OT: Please educate me on . . . Annuities

[BumbleBeeDave]

So I went to see my broker last week with Edward D. Jones and he pitched me on an Annuity--Prudential Premier Retirement Variable Annuity.

His pitch is that it offers guaranteed income after retirement--essentially my own private pension. It supposedly offers an extra layer of protection over simply buying dividend stocks because it's backed by Prudential--a major, long lived company with large cash reserves. He didn't suggest I put all my money into it, but suggested that it's one ingredient in a well-balanced portfolio that offers guaranteed income that will at least cover basic expenses after retirement, such as property taxes, utilities, food, etc.

This annuity also offers something called highest daily lifetime checking, where gains are locked in every day, not just once a year as with most annuities. The positive side is supposedly that your gains are locked in every day and you are insulated against losses. After the guaranteed waiting period I can begin taking money out without touching the principal--up to 5% yearly for as long as I live, and after I die the principal is inherited by my descendants.

So it all sounds real good. But what's the catch? Is there one? There's got to be . . . there always is!

What traps should I be looking out for as I scan the literature he gave me?

How does Prudential make their profit off of something like this?

What's in it for my broker?

What is a "premium based charge" listed in the brochure?

What is a "contingent deferred sales charge" also listed in the brochure.

Is there an alternative investment that offers the same benefits without the catches?

This guy has been straight with me in the past and Jones has a rep as a conservative, reliable company. That's why I picked them.

Many thanks for any advice from what I am sure is a knowledgeable group of investors here!

BBD

[Ahneida Ride]

guaranteed income after retirement-

guaranteed ?

[BumbleBeeDave]

. . . so where's the catch and how big is it? Is there going to be fine print that would let them off the hook if the market tanks after I retire?

That's the danger with dividend stocks as I understand it. Not a good idea to depend on dividend stocks for income. If the market blows up, the companies suspend their dividends and I end up living under a bridge and eating dog food.

I recognize that NOTHING is truly guaranteed in life, but if this offers an additional layer of security at a reasonable price, then maybe it's appropriate for me.

I'm just assuming there are others here who have been through this same issue and can offer advice.

BBD

[Ozz]

How long do you plan on living? The longer, the better deal it is. I am sure there is formula somewhere that shows the "rate of return" based on different time periods....ask your guy for that. Then compare to returns on alternative investments.

Prudential is a pretty solid company (meaning you have heard of them and they have been around a long time), but ask what other annuity options you have.

FWIW - investment planners make lots of $$ on annuities....

Did you pay a fee for the Edward Jones advice, or was it free? You generally get more impartial advice from someone who does not have a vested interest in selling you something.

[nm87710]

Originally Posted by BumbleBeeDave

So it all sounds real good. But what's the catch? Is there one? There's got to be . . . there always is!

How does Prudential make their profit off of something like this?
Like any business they make money off the spread between what they pay you(net) and what they make off investing your principal balance.

What's in it for my broker?
A commission. Financial brokers/consultants/planners make money off the transaction(fee/commission) regardless of investment performance.

Is there an alternative investment that offers the same benefits without the catches? One can build their own diversified income portfolio (dividend stocks, bonds, munis, CD's, etc) that still gives you access to principal if you need it.

Just like cycling it comes down to do have the skills and like wrenching your own stuff or prefer to pay an expert wrench to do it. In either case you ride the bike into the sunset.

Good Luck & Enjoy

[binxnyrwarrsoul]

"a major, long lived company with large cash reserves."

A company can be in business 100, 200 years, or even forever. Doesn't mean that, down the road, they will not be bought, gutted, then sold, a few times, changing the "dynamic" of their "products", in this case being annuities. With little left of the original company, other than the name. Contrary to the cute commercials, these companies care more about their own profit, stock value and stockholders than us, their customers. Guaranteed, is a term thrown around quite a bit by these companies, lately.

[professerr]

I only know enough about annuities to be dangerous, but here's what I can tell you. Typically the rap against annuities is that they carry a lot of fees that in the long run swallow up quite a bit money (say, 4% per year) that offset any security they provide. For example, I bet the annuity you are looking at charges extra for locking in gains every day, for guaranteeing the income at 5% (which income typically comes out of the principal if the investment underlying the annuity isn't generating 5%, thus leaving less for your heirs), "mortality and expense" fees, early surrender fees, account maint. fees etc. The also will typically limit where you invest the principal to mutual funds that charge high fees (compared to, say, a vanguard index fund). I've found it very difficult to get brokers to lay all this out when you try to discuss it with them and when you ask them to put it in writing they will refer you to very confusing boilerplate disclosures. I don't know what cut the brokers get from all this, but they don't push these instrument out of the kindness of their soul. Brokers are salespeople. Never forget that.

My personal view is that the fees you incur in annuities will almost guarantee you will underperform the market in the long run by a significant amount compared to simply putting your money in an index fund. So unless you are fairly old, the security you get from the income guarantee is more than offset by the fact that you'll have significantly less money when you retire.

