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! :rolleyes:

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]

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

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... :crap:

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_burns/archive/2011/09/07/in-insurance-products-it-s-all-in-the-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.

[dekindy]

Scott Burns writes a financial column for the Dallas Morning News.
Read this:http://assetbuilder.com/blogs/scott_burns/archive/2011/09/07/in-insurance-products-it-s-all-in-the-details.aspx

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

Not a good substitute if you are trying to duplicate the product more efficiently.

CD's or fixed annuity or US Government investments or Investment Grade Corporate Bonds plus index equity funds would be a direct comparision to the VA guaranteed income rider.

[veggieburger]

Deferred sales charge means he gets paid the moment you sign up, and you are locked in for x years...it also means that his responsibility towards you fades.

Better that he gets paid based on the value of your assets...that was he has an interest in them. They increase, so does his revenues. It would also mean you are no longer locked in if you don't like the returns/structure etc.

There is never a reason to be locked into an investment for more than 90 days...

[BumbleBeeDave]

Sounds like there is already a consensus taking shape here . . .

More thoughts?

BBD

[dekindy]

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... :crap:

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


It is not as simple as all that. An immediate annuity can be appropriate for any age person. It is the high commissioned variable annuity that has muddied the waters.

A guaranteed immediate annuity guarantees income for life. What you need to understand is the annuitization rate. Annuitization rate is the amount invested divided by the amount invested. Let's use a simple example from immediateannuities.com

A 65-year old male living in Indiana invests $100,000 and receives $585 per life with no survivor benefit. $585x12=$7,020 per year which equals a 7%(truncated for simplicity) annuitization rate

However an 80-year old investing the same $100,000 amount receives $992 per month.

Now, you are upset because you have liquidated principal and there is no money for heirs or if you die early you receive significantly less. Firstly, you cannot calculate the maximum income from any other investment because it is not guaranteed. If still not satisfied you can take less income and get a guaranteed minimum payout of 5,10,15,20 years or installment refund whick means the principal, in this case, $100,000 is paid to survivors.

Then you might argue that people in poor health are not a market for annuities. Not true if you know what you are doing. Some insurance companies underwrite immediate annuities which means that the sicker you are the higher the payout. For instance the same 80-year old with congenital heart problems might receive $1,500 per month for life or has the option to receive less income and guarantee an amount for survivors.

Because of the commission motivated bad selling tactics there have been regulations proposed to limit the sale of annuities to older people. That would be sad as there are a lot of old people that are fearful that they will run out of money and an immediate annuity is the answer because they are worried about themselves, not their heirs.

[Ralph]

A Premium based charge is a fee charged against the customers investment assets for the insurance that allows them to make the guarantee. They may be laying the risk off to a third party, or one of their divisions, for this fee, to make the guarantee.

A deferred sales charge is the commission. The salesman will usually get his pay immediately.....maybe 4-5%, borrowed from the company, and you pay that back from your assets over an extended period of time.

Sometimes the sals commission is as as low 1% immediately (borrowed from the company and you pay it back over time), and he will get a big fee every year you keep the policy in force.

Personally (I'm retired and live off my investments), I would never do one of these in a hundred years. Just too much expense and fees you can't really figure out.

In all fairness, there are some situation where they are apropriate. But not very many....if they are fully and truthfully explained. To some folks, it just may be so important they insure these assets against losses, and get some cash build up , or guaranteed cash flow, nothing else much matters. And I do trust the big insurance companies to be stable. My son reminds me regularly....if I had put a bunch of money in an annuity 6-8 years ago....would still have it. But with markets under performing for about 10 years.....I'm fairly builish now. Young person.....go to Vanguard.com and buy your favorie no load fund, and invest regularly....and let a lot of time go by. it will work. But annuities can be a solution to an investment problem, even if I don't like them.

[54ny77]

My beef is the dozens upon dozens of calls thus far havent even touched on what you described below. They were all a bunch of fing scumbags from boiler rooms to pru and allstate, and since they generally werent registered reps i had no recourse that was worthwhile to file a complaint. Id go to ends of earth with finra with a couple of em if i could. Same sentiment holds for brokers in general. Hey smith barney that means you. One pos acct manager liquidated major chunk of parent retirement stock portfolio all high grade large caps with solid dividends to get poured into front loaded smith barney mutual funds that went nowhere. We didnt find out until later, or rather, i didnt find out about it until far too late. Rather than spend a lot of money in legal fees we moved on and account was closed. I fing HATE brokers, with a passion.

Rant over...

It is not as simple as all that. An immediate annuity can be appropriate for any age person. It is the high commissioned variable annuity that has muddied the waters.

A guaranteed immediate annuity guarantees income for life. What you need to understand is the annuitization rate. Annuitization rate is the amount invested divided by the amount invested. Let's use a simple example from immediateannuities.com

A 65-year old male living in Indiana invests $100,000 and receives $585 per life with no survivor benefit. $585x12=$7,020 per year which equals a 7%(truncated for simplicity) annuitization rate

However an 80-year old investing the same $100,000 amount receives $992 per month.

Now, you are upset because you have liquidated principal and there is no money for heirs or if you die early you receive significantly less. Firstly, you cannot calculate the maximum income from any other investment because it is not guaranteed. If still not satisfied you can take less income and get a guaranteed minimum payout of 5,10,15,20 years or installment refund whick means the principal, in this case, $100,000 is paid to survivors.

Then you might argue that people in poor health are not a market for annuities. Not true if you know what you are doing. Some insurance companies underwrite immediate annuities which means that the sicker you are the higher the payout. For instance the same 80-year old with congenital heart problems might receive $1,500 per month for life or has the option to receive less income and guarantee an amount for survivors.

Because of the commission motivated bad selling tactics there have been regulations proposed to limit the sale of annuities to older people. That would be sad as there are a lot of old people that are fearful that they will run out of money and an immediate annuity is the answer because they are worried about themselves, not their heirs.

[NRRider]

The huge up-front fees have always made be leery of whole life insurance as well, though I have many colleagues that have been thrilled with it. I think if you stick with the product for several years the fees become less of an issue. That said, I've avoided life insurance-type products (other than term life) for this reason.

[BumbleBeeDave]

. . . this isn't a good deal, primarily because of the fees.

so what other vehicles are available that provide the monthly payoff at retirement but don't have the huge fees?

BBD

[Ralph]

You don't need to think that way. We get dividends from our stocks quarterly. Some dividends from our bond funds (hi yield and investment grade) monthly. That income comes into our investment account, regular and retirement (IRA's), and goes into a money market fund. From these accounts, I calcuate what's coming in, and take a certain amount monthly. No product as such, just diversified portfolios. No fees either. Although I'm 70, to me....situation is about normal. Investments go up and down in value all the time. It's my job to see I get the income I need from them.

[Gummee]

. . . this isn't a good deal, primarily because of the fees.

so what other vehicles are available that provide the monthly payoff at retirement but don't have the huge fees?

BBDThere's Mutual Funds, Cash Value Life Insurance (fixed, indexed and variable), individual stocks and bonds, and maybe some things I'm forgetting right now.

...and you WILL pay fees. One way or another. No load = % off the top. Front end = pay now. Back end = pay later.

