Best Alternatives to Annuities - Recent Retirees w/ NO Risk Tolerance

[jake1988]

Here is the situation Mustachians. My parents both recently retired and thankfully have many Mustachian qualities (live below their means their whole life and are big savers, not spenders, no debt, house paid off long time ago, keep their cars 10+ years, etc.).

Neither of them have much of an understanding of finance and after speaking with them last night I now have a much better scope of their financial situation. They do NOT have a pension and are 62 years old and plan to live off of their NW. NW is approximately $1.2 Million and their "investments" are with two separate advisors (Advisor #1 below holds $800K and Advisor #2, an EJ person, has $200K, and the remaining $200K is in a variety of IRAs, Bonds, and other investment vehicles from the course of their working careers).

Advisor #1 - someone they have known for 10 years, not all that impressive IMO on paper, or in person, but they like him. I knew they had SOME annuities as part of their "investments" with him, but found out last night that 100% of their "investments" with this "advisor" is in a variety of annuities, this represents $800K of their NW!!! In addition, I found out that 6 months ago, he got them to sign up for a long term care plan that costs them $6,500 per year in premiums (representing their largest monthly expense now!) with North American Company for Life and Health Insurance (I took a pic of the plan and it appears to be $300K each Death Benefit, Universal Life, with a "guaranteed interest rate of 2.5%", Surrender Charges = $10,650). I don't know much at all about LTC insurance, but this sure seems costly... In addition to all of the money this advisor makes off of these annuities, he is charging them a 1% annual AUM fee he collects quarterly... scumbag... IMO, this guy has scared the living daylights out of my parents talking about the market being overvalued and how annuities are the answer at their age, blah blah blah, and it makes complete sense to them.

My parents risk tolerance is basically 0 as they plan to live off of their NW the rest of their life. I tried to explain how they should simply think about why the advisor is putting them in these annuities and brought to light the fact that annuities are the highest commissioned product possible and perhaps this advisor is thinking in ... HIS personal interest.

My father's question to me, which I do NOT know the answer to, is where he should put the money if not in annuities? He apparently has several different types of annuities and is quite happy with the "bonuses on sign up", which he showed me to be 5% and 12%?, he believes worst case he will make 5% annually on these. All I know about their annuities at this point is that they are with Athene and Security Benefit and that they range between 1-5 years... Also, my father is the type that believes he "needs" a financial advisor and values being able to go in and talk to someone as he does not understand finance all that well. He is particularly impressed with their "retirement calculators" and graphs. He also is super conservative and as long as he is "guaranteeing 5%" which is what he thinks is happening with the annuities, he does not seem to care that the advisor is robbing him of fees...

With that said, what would be some alternatives to annuities for them?

[Gin1984]

Most experts do recommend LTC insurance for middle class retirees such as your parents and is costly.  The rest, I'm sad to say maybe just as reasonable.  If they can't deal with having the money go down, annuities offer protection.  Because frankly they don't have enough money to have zero risk (aka cash or even bonds).  My mom plans to live off her investments too, but she is still mostly in stock because the biggest risk to her is inflation.
My mom uses fidelity because she can go in and talk to someone and that makes her feel safe (even though I do most of the planning) but it took her years to get there and did have an annuity IN HER SIMPLE IRA for about ten years.
Can they live off their social security?  Also you can tell them for your mom's sake, they need stock because she is likely to outlive your father and this situation will set her up for poverty like many elderly women. 

[Proud Foot]

What are their expenses and what do you know of the annuities? Do they pay enough to cover their expense? Are they a fixed payment or does it adjust for inflation? Don't know much about pricing of LTC insurance but it is a reasonable product for them to have. If their annuity payments cover their current expenses they can put off collecting SS until later when they will have a higher number and work with them to invest any surplus in stocks. Like Gin1984 said your mom has a bigger risk as she will most likely outlive your father. Also with their age they are looking at a retirement of 15+ years, unless there are other health type factors not presented here. 15 years is a long time to be on a fixed income that does not increase with inflation.

[MDM]

Oh, wow, where to start...?

Poster ThePrune at Bogleheads has studied annuities in detail.  Some threads that include his posts:
2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly - Bogleheads.org
Investor Analysis of Index Annuities - Bogleheads.org
Opinions on Annuities...Good? Bad? - Bogleheads.org

Coincidentally, I am in the process of helping a family member move an annuity from NACoLaH (the company mentioned in the OP) to Vanguard via a 1035 exchange.  Got a letter from NACoLaH saying this transfer "may result in considerable losses."  Further down the letter, the actual loss was documented as "$0.00, or 0.0% of your accumulated value."  That's because the surrender fee period had passed.  Your parents are probably still within the surrender fee period, unfortunately.

If they truly have no risk tolerance, a Single Premium Immediate Annuity may be useful.  In any case, two things are probably worth exploring in more detail:
1) Their annual expenses, and income sources.  I.e., what is their expected cash flow, year by year?
2) The annuity terms.  Especially, what are the
- surrender fees, and
- annual interest calculations?

The annual interest calculation is likely very simple - once you wade through the 100 page prospectus and understand the meaning and value of all the terms describing it.