Author Topic: Annuities  (Read 2063 times)

Orca2

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Annuities
« on: April 21, 2018, 09:29:08 AM »
Hello-

Newbie to the site.  Looks like a lot of good info>

Short story - married couple, early sixties.  In Seattle (expensive real estate!).  Home is paid for.  Both will drop to part-time work next year but have medical coverage.  House is paid for, no debt, $1.8M in retirement savings.

My spouse is a teacher and will be substituting next year - she can collect her small pension in 3 yrs at 65.  The union offers free financial classes which were informative - but also a few sessions with a planner from Valic.  Like most here I've managed our investing over the years keeping it simple - cheap index funds, bonds, and fannie mae funds.  Used to do stocks but it made my stomach hurt.

So this planner, of course, is pitching a whole management system for our portfolio, which is a no go.  He also pitched a variable indexed annuity which sounds good but is pretty complicated.  And then a simple indexed annuity - can take out only 10% in first 7 yrs.  After that - no limit.  Guranteed never to have a 0% interest year no matter what index does.  Tied to Merrill Lynch Dynamic Index.

Over last 20 yrs index has varied between -1.5% to 12%.  They take a 1.2% cut.

My take is - can't I just manage my portfolio to manage risk among cash, bonds, and stocks as I've been doing?  Their take is this is a conservative pot that is better than CDs and is one pot in the strategy.  Thoughts?

MDM

  • Walrus Stache
  • *******
  • Posts: 9894
Re: Annuities
« Reply #1 on: April 21, 2018, 09:42:33 AM »
My take is - can't I just manage my portfolio to manage risk among cash, bonds, and stocks as I've been doing?
Yes!!

Quote
Their take is this is a conservative pot that is better than CDs and is one pot in the strategy.  Thoughts?
One thought: their "take" will be a very large chunk of your money.

See http://www.forbes.com/2010/08/10/truth-about-equity-indexed-annuities-personal-finance-bogleheads-view-lindauer.html for more.

A reasonable rule of thumb: never let anyone sell you an annuity of any kind.

A corollary to that rule is that one should consider an annuity only after one does many hours and days of due diligence to understand all the nuances of any particular annuity, and then calls the annuity provider to make the purchase.  In other words, "don't call me - I'll call you."  Many, perhaps most, who do that study will decide annuities are not appropriate.  For some, particularly later in life (and early sixties is not yet "later in life"), a Single Premium Immediate Annuity might be defensible.

See also Equity-indexed annuity - Bogleheads.

DreamFIRE

  • Handlebar Stache
  • *****
  • Posts: 1596
Re: Annuities
« Reply #2 on: April 21, 2018, 09:47:15 AM »

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2195
  • Location: Seattle, WA
Re: Annuities
« Reply #3 on: April 21, 2018, 10:38:29 AM »

So this planner, of course, is pitching a whole management system for our portfolio, which is a no go.  He also pitched a variable indexed annuity which sounds good but is pretty complicated.  And then a simple indexed annuity - can take out only 10% in first 7 yrs.  After that - no limit.  Guranteed never to have a 0% interest year no matter what index does.  Tied to Merrill Lynch Dynamic Index.

Over last 20 yrs index has varied between -1.5% to 12%.  They take a 1.2% cut.


No! No! No! Hell no!   Indexed annunities and variable index annunities are some of the biggest financial rip-offs ever devised by man.   There are no circumstances where these products make any sense for any person.  Run away screaming as if your hair was on fire.

Orca2

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Annuities
« Reply #4 on: April 21, 2018, 12:02:03 PM »
Thanks - kinda figured.

Maybe it boils down to this.  The annuity we were pitched is fairly liquid.  You can take out only 10% of the value the first seven years.  After that you can pull out completely with no fee.  They scoop up 1.25% off their index - you are guaranteed at least 0.5% a year even if the index goes negative.  Index has ranged 12 to -1.4 - mix of stocks and bonds.