VAs have some of the highest fees. FAs = some of the lowest.

CV life insurance basically follows the same pattern as annuitites VA -> Indexed -> fixed AFA fees go.

HTH

M

[zap]

. . . this isn't a good deal, primarily because of the fees.

so what other vehicles are available that provide the monthly payoff at retirement but don't have the huge fees?

BBD

As others posted, self directed retirement account.

[peanutgallery]

an annuity is not necessarily a bad thing, if you get the one that is right for you. simpler the better in my book, IMHO a variable product from a company like Prudential is about as scary a universal life policy where the policyholder pays the minimum premium and gets left with nothing 25 years later

you are still relatively young, but it might be a good time to cycle some money into a situation where you might preserve some cash gains you have made over the years. the older you get the less time you have to recover from a big hit in the market. if you want an annuity, focus on a deferred, single premium with a fixed interest rate or a point to point that is tied to an index. they can never lose $ and should perform at an acceptable interest rate over 10 years or so. the $ you put in one is that which you will not need at the moment. many companies allow a penalty free withdrawal of up to 10% per year (after the first 12 months). the penalty for early withdrawal diminishes annually and disappears after the time you are tied to the product. it will sit around tax free until you use it, revisit the situation then to set up your next one (and payout options if applicable ages 59 and 70 are 2 to keep in mind when it comes to this)

couple of other things to keep in mind
1) this should be no touch money, you don't have immediate plans or needs for it. in order for the annuity to do its job, leave it there
2) taxes: if the source of the single premium is 401k $ for example, you will be taxed on the entire amount that you take out, if you use after tax $ out of your mattress or something - you are taxed only on the income generated by interest. while it is in the annuity and growing, no annual taxation
3) never pay a fee to start an annuity. if there is one consider walking away from the deal. yes the commish for a sale is good - but this is between the agent and the company. if the client gets 4% interest and pays no fees, there is no complaint

annuities can be helpful in the right situation, but they are a commitment and get the flavor that suits you. if they work, they are definitely preferable to paying Edward Jones or Prudential their fees to "help" you out with your money market account or whatever.

as far as the people who sell these products, don't throw the baby out with the bathwater...we all have to make our way in the world. find a financial adviser you trust and talk to them about it, lots of fish in the sea. don't be afraid to look around

[weiwentg]

Backing up, why are you seeking a variable annuity in the first place? A variable annuity is a 401(k)/IRA like vehicle in that you get to invest in a bunch of funds except that the company guarantees a minimum benefit (and to answer your question about how they make money, they charge you a lot for it; these are expensive products). In other words, the catch is that the expense ratios in the mutual funds are going to be at least 1-2% ON TOP of what the funds already charge.

If you are for some reason buying this thing with after tax money, the account will grow tax deferred, but you'll be taxed when you withdraw the money. If you're buying this in a 401(k) or 403(b) retirement account, then I have to wonder about your broker - you might as well just buy a traditional annuity, because you already have tax deferral in the 401(k).

Why haven't you maxed out your 401(k) and your IRA? If you own your own business, why haven't you maxed out your SEP-IRA?

As others have pointed out, your broker is going to make a lot from selling you a VA.

[Chance]

you are still relatively young, but it might be a good time to cycle some money into a situation where you might preserve some cash gains you have made over the years. the older you get the less time you have to recover from a big hit in the market.
Can someone explain in simple terms why age is so often used in this sense? Not trying to hijack the thread because it seems relevant to the OP's question. Plus this thread is informative even for those who are just starting to save.

It’s hard for me to follow this often-stated age logic. If a retired 80 year old has $100,000 and loses 40 percent he is left with $60,000. No doubt that’s a huge hit.

However, if a 50 year old closing in on retirement has $100,000 and loses 40 percent isn’t he left with the same $60,000? It’s a big hit too. Why is the loss more important to the 80 year old just because he doesn’t have the time to “recover”? What does that really mean? Won’t both recoveries on that $60,000 start from the same baseline? Also by the same logic the older man doesn’t have as long to live so he won’t need as much “recovering”.

Maybe this question makes no sense at all to financial guys but it would be helpful to understand why older people shouldn’t take just as much (or nearly as much) risk in investing as younger ones.

[CNY rider]

Can someone explain in simple terms why age is so often used in this sense? Not trying to hijack the thread because it seems relevant to the OP's question. Plus this thread is informative even for those who are just starting to save.

It’s hard for me to follow this often-stated age logic. If a retired 80 year old has $100,000 and loses 40 percent he is left with $60,000. No doubt that’s a huge hit.

However, if a 50 year old closing in on retirement has $100,000 and loses 40 percent isn’t he left with the same $60,000? It’s a big hit too. Why is the loss more important to the 80 year old just because he doesn’t have the time to “recover”? What does that really mean? Won’t both recoveries on that $60,000 start from the same baseline? Also by the same logic the older man doesn’t have as long to live so he won’t need as much “recovering”.


Maybe this question makes no sense at all to financial guys but it would be helpful to understand why older people shouldn’t take just as much (or nearly as much) risk in investing as younger ones.

The 50 year old can probably work another 15 years to make up the losses if needed.
He also does not need to access the money at this time.
The 80 year old is probably using that money to pay the light bill and put food on the table. He is much more vulnerable to a sudden loss and has less chance to recover from it.

[Ralph]

Can someone explain in simple terms why age is so often used in this sense? Not trying to hijack the thread because it seems relevant to the OP's question. Plus this thread is informative even for those who are just starting to save.

It’s hard for me to follow this often-stated age logic. If a retired 80 year old has $100,000 and loses 40 percent he is left with $60,000. No doubt that’s a huge hit.

However, if a 50 year old closing in on retirement has $100,000 and loses 40 percent isn’t he left with the same $60,000? It’s a big hit too. Why is the loss more important to the 80 year old just because he doesn’t have the time to “recover”? What does that really mean? Won’t both recoveries on that $60,000 start from the same baseline? Also by the same logic the older man doesn’t have as long to live so he won’t need as much “recovering”.

Maybe this question makes no sense at all to financial guys but it would be helpful to understand why older people shouldn’t take just as much (or nearly as much) risk in investing as younger ones.

I mostly agree. I'm 70, retired since 1998, and mostly live off investments. As an investor, I know I've got to have a way bigger return over long periods of time than any annunity can povide. I know (roughly) the first 3-4% of return I make just offsets inflation and pays some taxes. So if I play safe....I lose. If I buy 2-3 percent returning investments from a bank or treasury....I just automatically locked into a loss. So to me, no what what age, I must be an agressive investor. Notice.....I didn't say stupid investor. I didn't say gambling investor. I just said long term agressive investor. To do that....I need to keep 3-5 years spending money in cash or near cash. The rest in stocks and somewhat agressive bonds. Also have some investment real estate, but it's tougher to manage and get cash from. Can't get rid of it with click of mouse. But do feel the need to stay diversified. IMHO....play overly safe.....and you automatically lose. I would rather lose in bad times my way. And the reason you need to keep substantial cash is so you don't have to sell in bad down markets for living money, and so you can buy these bargains everyone else is dumping to survive.....like in 2007-2008 market bottom.