[eddief]

says run away. I know that is not particularly well informed. It is just what I remember. If it is a life insurance product, most would say by the term type and then find a more reliable investment that does not end up as a new boat for your broker.

i also remember hearing these are way front loaded, and if you ever want out early, you are screwed. sorta like being underwater on your mortgage.

[54ny77]

i've spent a bit of time telling the slimeballs who cold call my parents or grandparents trying to hock these products to go forth and multiply...

really, an annutiy product for an 80+ year old?

insurance co's (and their scumbag salesmen) are preying on the aging boomer set in hocking these financial products, as the past few years of markets has wiped out staggering amount of peoples' retirement assets (financials, real estate, etc). the embedded fees are insane, especially if the time horizon is measured in years (10+). expectations have been so hammered that someone offering you 5% "guaranteed" returns sounds good. what they don't tell you is that nothing--repeat, nothing--is "guaranteed."

apart from that more objective answer to your question...here's the more subjective one: today's interest rate environment has put massive spread compression on insurance co's investment portfolios, to the point that some are scaling back the sales of annuity products. even the fee profits aren't enough to offset the spread tightening. my opinion is that if there's any semblance of meaningful market turnaround in, say, 5 years (along with a measured rise in interest rates that doesn't impair that growth), then even a plain jane index fund or mutual fund will exceed the total return offered by an annuity product over the course of an investment window (defined as, say, the next 20 years).

and frankly, i would rather own a financial instrument that is 100% correlated with the performance of XYZ company (e.g. XYZ's common stock) rather than own a financial instrument like an annuity that, while it too may be invested in XYZ company stock (among many holdings), at the end of the day the fate of my investment depends on the credit of the insurance company, not its holdings in XYZ company.

[bargainguy]

Edmund Jones is a full commission broker. They supposedly have excellent customer service but you pay through the nose for it. Annuities are not the best investment out there and they stand to make a boatload in commission from you. I wouldn't.

If you want an impartial second opinion, go see a fee-only investment broker and pay for an hour of his or her time. Could save you from EJ pressuring you here.

Don

[biker72]

Scott Burns writes a financial column for the Dallas Morning News.
Read this:http://assetbuilder.com/blogs/scott_...e-details.aspx

Bottom line:This is a good deal for the salesperson and the insurance company he represents. It is unlikely to be a good deal for you.



Index funds are the way to go. Broadly based and low cost.

[Earl Gray]

You don't to swing at every Pitch.

Let this one go.

[zap]

If you have not done so already, find a tax accountant who is also a certified financial planner.

Also, some community colleges offer investment classes. Sign up for a class if one is available in your area.

I fear that there is a good chance that many future retirees will suffer from real inflation and a rising state/local tax environment. Giving away valuable points to sales people is not what you want to do.

[dekindy]

I assume you have a variable annuity illustration. If you don't get one.

1. Once you get the illustration, go to immediateannuities.com. Input the information they request and determine the lump sum required to generate the same income as the variable annuity.
http://www.immediateannuities.com/

2. Then calculate the rate of return necessary to take the lump sum invested in the variable annuity today, to the lump sum that you calculated in #1 above.

I have been out of the business for awhile, but the annuitization rate relationship to the variable annuity guaranteed accumulated amount to the guaranteed income is generally very low, 1.5-2.0%. The annuitization rate in #1 abouve is probably 5% or better.

If you need any help with this calculation, pm me, and I will walk you through it.

For instance I will make up some numbers. You are going to invest X dollars that will accumulate a theoretical Y dollars at retirement and Z guaranteed income amount. Ignore Y, it is meaningless.

Take the Z guaranteed income amount and input it into the immediateannuities.com calculator and determine a Y dollar amount invested. This Y amount is relevant.

Now you know X, a true Y, and the number of years that X will be invested to generate a true Y. Now all you need to do is calculate the rate of return required to get you to Y.

X - Dollars invested now
Y- True Dollars(not a made up number in the VA) needed in the future at retirement to generate Z
Z- Guaranteed Income at Retirement
Unknown-rate of return on X needed to accumulate True Y to generate Z.

I intended to analyze this scenario and blog about it before leaving financial services but never got an actual case and left before I got around to it. It would not surprise me if the calculated variable annuity rate of return needed to generate Z is negative based upon the dollars you will invest in the variable annuity and the guaranteed income as compared to an immediate fixed annuity.

If you have difficulty following my instructions don't feel bad. If I had an actual example I could make it clearer. Or if you want to give me the variable annuity numbers I will calculate it for you and explain it.

BTW, I did not sell this product when I was a commissioned based financial planner because it appeared to me you could either take the money you would invest in a VA and put it in a CD or under your mattress and generate a higher income at retirement than their guaranteed. Insurance companies have to reserve for this product so if they guarantee very much at all it limits their ability greatly to guarantee other products and thus make them very unprofitable. So don't expect much in the way of guarantees.

[ORMojo]

As has already been stated several times, based on what you have told us, don't bother with that product.

Several correct reasons for that have already been stated, and the linked article does a fair job of providing some details. I'll just add that I've been providing financial advice to private clients for many years (as my own solo business, not working for/with any firm) and investing/managing their money, and none of their funds (nor my own, for that matter) have been, or ever will be, in a product such as the one you are being pitched.