Annuities

13 years ago

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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Comments (6)

calirose
13 years ago
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.
jakkom
13 years ago
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.
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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.
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stelzer
13 years ago
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.
jakkom
13 years ago
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, whatÃ¢ÂÂs the yield on the S&P 500? The fact that many investors can answer the first question and are clueless about the second, reveals whatÃ¢ÂÂs wrong with retirement finances today.

....Recent history has taught us that we can go a decade or more without capital gains. ThatÃ¢ÂÂs less of a problem during our working years, when weÃ¢ÂÂre drawing a salary and donÃ¢ÂÂt 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 wonÃ¢ÂÂt 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
calirose
13 years ago
Thanks for the link, jkom.
jakkom
13 years ago
You're welcome, calirose. And obviously I can't spell sometimes, as that should be "(excerpted)", not excepted, LOL!

Annuities

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