[Chance]

The 50 year old can probably work another 15 years to make up the losses if needed.
He also does not need to access the money at this time.
The 80 year old is probably using that money to pay the light bill and put food on the table. He is much more vulnerable to a sudden loss and has less chance to recover from it.
These facts we all get. Still it doesn't explain at all (to me that is) why it makes sense for young people to be relatively aggressive and old to sit back. Particularly when some people retire at 55 when forced out of work force and may live another 30 or 40 years.

It's the lack of numbers supporting the conservative approach that would be nice to understand better. Ralph's explanation above makes more sense to me on the surface. However, it'd be nice to hear other opinions too.

OK, back to superbowl. ;)

[BumbleBeeDave]

Backing up, why are you seeking a variable annuity in the first place?

. . . seeking it. I went to see my broker for a regular meeting and he pitched it to me. I already a have a varied portfolio in mutuals, single stocks, and several other vehicles, including a Roth IRA.

But the guaranteed return attracted my attention. I'm intrigued by anybody offering any kind of guarantee on the return on the investment, especially a rate that might end up being above the market if things continue as they have been. Yes, yes, I know--nothing is ever totally guaranteed.

Just looking to get the best mix of ROI and safety in the 10-15 years I have until anticipated retirement.

BBD

[BumbleBeeDave]

. . . since my broker has made another pitch and I'm really having a hard time seeing where the disadvantage is.

Here's what he's pitching . . . "Prudential Highest Daily Lifetime v2.1" . . .

http://www.thestreet.com/story/11851215/1/prudential-annuities-launches-prudential-defined-income-variable-annuity-and-highest-daily-lifetime-income-v21.html

http://www.annuityfyi.com/blog/2013/03/prudentials-newest-variable-annuity-offers-defined-income/

This would be only part of my portfolio. Almost all the initial investment would be funds that are already in my individual IRA (not Roth). The details are . . .

-Guaranteed increase
-No tax exposure now
-Get in now as I hit 55 and get guaranteed 5% withdrawal for as long as I live after 65. Even if the market goes to heck, I'd still be getting this income.
-Whatever's left over when I die goes to my daughter.
-Variable annuity
-1.84% annual fee
-Daily lock-ins

I won't be touching the money in the IRA till I hit 65 anyway, so his suggestion is this is a way to maximize return and guard the IRA money against market losses. Right now it's in single stocks and some mutuals. He has also stressed that this is just one aspect of a good portfolio, I shouldn't put more than a third of my funds into an annuity, and that this is a good time--10 years before retirement--to get into this particular one since the guaranteed income would start on the 10th benefit anniversary when I hit 65 anyway.

I asked him about how he gets paid and he said yes, he gets a commission. But right now I'm making regular trades to take advantage of specific company growth and he said--accurately--that I'm paying him commission on this money now every time I make a trade anyway.

Yes, that fee may add up to a lot over the next 10 years. But it seems to offer security and guaranteed growth till I hit 65, then guaranteed income after that. That's attractive.

Prudential has a long reliable history. I've got a good history with Edward D. Jones and this broker has always been a straight shooter with me. I know this guy is trying to sell a product and that's OK with me if both of us benefit. Am I missing anything? What else should I be asking him?

BBD

[Don49]

Here's a good place to start reading about VA: http://assetbuilder.com/category/scott_burns/variable_annuity_watch

If the expenses and commissions weren't so high the brokers wouldn't be pitching them to everyone regardless of age and suitability.

[oldpotatoe]

guaranteed income after retirement-

guaranteed ?

Mine gives a guaranteed 6% return regardless of the market.

[Mr. Pink]

Mine gives a guaranteed 6% return regardless of the market.

More like 4% after fees, if you're lucky.

Read John Bogle. It's actually quite simple. Low fee index funds or ETFs (hello, Vanguard) split conservatively between stocks and bonds. Feed the leeches in the financial industry as little as you can.

My favorite financial book title is "Where Are The Customer's Yacht's?"
http://www.amazon.com/Where-Are-Customers-Yachts-Investment/dp/0471770892

Nothing in life is guaranteed, except, well, death.

[saab2000]

. . . since my broker has made another pitch and I'm really having a hard time seeing where the disadvantage is.

Here's what he's pitching . . . "Prudential Highest Daily Lifetime v2.1" . . .

http://www.thestreet.com/story/11851215/1/prudential-annuities-launches-prudential-defined-income-variable-annuity-and-highest-daily-lifetime-income-v21.html

http://www.annuityfyi.com/blog/2013/03/prudentials-newest-variable-annuity-offers-defined-income/

This would be only part of my portfolio. Almost all the initial investment would be funds that are already in my individual IRA (not Roth). The details are . . .

-Guaranteed increase
-No tax exposure now
-Get in now as I hit 55 and get guaranteed 5% withdrawal for as long as I live after 65. Even if the market goes to heck, I'd still be getting this income.
-Whatever's left over when I die goes to my daughter.
-Variable annuity
-1.84% annual fee
-Daily lock-ins

I won't be touching the money in the IRA till I hit 65 anyway, so his suggestion is this is a way to maximize return and guard the IRA money against market losses. Right now it's in single stocks and some mutuals. He has also stressed that this is just one aspect of a good portfolio, I shouldn't put more than a third of my funds into an annuity, and that this is a good time--10 years before retirement--to get into this particular one since the guaranteed income would start on the 10th benefit anniversary when I hit 65 anyway.

I asked him about how he gets paid and he said yes, he gets a commission. But right now I'm making regular trades to take advantage of specific company growth and he said--accurately--that I'm paying him commission on this money now every time I make a trade anyway.

Yes, that fee may add up to a lot over the next 10 years. But it seems to offer security and guaranteed growth till I hit 65, then guaranteed income after that. That's attractive.

Prudential has a long reliable history. I've got a good history with Edward D. Jones and this broker has always been a straight shooter with me. I know this guy is trying to sell a product and that's OK with me if both of us benefit. Am I missing anything? What else should I be asking him?

BBD

This is the number that caught my eye. I've been getting very interested in personal finance and retirement planning in the past few years and have received some excellent education on the subject from a member here.

I don't know much about annuities but it's worth doing a Google search about plusses and minuses. You will probably also get good answers here from knowledgeable folks.

But that 1.84% fee is a lot. I don't know how it compares to other brands of annuities, but I promise you it pays to shop around.

A number of years ago, my father and I had some investments with a local brokerage in Appleton, WI, where I grew up. He always complained about the fees and one day changed and then convinced me to switch also. We both switched to Schwab. I am not recommending this but they are known as a low-fee brokerage and might offer something interesting for you.

At the very least, shop around. This fee sounds high and everyone I've ever discussed investments with has warned of fees. They seem low but over time can really kill you.

[BumbleBeeDave]

If the fee is a constant 1.84% of what's in your balance then your investment may be be guaranteed to go up, but so is your fee. It also seems like there's really no way to predict how much in fees I would end up paying over say, the next ten years, because there's no way to truly predict how the balance will increase with the market.

So I guess the question still seems to be . . . Is there even a ballpark way to predict the fee growth over the years with, say, the average market growth over time? And if I can do that even roughly, is that amount worth it to me for the security and the guaranteed income after 65? That seems to be the overriding question. Or is it?