We have $200k in cash - seems this annuity could be better than a CD - if we didn't like it after 7 yrs could pull out.  I'm not clear on the harm in putting in say $150k of a $1.8-2M portfolio.   

......what else would be a safe fairly liquid investment instead of parking this in a cash account?
« Last Edit: April 21, 2018, 01:03:04 PM by Orca2 »

MDM

  • Walrus Stache
  • *******
  • Posts: 9894
Re: Annuities
« Reply #5 on: April 21, 2018, 01:58:54 PM »
...indexed annuity which sounds good but is pretty complicated.
If, despite all the negative advice, you are determined to go down this path, at least do this: have the salesperson explain the very simple equation for the interest rate you will receive each year.

The equation itself is likely simple, as discussed in I think I did a real bad thing.

The trick is deciphering the equation from the verbose and intentionally confusing prospectus, and then understanding the values of the parameters in the equation that the insurance company can and will change.

If you can come back with the equation and contractually allowed parameter ranges, folks can comment more directly.

Consider also Investor Analysis of Index Annuities - Bogleheads.org.

If the sales person refuses to provide the simple equation and parameter ranges, then you can choose to invest in something you don't understand, or not.

Orca2

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Annuities
« Reply #6 on: April 21, 2018, 03:28:07 PM »

Thanks definately leaning NO.  But running through the options.  Probably the biggest concern is that I've done fine myself to date, why not just age-base my cash-stock-bonds ratio and call it good.

MDM

  • Walrus Stache
  • *******
  • Posts: 9894
Re: Annuities
« Reply #7 on: April 21, 2018, 06:24:53 PM »
Probably the biggest concern is that I've done fine myself to date....
Doesn't seem a particularly troubling concern if you were to continue doing so. ;)

ILikeDividends

  • Bristles
  • ***
  • Posts: 459
Re: Annuities
« Reply #8 on: April 21, 2018, 10:28:16 PM »
"Buying" an annuity is an investment in insurance products.  It is not an equity position.

Once you buy into an annuity, the insurance company owns your money that instant, and all you own is the terms of the annuity contract.

You do not own index funds or bonds of indebtedness.  Dig into it and you will learn you are basically helping the insurance company underwrite policies, and they then split the profits with you, and then charge you a fee for the privilege under many circumstances.

They are basically betting that you will die before you realize a value of the annuity exceeding their liabilities for offering it to you.  It's what insurance companies do.

My late uncle swore by annuities.  He had not even the slightest tolerance for risk of any kind. Preservation of capital was everything, and earning a real return on his money wasn't even a footnote in his goals.  For him it was the right choice.

Do what's right for you.
« Last Edit: April 21, 2018, 10:39:42 PM by ILikeDividends »

CorpRaider

  • Bristles
  • ***
  • Posts: 439
    • The Corpraider Blog
Re: Annuities
« Reply #9 on: April 22, 2018, 11:00:22 AM »
I agree that an annuity could be a valid choice for a portion of a portfolio for people who are not able to tolerate any volatility.  It is very unlikely, however, that one which is being promoted to you at such an expert level is the best available option.  He's likely at least getting a load fee off the top. See http://thecorpraider.com/2018/03/13/buying-what-no-one-is-selling/

Vanguard has some annuities available, if you check out the site. 

I wouldn't rely on his oral representations about the ease of no-fee access, as they are pretty much irrelevant.  If you have access it is likely in a restricted window with hurdles designed to make you pay fees. 

There are tax disadvantages/complexities for annuities which you should examine, such as pro-rata basis allocation to offset gain on sale/redemption.

If you get a copy of the annuity contract/policy documents and can read and understand those I would be absolutely stunned.
« Last Edit: April 23, 2018, 03:11:41 PM by CorpRaider »

Orca2

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Annuities
« Reply #10 on: April 23, 2018, 01:57:38 PM »
Thanks - all helpful.  We told the advisor thanks for the information but we'll just Stay Calm and Carry On.