Variable Annunity Anyone?

CassandraApril 23, 2011

I'd like to hear from anyone who has or is thinking of a variable annunity. My financial planner is suggesting one for me. I trust her a great deal but the information on these things is hard to find, they are complicated, and the chat on the web is often quite negative. My stats: 54, single, plan to retire at 70, no pension, fully invested in a Roth, have both a good stock/bond portfolio and 403b portfolio, just bought long term care insurance. Thus the annunity would be an additional piece of a total investment package. The annunity investment would be approx. $200,000.

I'm still at the gathering-information stage. Basically I understand that the annuity grows tax-free and that it is a type of "income insurance." Since I don't have a pension and may live 20 years after retirement, a guaranteed annual income for the post-retirement years is certainly attractive to me, especially if the market crashes again and I lose other assets (I'm generally a pessimist in this regard). But much of what I read states that the fees for an annuity could eat up any potential gains. I have discussed the fees with my financial manager as well as the possibility of simply investing the $200,000 in a muni. I would welcome any thoughts or experiences, as well as any recommendations for sources of information.

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I listen to Bob Brinker on radio on Sundays, and he's was dead set against annuities. How much commission does your adviser get?

Also check out Dave Ramsey, who is good about money management. But I've never heard a good word about annuities that didn't come from the person who made money off them.

Here is a link that might be useful: Bob Brinker's website

    Bookmark   April 23, 2011 at 10:17PM
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They have their uses, especially for those who won't receive a pension or annuity from previous employers. However, the independent CFP I worked for had firm rules for annuities: no more than 25% of total portfolio assets to be put into them, and it was important to select not only a highly-rated company but also one that had a good choice of funds.

General advice can be useful, but it's a starting point only. Everyone has a unique financial profile, portfolio, goals, and risk assessment, and there is no 'one size fits all' that is truth for everyone. Life would be so much simpler if it was, LOL!

Annuities are better buys when interest rates are high. The Fed will stop its QE2 bond-buying program in June 2011 and long-term Treasury rates will start to rise. I don't see anything that would make me rush to buy one now. This means you have lots of time to research what's right for you.

If you want a second opinion, ask your advisor to refer you to another fiduciary advisor to do an investment check and advise you what s/he thinks of the variable annuity suggestion from your advisor of record. Any ethical fiduciary will be happy to do this - if they aren't, it's a warning sign and I'd do it on my own.

Make sure you are talking to a fiduciary advisor, not an uncertified advisor who follows only the useless 'suitability' standard.

You should also discuss with your advisor the reasons for recommending a variable vs an immediate annuity, to be purchased when you're older. There is another type of annuity, purchased on a short-term basis, but I don't think that's what your advisor is referring to.

I don't know much about the latter except that there's at least one person on the Finance forum who was looking at this type of annuity as a 7-yr investment vehicle last year when interest rates were rock-bottom and they were looking for a higher guaranteed return.

As sushipup points out, fees can be high so you are paying a premium for that guaranteed return. But if it is part of an overall portfolio allocation, and you didn't plan on using that money until after the surrender penalty period was over anyway, such an investment vehicle might well have a specific risk mitigation place in your financial planning.

    Bookmark   April 24, 2011 at 4:20PM
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"a variable vs an immediate annuity"

I think jkom means a variable vs a FIXED annuity -- ie, an annuity that grows at a fixed interest rate and pays out a sum certain perdiocally (usually monthly) over either a fixed term of years or until the annuitant dies (a "life" annuity).

A fixed annuity isn't usually considered an investment vehicle. It's most often used by retirees to secure a fixed and certain sream of income, similar to what a pension would provide. However, it's unlike a pension in that it's an insurance product purchased and funded by the individual. A fixed annuity can be either immediate (payments start immediately) or deferred to some date in the future.

A variable annuity, which IS considered a type of investment, is also an insurance product. It returns a variable rate of interest tied in some fashion to the performance of, most typically, the equities market. Thus, it carries some risk, but the risk is hedged to some degree by a partial guarantee on returns. Thus, you won't lose your shirt as you might in the stock market, but you also can't expect to get the same level of returns as you would if you invested in stocks directly, or in indexed mutual funds whose performance is setup to mirror the performance of a stock index, such as the S&P 500.