BBD

[CNY rider]

Dave you need to change your focus.
Stop focusing on the fees paid over 10 years.
Focus on the actual returns.
If an adviser can make me a fortune and in the process collects lots of fees, I'm still happy as long as my pockets are full.
This is how a hedge fund can justify high fees BUT it only works if they are making a high rate of annual return for the investors AFTER fees.
I doubt that's the case with this annuity but that's the part you need to figure out.
I don't have time to read the links but you need to figure out what kind of returns you are looking at over time. What are they based on?

[professerr]

. . . since my broker has made another pitch and I'm really having a hard time seeing where the disadvantage is.

Here's what he's pitching . . . "Prudential Highest Daily Lifetime v2.1" . . .

http://www.thestreet.com/story/11851215/1/prudential-annuities-launches-prudential-defined-income-variable-annuity-and-highest-daily-lifetime-income-v21.html

http://www.annuityfyi.com/blog/2013/03/prudentials-newest-variable-annuity-offers-defined-income/

This would be only part of my portfolio. Almost all the initial investment would be funds that are already in my individual IRA (not Roth). The details are . . .

-Guaranteed increase
-No tax exposure now
-Get in now as I hit 55 and get guaranteed 5% withdrawal for as long as I live after 65. Even if the market goes to heck, I'd still be getting this income.
-Whatever's left over when I die goes to my daughter.
-Variable annuity
-1.84% annual fee
-Daily lock-ins

I won't be touching the money in the IRA till I hit 65 anyway, so his suggestion is this is a way to maximize return and guard the IRA money against market losses. Right now it's in single stocks and some mutuals. He has also stressed that this is just one aspect of a good portfolio, I shouldn't put more than a third of my funds into an annuity, and that this is a good time--10 years before retirement--to get into this particular one since the guaranteed income would start on the 10th benefit anniversary when I hit 65 anyway.

I asked him about how he gets paid and he said yes, he gets a commission. But right now I'm making regular trades to take advantage of specific company growth and he said--accurately--that I'm paying him commission on this money now every time I make a trade anyway.

Yes, that fee may add up to a lot over the next 10 years. But it seems to offer security and guaranteed growth till I hit 65, then guaranteed income after that. That's attractive.

Prudential has a long reliable history. I've got a good history with Edward D. Jones and this broker has always been a straight shooter with me. I know this guy is trying to sell a product and that's OK with me if both of us benefit. Am I missing anything? What else should I be asking him?

BBD

It has been an even longer time since I looked at these but here goes. Others more knowledgeable than me please chime in to correct me as needed so I can learn too.

An annual fee of 1.86% seems crazy high compared to the .15% a broad index fund will charge for you to just track the stock market overall. It is 37% of the entire annual amount you'll receive yourself! I'd also check to be sure there aren't other fees that are not called "fees." I don't recall all the other names they are given, but the terms can be very weasely. And I suspect that the funds your instrument would be investing in carry high fees/expenses/etc. too that aren't included in the "annual fee".

You'd be rightfully nervous about tracking the overall stock market via an index fund, but you're not putting all your money in this annuity anyway, and I believe the odds of your putting your money in a broad index fund and it not growing by more than 5% nominally (i.e. not adjusting for inflation, which how I presume your annuity works -- some annuities charge an additional fee for inflation protection I recall) over, say, 15 years are fairly slim. But even that is not a fair comparison, because if I recall correctly these sorts of annuities aren't guaranteeing you a 5% return on your investment, but rather just that you can withdraw 5% per year for life. THis means that if the market rises less than 5% you'll still get 5%, but this will eat more into what your heirs get.

More than anything, though, your warm fuzzy feelings about Prudential, Edward Jones and your personal broker cause me to worry, to be honest. I've interacted with numerous brokers and financial guys and have had to clean up very sad financial messes (including a variable annuity) for relatives several times -- their sentiments toward the equally reputable financial guys who got their claws into them were very much like yours. I'm not saying anyone is necessarily dishonest, but the incentives are all wrong when it comes to them looking out for your long term financial interest. At the very least, go to some outfit that doesn't sell annuities at all and ask their opinion.

[fkelly]

Ditch the broker and find a fee-based Certified Financial Planner based on references from people you know. Pay for a financial plan that projects out into your retirement years. You may pay $1000 or more off the top for this service and it will only be really useful if you participate in detail in developing it.

Use a discount brokerage house for your investments (Schwab, Etrade, and there are others). As others have said: diversify. You should have a mix of index funds and Exchange traded funds, some dividend stocks, bonds (inflation protected treasuries, for instance) and maybe even a small percentage of gold stocks just in case. Your planner and you should discuss the mix of investments. You will need to keep on top of it, periodically rebalancing it. If the market goes up for a while (as it has recently) you will want to take some out of stocks and put it into the fixed income part.

Re. expenses one thing to keep in mind is that with most managed investments such as mutual funds (I'm not sure about your annuity but probably it's true there) these expenses are taken annually. So if you have say 10,000 in an investment with a 2% expense ratio, they take $200 the first year, $200 the second year and so on forever. That's where it adds up.

Brokers are glorified bookies. They make money regardless. Annuities are a way to rip you off.

[professerr]

Dave you need to change your focus.
Stop focusing on the fees paid over 10 years.
Focus on the actual returns.

That's a standard broker line, but in Dave's case we know what his return will be: 5%. And we know what the fee will be: 1.86%. This seems like an expensive put, no?

[verticaldoug]

Dave,

It's a pretty complex product. You need to spend some time reading the fund documentation. There are a lot of disclaimers there. The disclaimers are there for a reason.

I do not think the 1.81% fee is the only drag. The bulk if not all of this annuity may be in fixed income. A large portion of this may be in the AST Long Duration Bond Portfolio. This fund also charges 83 bps fee and another 107 bps for insurance wrapper so total drag will be an additional 190 bps per year. (? You need to ask questions to your FC)

Actual returns, net of fees, will probably be disappointing. You also assume the credit risk of Prudential for the guarantee. (? I may be wrong here)

You can go buy Prudential Finance 5.625 6/15/2043. It is callable in 2023. Yield to call is 5.417%. After the call, it resets to a US 3Mth + 392 bps.

Ask your FC to compare the income streams net of fees over the life of the two investments. If the guarantee on your annuity is Prudential Credit, you are just comparing returns on the same credit. (All of this is the devil in the details which will be outlined in the fund documentation)

This is just one slice of your portfolio. I suggest keeping slices simple so you more easily understand the allocation of risk across your portfolio. You should take the amount of time necessary to get yourself comfortable with the documentation and the assumptions you are making.

D

[EDS]

Mine gives a guaranteed 6% return regardless of the market.

My wife's annuity through work is 8%. Which just means there are some advantages to government work.

[josephr]

That's a standard broker line, but in Dave's case we know what his return will be: 5%. And we know what the fee will be: 1.86%. This seems like an expensive put, no?

This is pretty much it....he's netting 3.14% (his part of the Pi?)...its much better return than bonds/money market/savings accounts at the moment but not nearly as good as a decent mutual fund....

the trade-off is always risk/reward...I don't know about your personal situation, I wouldn't trade out of something to put into this one. If that's what this broker is suggesting, then you need a new broker as he's 'churning' you for fees. If you have a butt-load of cash just sitting somewhere that's you're rainy-day fund that you just can't see losing, then it might be an option...but just be aware its not a growth/income strategy...its a minimal risk strategy.

