a notarized after a year if it is going to be a note ties after a year, SPIA makes a hell of a lot more sense than an FIA.

I have two concerns. First it's hard to understand why your cousin would be buying an annuity at this stage of life. Second, I'm very familiar with the FIA product and it's just not a good product.

Thanks for taking so much time to help me on this.

I just had a long call with my cousin and explained things. Like I said, my cousin is not a dumb guy. He just made the choice early on to outsource his financial management. I think he is up to speed on a lot of the details and has a list of questions to ask tomorrow.

The main question is "what is this FIA contract attempting to accomplish?" Once we know this we can decide if the goal is reasonable and if the FIA is the best way to accomplish the goal.

I explained that if an annuity is the goal that the consensus is that a SPIA is a better choice, so he can ask that.

One thing I found out this morning is that he has been withdrawing about 10% from his IRA every year and the balance has gone up (not sure by how much). He said that for the past two or three years the FA has been asking him if he can reduce his monthly IRA withdrawal. My cousin said that he reduced it by 10% each time the FA asked.

So it might be that the FA is proposing this as insurance against the excessive withdrawal rate. The FA should clarify this tomorrow.

I don't have info on the exact account balances. My cousin has been helping a problem child so that probably helps to push the 10% IRA withdrawal rate rather than my cousin living the high life.

My cousin told me that the proposal when annuitized would end up with the payment being about half of what he spends above SS with the other half being taken from the remaining IRA. So I may be mistaken when I said that the premium would be half of the IRA balance. He may have meant that the payment would be half of the spend.

He also told me that he has about 5 years of expenses outside the FA in a high yield saving account as a SHTF emergency fund.

The plan is for my cousin to ask the questions tomorrow, not commit to anything, and talk to me again after that.

 

[pb4uski]

.... One thing I found out this morning is that he has been withdrawing about 10% from his IRA every year and the balance has gone up (not sure by how much). He said that for the past two or three years the FA has been asking him if he can reduce his monthly IRA withdrawal. My cousin said that he reduced it by 10% each time the FA asked. ...

Alarm bells are ringing for me. To reduce withdrawals is a very odd request from a FA, especially multiple times. Between that information and the pitch for the FIA it seems the FA is keen to preserve and enhance the fees and commissions that he and his form receive from your cousin.

 

[Kings over Queens]

One thing I found out this morning is that he has been withdrawing about 10% from his IRA every year and the balance has gone up (not sure by how much). He said that for the past two or three years the FA has been asking him if he can reduce his monthly IRA withdrawal. My cousin said that he reduced it by 10% each time the FA asked.

There may be a perfectly good reason behind this and the advisor actions may completely be in the best interest of your cousin, OR, and this is the pessimist in me, perhaps he's slowing the distributions because it increases the size of the account under management, which is how he's compensated.

Its not fair to keep pointing fingers at the financial advisor because we don't have the full story and he's not here to defend or explain the suggestions.

 

[Kings over Queens]

Alarm bells are ringing for me. To reduce withdrawals is a very odd request from a FA, especially multiple times. Between that information and the pitch for the FIA it seems the FA is keen to preserve and enhance the fees and commissions that he and his form receive from your cousin.

Me too, but let me play devils advocate for a second.

Perhaps the advisor sees the withdrawals as being in excess of his spending needs, and thus are creating an unnecessary tax trigger? As well, perhaps he's viewing the portfolio from a conservation viewpoint?

 

[jazz4cash]

One thing I was wondering this morning. The proposal has the thing being 100% invested in the SP500 with an upside cap (not clear on the exact percentage, maybe 4.5%) and a no loss floor.

With some saying that the expected return of the market over the next 10 years being expected to be sub par or less than what we have seen for the previous 10 years, might the FA's motivation be,

Surely that is wrong/too low? There may also be a “participation rate” applied to the calculation. If the index rises 5% but the participation rate is 80% the result is 4%, even less than the cap.

 

[joesxm3]

Surely that is wrong/too low? There may also be a “participation rate” applied to the calculation. If the index rises 5% but the participation rate is 80% the result is 4%, even less than the cap.

The seemingly personalized examples show the indexed SP500 portion at 100% and the guaranteed interest portion at 0%. They also list the upside cap at least twice as 4.5.%.

The examples show doing great and balance going up by 4.5% minus the 1.1% annual fee. Market flat or negative and balance going down by the 1.1% annual fee.

Incidentally, I saw a clause that the fee can increase 0.4% every so often (5 years?).

The cap can change every year. But if he wants to pull the money there is a withdrawal charge ranging from 9% to 0% over 7 years.

Like pb4uski said: many dials and levers that the insurance company can manipulate after you are locked in.

 

[pb4uski]

Also, what is the surrender charge schedule? Of course, that is moot if he annuities in a year.

 

[joesxm3]

Also, what is the surrender charge schedule? Of course, that is moot if he annuities in a year.

It seems to start around 9% and drop to 0% over 7 years. Not flexible in my opinion.

It seems to me that the logical direction of peeking behind the curtain is to question the premise of having the FA. But that in beyond my pay grade. I don't want to talk him into going solo just as the market might be heading into a slump that will be view as karma for ditching the FA.

 

[joesxm3]

Thanks to all who responded. I learned a lot about annuities from your responses and my Grok research. That will serve me well if I eventually consider an annuity.

Just to wrap things up, here are some final details that my cousin found out at the meeting yesterday.

The FA is recommending the annuity because he feels that over the next 10 years (market mean reversion) he will not be able to generate enough returns to cover my cousin's burn rate and he predicts that the portfolio will be exhausted in 10 years.

This particular Jackson contract has both an option to annuitize (which was what I focused on) and also a Guaranteed Annual Withdrawal Amount rider which is similar but different to annuitizing the contract.

The FA wants my cousin to activate the GAWA rider immediately and start receiving payments. The reason for this rather than a SPIA is that there is a death benefit and the SP500 index feature keeps adding to the death benefit balance even after receiving payments.

I agree with the idea that the FA and the Jackson contract may not be what we would pick for ourselves, but I don't see anything bad enough to go out on the limb trying to talk my cousin out of doing it.

Thanks again for taking the time to help me understand this stuff. I really appreciate all the advice. And to be honest, having joined the forum in 2010 or so, I probably would not be FIRE'd 10 years without the forum member guidance.

 

[TheQuestionGuy]

Usually takes 15 - 20 years to recoup the money put in (depends on fees and such).
Seriously, how long is he expecting to live?

 

[FloridaJim57]

I bought an immediate annuity through ImmediateAnnuity.com. at age 69. Very simple deal, I gave them a certain amount of money and they promised a certain amount of money every month until both my wife and I pass. Nothing tricky here. I used Penn Mutual Insurance and they have excellent customer service.