Variable annuities are usually VERY complicated. Dont buy one unless and until you completely understand all its features. They always carry the significant disadvantage of a considerable "load" -- the commissions paid to the sales agent through whom you buy it. Be aware that your financial advisor will be paid at least a part of this commission should you follow her advice. I'm not saying that's a reason by itself not to buy it, but it's certainly something to think about.

From what I can tell, most of the online financial gurus aren't very enthusiastic about VAs, mostly because of the commissions, which reduce the amount of return on your investment. The guaranteed returns may sound good, but they're always calculated to be lower than the historical average rate of return of whatever index they are based on. The insurance companies, after all, are in the business of making money and over all they're pretty good at it.

Personally, I wouldn't buy a variable annuity. I do intend, however, to invest some of our stash in fixed annuities for the DH and me once he finally is mostly retired. That should be about five years from now, when we all expect that annuity interest rates should be quite a bit higher than they are now.

    Bookmark   April 25, 2011 at 4:39PM
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Thanks for responding everyone. Very good advice. I am certainly moving slowly on this one. Would love to hear from others. Is Dave Donhof (sp?) still around? He always had good advice.

    Bookmark   April 25, 2011 at 4:49PM
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Dave specializes in real estate financing, I believe. He is not an insurance specialist nor is he certified in financial planning. This is not to 'diss' him, he gives very good advice on the subjects he specializes in.

feedingfrenzy, thanks for the correction. You are right, I meant fixed, not immediate.

    Bookmark   April 27, 2011 at 12:45PM
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In fact, Dave is a "Certified Life, Health and Annuity Insurance Agent," according to his website. He is also an agent for TriQuest USA Equity Managment, an insurance company that seems to be very active in universal life insurnace policies.

    Bookmark   April 27, 2011 at 2:00PM
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Oh, that's right, he shifted from mortgages to insurance. His certification, however, does not indicate fiduciary responsibilities, only insurance sales. I hope he's doing well, he hasn't been on the boards in quite a while and I recall he and his wife suffered a huge personal tragedy a couple of years ago, it was really sad.

There is, BTW, an insurance certification for estate planning purposes that is recognized as fiduciary, but they can only do financial planning in regards to insurance needs. No portfolio allocations or investment advice other than funds investible through insurance policies such as UL, VUL, or annuities.

The OP's advisor seems to be recommending the variable annuity for risk mitigation purposes, which is not something any insurance agent, certified fiduciary or not, should be advising on. They have to be very careful in this area, it is a real sore point of fiduciary advisors vs insurance agents and one the SEC is going to have to address at some point.

The question to ask an insurance agent would be "what would be the pros and cons for a variable annuity policy vs a fixed annuity policy, both right now and 5 yrs from now?"

The question to ask a fiduciary advisor would be "what purpose would this annuity serve as part of an overall investment strategy, and why a variable product instead of a fixed annuity?"

There is a distinct legal difference between the two questions, so one has to be careful.

    Bookmark   April 28, 2011 at 2:01PM
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An IMMEDIATE fixed annuity isn't considered an investment. It's a way to turn the lump sum of money used to buy it into a periodic stream of income. The OP is 54, employed and has no present need for such a product. She wants to invest her money so that it will turn into a nice nest egg when she retires. At that time, she might well consider a fixed immediate annuity.

It's true that you can also buy a DEFFERED fixed annuity. You pay the lump sum now and then start your income stream some time in the future. The interest rate is adjusted periodically. As an investment, this type of annuity is likely to pay returns only slightly better than a CD. meaning that it will pay almost nothing in today's low-interest environment, but would perform better in the future if interest rates were to rise. The OP has 16 years until retirement and is thinking of investing in munis, which have higher returns but carry somewhat more risk, so I'd guess that a DFA would be too conservative an invesment for her 200K. I certainly wouldn't do that if I were in her position.

    Bookmark   June 10, 2011 at 10:46AM
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Do you get the feeling that the OP has $200,000. to invest now to pay her beginning at age 70, or is she aiming at making periodic payments through the years between, to build an asset of $200,000. at age 70?

I'm assuming the former.

ole joyful

    Bookmark   January 24, 2014 at 5:22PM
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