That being said...I'm not broker/advisor/tax attorney --- just some guy on the internet. Good luck!

[CNY rider]

That's a standard broker line, but in Dave's case we know what his return will be: 5%. And we know what the fee will be: 1.86%. This seems like an expensive put, no?

Agree completely.
That's what needs to be focused on: The paltry rate of return Dave will get on his money after fees.

[veloduffer]

Lots of good caveats in the previous posts. But the perspectives are geared to long term (returns) and capital accumulation. You also need to think about cash flow needs and risks.

1. What are your cash flow needs in the future? Will you mortgage be paid off? Do you live in a high tax state? Besides yourself, are your dependent a in good health or do you anticipate healthcare costs or need assisted living?

2. The cash flow issue is a problem if you need money and have to liquidate assets in a down market.
Most folks buy annuities to cover their "fixed costs". During the crisis, annuity holders appreciated the guaranteed income as all the other asset classes crashed except US Treasuries (flight to safety). Annuities are a safety blanket, but costly. If you are very risk averse, then an annuity might be the right product for a portion of you portfolio. There are many favors/features to annuities, as insurance companies come up with new products. It pays to look around.

Markets are volatile and can be in prolonged downturn (see Japan). Past market performance is even less of basis for future market returns,as the capital markets have changed so much in the last 20 years (invention of ETFs, explosion of mutual funds, growth of bond and leveraged loan markets, rapid movement of capital globally). Plus event risk is more prominent. Nobody could imagine that multi-trillion dollar markets could seize as the did in 2008. Also stocks and bonds have become more correlated, so diversification into bonds is less effective

You are trading market risk for credit risk (that Pru stays in business). As someone mentioned that you could buy a Pru bond, which provides the same risk. But the corporate bond market is not a retail market and difficult for individuals to purchase.

You could build a ladder of bonds (Treasuries, municipals) to receive interest income and avoid market risk (again you are trading for credit risk).

You may want to talk to a financial planner that is paid on a flat fee rather than commission. Some can be paid by the visit/consultation or on an percentage of assets (usually 1-2%). The latter is more expensive but their incentive is aligned with yours -- to grow your assets and minimize volatility. Like a doctor, it sometimes pays to get another opinion.

[Mr. Pink]

My wife's annuity through work is 8%. Which just means there are some advantages to government work.

There is something wrong in that statement. It is very dishonest to sit across a table and tell someone that they will make 8% on their money, no matter what, for, what, a very long period of time, right? Until the end? It's a lie. Because, the only investment most financially savvy people consider rock solid safe (although the tea baggers would argue with this), is a U.S. Treasury bond. Full faith and credit of the greatest economy on Earth, right? But, the highest return one can earn on one of these bonds is 3.56% on a thirty year loan to the government, as of today. Now, we're missing another 4.5%, obviously, after, of course, whatever gets skimmed off the top or, ahem, falls off the table during transactions between intermediaries. As a 61 year old looking at retirement very soon, I would love to have 4.5% guaranteed on my money, for the rest of my life. I could live OK to pretty good, considering. But I'm not enough of a fool to believe that there is any, any, investment that could guarantee that, besides T Bills, and, as I said, not even then. I mean, it's been a good ride, but, I lost a few percent this year. It's a little hairy right now. It is a period of volatility, as they say. I worry about China, too. Furgetabout Greece.
Anyway, I have to say, never ever believe that someone can get you more than a 30 year treasury, guaranteed. They can't. Madoff did consistent 10-11% in a 15-20% world, so he flew under the radar for years. Slow and steady. And crooked.

It's no surprise to me that a government "annuity" is guaranteed 8%, but I would love to see how they achieve that figure. This is the same figure that public pensions use as a benchmark in their actuary calculations. In other words, millions of local to federal union employees are promised pensions in the future based on 8% average returns on the sums that the government supposedly invests for them (but, as we have found out in many places, that's all a fiction, because the money doesn't even exist!). Really. I'd be planning a two month ski trip to the French Alps right now if I knew, absolutely, no joke, no kidding, guaranteed, swear on my mother, that I'd get 8% on my savings until I die. Those are fictional returns in a ZIRP world, and, trust me, interest rates are stuck where they are for years.

I just wish the Euro would tank. I wanna bike Tuscany all summer. I'm not getting younger.

[CNY rider]

There is something wrong in that statement. It is very dishonest to sit across a table and tell someone that they will make 8% on their money, no matter what, for, what, a very long period of time, right? Until the end? It's a lie. Because, the only investment most financially savvy people consider rock solid safe (although the tea baggers would argue with this), is a U.S. Treasury bond.
Full faith and credit of the greatest economy on Earth, right? But, the highest return one can earn on one of these bonds is 3.56% on a thirty year loan to the government, as of today. Now, we're missing another 4.5%, obviously, after, of course, whatever gets skimmed off the top or, ahem, falls off the table during transactions between intermediaries. As a 61 year old looking at retirement very soon, I would love to have 4.5% guaranteed on my money, for the rest of my life. I could live OK to pretty good, considering. But I'm not enough of a fool to believe that there is any, any, investment that could guarantee that, besides T Bills, and, as I said, not even then. I mean, it's been a good ride, but, I lost a few percent this year. It's a little hairy right now. It is a period of volatility, as they say. I worry about China, too. Furgetabout Greece.
Anyway, I have to say, never ever believe that someone can get you more than a 30 year treasury, guaranteed. They can't. Madoff did consistent 10-11% in a 15-20% world, so he flew under the radar for years. Slow and steady. And crooked.

It's no surprise to me that a government "annuity" is guaranteed 8%, but I would love to see how they achieve that figure. This is the same figure that public pensions use as a benchmark in their actuary calculations. In other words, millions of local to federal union employees are promised pensions in the future based on 8% average returns on the sums that the government supposedly invests for them (but, as we have found out in many places, that's all a fiction, because the money doesn't even exist!). Really. I'd be planning a two month ski trip to the French Alps right now if I knew, absolutely, no joke, no kidding, guaranteed, swear on my mother, that I'd get 8% on my savings until I die. Those are nice returns in a ZIRP world, and, trust me, interest rates are stuck where they are for years.

I just wish the Euro would tank. I wanna bike Tuscany all summer. I'm not getting younger.

She works for the government.
It doesn't matter what their investment returns are.
They have the power to levy taxes to generate whatever $$ they need.
It's the rest of us slobs with defined contribution plans that need to worry about where the returns will come from.

[xlbs]

I'm a Canadian financial advisor, so my technical knowledge of US rules is weak and therefore can't apply, but my practical experience does apply.

Variable annuities, as with any guaranteed income product, offer that guarantee at a price. How else can the insurance company offer to support the investment? Do you want the insurance company to fail because it wasn't prudent (pun intended)?

"It depends" are the two key words in any discussion of a portfolio development over time.

Several posters here have a hate on for financial advisors who are commission-based, while others have a more measured stance. Since I am only paid by commission I must rise to the defence of a commissioned advisor---if the product makes sense as part of an entire strategy why is the advisor seen as gouging or manipulative? If Dave can ascertain that the modest income this product provides is within his "it depends" and he is willing to pursue it, with due diligence, why blast the whole product type and those who sell them?

