Annuities

blueheronOctober 16, 2010

DH and I are retired, in our 70's and are thinking of buying an annuity which guarantees a set amount per month.

I can't understand how they can guarantee 5% or more when interest rates are so low. I'd like to invest in the same things they're investing in! LOL!

Annuities used to have a bad reputation but I think they're much better now. We just sold a vacation house and have some funds to invest.

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calirose

I can't understand that either. DH and I looked for a "safe" place to put our money - the financial advisor said he could put it in an account and pay us 5% a month; and it would only cost us a management fee of 2% a year. sounds fishy doesn't it. Well, I kept asking him how it earned 5%; finally he admitted it didn't earn, they paid us our money at 5% a month in otherwords they kept our money, charged us 2% a year to dole our own money back to us monthly. Whatever it earned in that account depended on the market and could be nothing to whatever. I said I didn't need someone to charge me to dole our own money back. I settled for the 1.25 % the bank pays me in checking.

He claimed it wasn't an annuity. And it wasn't. But just another way for him to make money.

The seller of most annuities get quite a large payment on the front end. Just be very careful. I am 62 and with this economy I wouldn't want to tie my money up long term like an annuity. JMHO Too many things can happen where I might need money. I would separate it into CD's even though they aren't paying much now. But I don't know your money situation, income, etc. You might check with vanguaard or fidelity.

    Bookmark   October 28, 2010 at 10:10AM
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jkom51

calirose, if that 'advisor' is a CFP, you should report him IMMEDIATELY to the SEC and state licensing board for breach of fiduciary duty.

And you shouldn't check with any brokerage about annuities. These are sold by insurance companies, and any brokerage selling them to you is making management fees off it. Insurance agents make commissions with the carrier charging mgmt fees too, but at least you know that up-front.

Always deduct the annual management fee from the annual interest rate they're paying you. You may find there's not a great deal of difference in buying a 10-yr CD and having your money tied up in a 10 yr non-surrender annuity.

When interest rates are low it's not a great time to be buying annuities. The high guaranteed rates paid in previous years have come back to bite the insurers and rates are now much lower. You also need to be aware that fees on annuities are steep, and it will tie up your money for 7-15 years due to a standard non-surrender provision. So if there is any chance you might need those funds, do NOT put them into an annuity.

The best annuity is the one agents like the least: an immediate annuity. It has the least fees and commissions, but you'll get more $$$ monthly by waiting until you're older. That's just the way annuities work: you have a shorter life expectancy, so the policy pays you back faster.

You should also be aware that the standard advice from CFPs is to not put more than 30% of your portfolio assets into annuities.

Annuities are dependent upon the health of the insurance company staying in business. Stick with well-rated carriers, and find out what your state's limit is on annuity reimbursement should the carrier fail. It's very common for people to buy several annuities over time, and usually they buy them all from one insurer.

Unfortunately, in the event the insurance company goes under, the State Insurance Commissioner will liquidate the assets and return funds to the policyholders. But there is a legal $$ limit on liability for different types of insurance policies. It's the responsibility of the consumer to know what the limit is for their own state of domicile. In most states it's $100K, but it can and does, vary.

    Bookmark   October 28, 2010 at 6:50PM
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stelzer

I disagree jkom51. I know several "unsophisticated" traders who have taken this course and done very well. I am certainly not a Spam posting. When income generation in retirement is your goal, there are certainly several paths you can take. I agree that you should not put all of your eggs in one basket, but I also feel that it is important for investors to truly understand their investments. This is the reason I support this method. It's based on educating the investor to handle their own finances, thus reducing commissions (such as 3-5% in annuities). I understand that everyone has their own opinion and I certainly respect yours.

    Bookmark   November 11, 2010 at 10:11AM
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jkom51

Thank you, stelzer, I withdraw my comment about spam.

As you point out, there are other ways to generate retirement income. Those who are interested might find the article linked below (a short excerpt follows) to be useful:

How to Keep Cash Coming in Retirement
SmartMoney Magazine by Glenn Ruffenach October 21, 2010
(excepted)

"Chances are good you have a large-cap fund as part of your nest egg - "say, one based on the S&P 500. So, two quick questions: First, what direction has that fund been going in the past few months? (Up? Down? Sideways?) Second, whatâÂÂs the yield on the S&P 500? The fact that many investors can answer the first question and are clueless about the second, reveals whatâÂÂs wrong with retirement finances today.

....Recent history has taught us that we can go a decade or more without capital gains. ThatâÂÂs less of a problem during our working years, when weâÂÂre drawing a salary and donâÂÂt need to sell off bits of our nest egg to pay the mortgage. But once we start living off our portfolios, depending on capital gains and liquidating assets to meet expenses is a game of luck. If you happen to retire at the start of a nice, long bull market, you win; your savings likely will grow and last as long as you do. If you retire at the onset of a nasty bear market, you lose. Unless you enjoy the thought of moving in with your kids.

Income, then, should be Plan A in retirement, and capital gains, if they happen to come your way, a backup. The challenge, of course, is to pick the right investments to generate that income. Annuities? Dividend-paying stocks and equity funds? Bonds and bond funds? Preferred stocks? Master limited partnerships? Rental property? Ultimately, there are two deciding factors: stability (what wonâÂÂt fall apart in down markets) and growth (what will keep up with and outpace inflation)."

Here is a link that might be useful: SmartMoney: full article link

    Bookmark   November 12, 2010 at 1:53PM
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calirose

Thanks for the link, jkom.

    Bookmark   November 13, 2010 at 10:41AM
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jkom51

You're welcome, calirose. And obviously I can't spell sometimes, as that should be "(excerpted)", not excepted, LOL!

    Bookmark   November 13, 2010 at 3:43PM
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