For the record, I sell a few modest variable annuities in my practice, but I sell them to clients who are interested in some sort of pension-like income in their retirement years. I try, and generally succeed, in encouraging a broad-based and wise asset allocation that meets the "it depends" test on several fronts without focussing entirely on a variable annuity product.

So, from my perspective, having seen many stripes of advisors, and having seen some of the good programmes as well as some of the disasters that clients have had sold to them, I can assert very strongly that no one should buy a product that they don't understand completely, and no one should act under sales pressure to buy.

Having said all of that, there is no single perfect solution to any person's long-term goal.

So, for all of you who have proclaimed your favourite single solution to Dave, you should be very careful of the advice you have received!

For those who encourage wise due diligence, careful research, thoughtful questions, and a general prudent perspective, KUDOS.

[EDS]

There is something wrong in that statement. It is very dishonest to sit across a table and tell someone that they will make 8% on their money, no matter what, for, what, a very long period of time, right? Until the end? It's a lie. Because, the only investment most financially savvy people consider rock solid safe (although the tea baggers would argue with this), is a U.S. Treasury bond. Full faith and credit of the greatest economy on Earth, right? But, the highest return one can earn on one of these bonds is 3.56% on a thirty year loan to the government, as of today. Now, we're missing another 4.5%, obviously, after, of course, whatever gets skimmed off the top or, ahem, falls off the table during transactions between intermediaries. As a 61 year old looking at retirement very soon, I would love to have 4.5% guaranteed on my money, for the rest of my life. I could live OK to pretty good, considering. But I'm not enough of a fool to believe that there is any, any, investment that could guarantee that, besides T Bills, and, as I said, not even then. I mean, it's been a good ride, but, I lost a few percent this year. It's a little hairy right now. It is a period of volatility, as they say. I worry about China, too. Furgetabout Greece.
Anyway, I have to say, never ever believe that someone can get you more than a 30 year treasury, guaranteed. They can't. Madoff did consistent 10-11% in a 15-20% world, so he flew under the radar for years. Slow and steady. And crooked.

It's no surprise to me that a government "annuity" is guaranteed 8%, but I would love to see how they achieve that figure. This is the same figure that public pensions use as a benchmark in their actuary calculations. In other words, millions of local to federal union employees are promised pensions in the future based on 8% average returns on the sums that the government supposedly invests for them (but, as we have found out in many places, that's all a fiction, because the money doesn't even exist!). Really. I'd be planning a two month ski trip to the French Alps right now if I knew, absolutely, no joke, no kidding, guaranteed, swear on my mother, that I'd get 8% on my savings until I die. Those are fictional returns in a ZIRP world, and, trust me, interest rates are stuck where they are for years.

I just wish the Euro would tank. I wanna bike Tuscany all summer. I'm not getting younger.

No doubt, it is a curious thing, but in the case of the program my wife contributes to the interest rate is set by the state legislature. It is a piece of our retirement nest egg, but an attractive one currently. She contributes pre-tax dollars and has the option to rollover the account to a 457 or 401(k) plan down the road.

[Mr. Pink]

Well, you should pray for inflation. The money your wife is receiving is essentially a debt calculated at absurd rates of return in today's world, and the only thing that will erode a lot of that debt and ease the pain of paying it is rapid inflation, which basically reduces the size of that debt, in real terms. But, I'm afraid, and not for many trying, including the Fed, we are watching deflation slowly take hold in the developed world. It's not going to be pretty. Blood from a stone and all that, you know. I know, I know, guaranteed by state constitutions, blah, blah, but, watch Detroit right now. The retirees will be lucky to get 50 cents on the dollar that they were guaranteed. That's just the start.

[BumbleBeeDave]

. . . and I truly appreciate that and understand why some might hold them.

But I'm also looking for objective, informed suggestions. Looks like the best one seems to be to find a third party certified financial planner locally and pay them for their opinion. So I will pursue that. But it's not particularly helpful to me to be told not to purchase the product because "all brokers are scumbags" or that all annuities are just a way for the broker to rob me.

I don't trust my broker--or any broker--completely, just because they guy seems to have been a straight shooter with me. But I also don' think I'm being "churned" for fees if I'm paying the fee on the transactions that are making me a good rate of return on investments based on the company's analysis and research of the market. The chances of my making equivalent money based on my own knowledge are minimal.

That's the service I'm paying him and the Jones company for--their expertise in helping me grow my investments more than I could with my own knowledge. I guess I could take all my money and go to another broker and use them for 20 years and see how they do. But time is limited and this seems to be one of those situations where you get one shot, so you buys yore ticket and takes yore chances.

My central question remains. Based on the info I have about the fund . . . is there anything I could tell him I want to do instead with that chunk of cash that would have equal return guarantee and equal security for my original investment? If not, then it might be worth it to me to pay those fees over time.

As I'm understanding it, let's say I invested, for example, $100k in the annuity, let it sit for ten years till it grows to $140k, then take 5% per year out each year. If I live for more than 20 years, I get some or all of my fees back because part of the guarantee is that I keep getting 5% of the ten year maturity amount for as long as I live, even if that's longer than 20 years and they end up paying me out of their own pocket. After 20 years I will have withdrawn all my money and there will be no death benefit for my children, but there wouldn't have been any anyway if I took 5% of my original investment out every year.

But if I live past age 85 I end up getting free money from Prudential every year until I die. Or at least that's the appearance. If that's accurate, then maybe it's worth it to me to pay the fees in return for the security and guaranteed growth. If there's a "Gotcha!" in there, I'm looking for what it is or who can tell me what it is.

BBD

[josephr]

nevermind...

[tele]

Dave

cant really add much more other than to reinforce the notion that annuities are laden with fees and are not designed to really benefit you unless you live well past the average male age.

In a previous life I worked for a couple of broker/dealers and when annuities were discussed it was with the attitude that they were excellent for the insurance company because of the multiple layers of fees involved.

In my opinion there are much better and less cost to you ways to invest for your future, for example maybe designing yellow/black stripe kits with coordinating cables for bikers is of interest? I think there is market you can exploit...

[christian]

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.Yes, yes, a thousand times yes.

[rccardr]

Dave- First off, disclaimer: I'm not a financial planner, broker, etc. But I do manage a $70+ million 401k plan for my employer as well as several family trust arrangements, so I have quite a bit of exposure to the practical side of the retirement/investment world.

Prudential is a great company. We use them as our record keeper for the 401k and they do an excellent job. Their commercial products such as the Guaranteed Income Fund (never lose principal, currently pays 2.25% net of fees) are excellent. So if you want to have an annuity as ONE component of your overall retirement strategy, they are certainly one of a handful of companies that would fit the bill as likely to be around in the long term.

However, $100-140K in annuity principal at a 5% NET draw rate before taxes (and I have to question where the fees are coming from with that high of a GDR) will only give you $5,000-7,000 per year in income. It will be much less after taxes. That's $416-$583 per month (again, before taxes). So while it sounds like a lot of principal today, it's not going to pay for much of, well, anything ten years from now.

You like your broker, and Jones has a good reputation. But I'd look into wealth management companies in your area, find a reputable financial planner who is fee-based, and have a serious discussion about your assets and what you'll need in order to retire.

[yngpunk]

. . .
My central question remains. Based on the info I have about the fund . . . is there anything I could tell him I want to do instead with that chunk of cash that would have equal return guarantee and equal security for my original investment? If not, then it might be worth it to me to pay those fees over time.


Only you can decide if the fees are worth the return guarantee and security that the investment product offers and how solid is that guarantee. For some it is, for others it isn't, and for the balance, they just don't know or care. In the end, you need to decide if that investment product is right for you based on your own research and what you're willing to pay for your "peace of mind"

Good luck.

P.S. Let me know if you want to talk about buying a bridge that I have for sale....:)

[J.Greene]

Dave, there is a lot of misunderstanding here and inability to understand what these things do and how they do it. That's a good reason to be cautious in itself, because they are difficult to understand at times. Also, those of us in the financial industry who know these investments can't comment with our advice because of industry regulations, or we can't comment without being in a violation. PM me for my number if you want to chat for 5min. You will have the info you need to sit down with your Rep or any financial planner local to you who you may work with.

[BumbleBeeDave]

This is pretty much it....he's netting 3.14% (his part of the Pi?)...its much better return than bonds/money market/savings accounts at the moment but not nearly as good as a decent mutual fund....

the trade-off is always risk/reward...I don't know about your personal situation, I wouldn't trade out of something to put into this one. If that's what this broker is suggesting, then you need a new broker as he's 'churning' you for fees. If you have a butt-load of cash just sitting somewhere that's you're rainy-day fund that you just can't see losing, then it might be an option...but just be aware its not a growth/income strategy...its a minimal risk strategy.

That being said...I'm not broker/advisor/tax attorney --- just some guy on the internet. Good luck!

I don't agree that I'm being churned, but this puts the original question in good perspective. It is a minimal risk strategy, and so it sounds like some of the questions I should ask an independent CFP is how much security can mutuals really offer and is a 3.14% return really good in comparison to the fees being charged.

BBD

[dekindy]

. . . and I truly appreciate that and understand why some might hold them.


My central question remains. Based on the info I have about the fund . . . is there anything I could tell him I want to do instead with that chunk of cash that would have equal return guarantee and equal security for my original investment? If not, then it might be worth it to me to pay those fees over time.

As I'm understanding it, let's say I invested, for example, $100k in the annuity, let it sit for ten years till it grows to $140k, then take 5% per year out each year. If I live for more than 20 years, I get some or all of my fees back because part of the guarantee is that I keep getting 5% of the ten year maturity amount for as long as I live, even if that's longer than 20 years and they end up paying me out of their own pocket. After 20 years I will have withdrawn all my money and there will be no death benefit for my children, but there wouldn't have been any anyway if I took 5% of my original investment out every year.

But if I live past age 85 I end up getting free money from Prudential every year until I die. Or at least that's the appearance. If that's accurate, then maybe it's worth it to me to pay the fees in return for the security and guaranteed growth. If there's a "Gotcha!" in there, I'm looking for what it is or who can tell me what it is.

BBD

If you review my previous post, you are generally following the guidelines that I specified to compare the variable annuity to an alternative, safe strategy.

If you are concerned about your children receiving a benefit in case of death before life expectancy, a 20-year term certain annuity, which means it pays a minimum of 20 years if you die before the end of that term, would address that.

The gotcha is that the time frame you are referencing is long term and would lend itself to a more aggressive approach. Suggest that you consider at a minimum a guaranteed strategy that would return your original investment at the end of the term and invest the remainder in a well managed growth and income(100% stock) or blend fund(bonds and stocks where the manager determines the mix as well as the investments) oriented toward growth and income for the balance. A 50/50 blend of guaranteed investments and growth and income stock funds would be appropriate also. Or you could invest in Vanguard Wellesley Income that has a fixed mix of 1/3 stocks and 2/3 bonds with a very long track record and solid management.

The Certified Financial Planner could analyze your situation and determine how much risk you need to take. If you have enough assets that allow you to invest in a conservative strategy and still realize your goals that is the way to go. I am a firm believer in never taking more risk than you have to. Conversely, if you need high returns to have a decent retirement then you consider 100% growth and income stocks.

Sounds like you need some independent, professional analysis, or at a minimum utilize some basic financial calculators or some do it yourself basic financial software to put your picture in perspective.

I used to be a CFP and CPA/PFS. My former business partner has designed an inexpensive DIY program. You can view it http://www.yourfinancialwatchdog.com/. Or utilize something similar that includes a basic financial software that integrates Social Security and any other retirement assets you have

[BumbleBeeDave]

This is something I need to remember. I'm essentially betting I will live a long time.

I think that bumblebee thing would be an extremely limited market! :p

Dave

cant really add much more other than to reinforce the notion that annuities are laden with fees and are not designed to really benefit you unless you live well past the average male age.
....
In my opinion there are much better and less cost to you ways to invest for your future, for example maybe designing yellow/black stripe kits with coordinating cables for bikers is of interest? I think there is market you can exploit...

[BumbleBeeDave]

For those who encourage wise due diligence, careful research, thoughtful questions, and a general prudent perspective, KUDOS.

I'm striving to do the due diligence. Mainly looking for suggestions on research avenues and what thoughtful questions to ask and who to ask them to.

BBD

[Gummee]

Also, those of us in the financial industry who know these investments can't comment with our advice because of industry regulations, or we can't comment without being in a violation.

This.

Those that are offering their advice in this thread are typically not professionals in the business.

Just like bicycle frames, one size does not fit all.

M

[BumbleBeeDave]

. . . and thanks!

BBD


My former business partner has designed an inexpensive DIY program. You can view it http://www.yourfinancialwatchdog.com/. Or utilize something similar that includes a basic financial software that integrates Social Security and any other retirement assets you have

[BumbleBeeDave]

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.

The index fund might not offer acceptable risk, but I see your point about significantly less money after I retire.

BBD

[BumbleBeeDave]

Dave- First off, disclaimer: I'm not a financial planner, broker, etc. But I do manage a $70+ million 401k plan for my employer as well as several family trust arrangements, so I have quite a bit of exposure to the practical side of the retirement/investment world.

Prudential is a great company. We use them as our record keeper for the 401k and they do an excellent job. Their commercial products such as the Guaranteed Income Fund (never lose principal, currently pays 2.25% net of fees) are excellent. So if you want to have an annuity as ONE component of your overall retirement strategy, they are certainly one of a handful of companies that would fit the bill as likely to be around in the long term.

However, $100-140K in annuity principal at a 5% NET draw rate before taxes (and I have to question where the fees are coming from with that high of a GDR) will only give you $5,000-7,000 per year in income. It will be much less after taxes. That's $416-$583 per month (again, before taxes). So while it sounds like a lot of principal today, it's not going to pay for much of, well, anything ten years from now.

You like your broker, and Jones has a good reputation. But I'd look into wealth management companies in your area, find a reputable financial planner who is fee-based, and have a serious discussion about your assets and what you'll need in order to retire.

The broker puts it in terms of money return per month after retirement and with the amount I'm investing it would be more than this. But your point is well-taken. It's not really THAT much unless i haveseveral other sources of income per month to add to it.

I think the fee based CFP is a good idea and I'll try to find a good one around here. It will be valuable to have the input from somebody who doesn't have skin in the game.

BBD

[BumbleBeeDave]

PM me for my number if you want to chat for 5min. You will have the info you need to sit down with your Rep or any financial planner local to you who you may work with.

PM sent.

BBD

[josephr]

I don't agree that I'm being churned, but this puts the original question in good perspective. It is a minimal risk strategy, and so it sounds like some of the questions I should ask an independent CFP is how much security can mutuals really offer and is a 3.14% return really good in comparison to the fees being charged.

BBD

Disclaimer --- I'm not a broker/financial advisor....I just play one on the internet. :)

I'm just suggesting the 'churning' thing simply because I've no idea where the money that's going into this fund is coming from (nor do I want to know). If you have a large amount of cash in your mattress that you can't really see risking, an annuity may be a good option. But I'd really have a hard time with an advisor suggesting I move money from some type of mutual fund to an annuity...

nothing says you have to decide right now, right? you've got time to research, consider, weigh, evaluate, munch-on, mull-over, investigate...
Joe

[54ny77]

bbd, just be sure to read the fine print. surrender fees are your enemy, in case you need liquidity (you may be healthy today, but something catastrophic can change your needs in blink of an eye). front load and annual fees also eat into things. i found out about something a scumbag annuity salesmen put one of my family members into within the construct of the annuity vehicle, and it was so inappropriate and just plain stupid, i wish i'd have gotten wind of it earlier. try as i did to unwind, including legal action, the contract was the contract and there was no written record of what was said or advice given. the slimiest of 'em aren't finra-licensed, which means they can skate from firm to firm without being slapped or lose their ability to be employed in the industry, and the public has no way to dig into records of vilations (finra broker check). at minimum, ask your annuity salesman if he's got a bunch of finra licenses (6, 7, 63, etc.). if he/she doesn't, i'd say run.

hey ameriprise, FU to kingdom come and then some.

[Mr. Pink]

This article is about mutual funds, but, illustrates how low expenses in any form of investment can trump higher returns in many cases.

http://www.nytimes.com/2014/01/12/business/mutfund/in-fund-expenses-tenths-of-a-point-mean-a-lot.html

"In an article last year in Financial Analysts Journal, William F. Sharpe, a Nobel laureate in economics, calculated that owners of the Vanguard Total Stock Market Index fund, a passively managed fund with annual expenses of 0.06 percent, could “look forward to having the funds saved for their retirement provide 20 percent more purchasing power” than owners of actively managed stock funds, with typical expenses of 1.12 percent."

[professerr]

My central question remains. Based on the info I have about the fund . . . is there anything I could tell him I want to do instead with that chunk of cash that would have equal return guarantee and equal security for my original investment? If not, then it might be worth it to me to pay those fees over time.

BBD

First, let me say I'm not any sort of expert or financial adviser, but all the nervousness from guys here who are about giving you advice makes me nervous too, so, you know, my thoughts on this all are worth what you're paying for it: pretty much nothing. So don't rely on it, OK? I'm just some guy on the net.

Anyway, I think verticaldoug gave you an alternative: "You can go buy Prudential Finance 5.625 6/15/2043. It is callable in 2023. Yield to call is 5.417%. After the call, it resets to a US 3Mth + 392 bps." If I understand this correctly, this is a basically bond that pays 5.625 percent income until 2023, at which point the income resets to 392 bps above the 3 month Treasury bond rate and/or they can choose to repay you the principal. This income (which is greater than your annuity pays) and the principal appear to be guaranteed by the equivalent outfit offering you the annuity, without the 1.8++ annuity fees.



As I'm understanding it, let's say I invested, for example, $100k in the annuity, let it sit for ten years till it grows to $140k, then take 5% per year out each year. If I live for more than 20 years, I get some or all of my fees back because part of the guarantee is that I keep getting 5% of the ten year maturity amount for as long as I live, even if that's longer than 20 years and they end up paying me out of their own pocket. After 20 years I will have withdrawn all my money and there will be no death benefit for my children, but there wouldn't have been any anyway if I took 5% of my original investment out every year. BBD

With the annuities I've seen you continue to pay the fees as long as you hold the annuity, so in ten years when you start withdrawing the money, you'll still have to pay fees. It wasn't clear to me whether the fees came out of your 5% or were on top of it (probably it is the latter), but in the annuities I've seen that money doesn't come from their pocket: it comes from the principal you've deposited and you will deplete this principal to the extent it doesn't grow to match these withdrawals. In the annuities I've seen you can choose what sort of investment your deposit is used to purchase (typically conservative mixed portofolio mutual funds with fairly high expenses), but if these investments don't grow more than 5% plus fees, then you just draw down on the principal. I've oversimplified this a bit to fit it in the internet, but that's my recollection of the variable annuities I've seen.

Since the principal you've deposited would be invested in some mutual fund type investment from a selection they offer -- it won't just sit there -- generating income and/or appreciating in value, odds are it will take far more than 20 years of 5% payments to use it all up (assuming you actually hold the annuity for that long -- I've seen annuities rolled over and over and over, generating new fees...). So after 20 years it is unlikely you "will have withdrawn all my money and there will be no death benefit for my children". In the mean time, you would have been paying 1.8++ percent in fees all this time to basically invest in some mutual fund that you could have bought anyway outside of an annuity, or you could purchase the bond suggested by verticaldoug (in either case, without 1.8++ in annuity fees). I'm not saying annuities are always worse for you. I can think of scenarios where they are better than, say, a 100% index stock fund (e.g. the stock market tanks for more than a decade, like in Japan) or even verticaldoug's bond suggestion (e.g. the stock market soars, in which case a variable annuity's investment options can allow you to capture some of this equity upside in the way a verticaldoug's bond won't). I am saying you pay a LOT for protection from these sorts of scenarios.

Finally, I suggest you read A Random Walk Down Wall Street, if you've not done so already. It is really a quick read by an author with unassailable credentials, and even if you're not convinced you'll walk away with a much greater fluency in financial stuff.

Whew, I need a break. Back to work.

[malbecman]

Vanguard has a relatively new fund called the Managed Payout Fund that seeks to payout 4% per annum with only a 0.43% fee. They have the usual statements about investments being risky, may not achieve its objectives, etc but it might be a good part of someone's portfolio who didnt really want to roll their own.

https://personal.vanguard.com/us/whatweoffer/retirementincome/funds-for-income


They also have a section on how to achieve income in retirement:

https://investor.vanguard.com/what-we-offer/retirement-income/overview

It even includes some annuities which might be useful to the OP for comparison's sake. :cool:
(edit, looks like you'll need a quote for the annuities)

[veloduffer]

I don't think you should look at annuities as an investment vehicle, but as an insurance policy with some upside potential. You are essentially insuring against market volatility and in the worst case having to sell assets at low prices to meet bills.. It's a type of catastrophe policy, much like flood and fire. Because that coverage is expensive, annuities tend to lag the market, particularly over a long period.

You are already invested in the market, so it sounds like you want to moderate your risk. An annuity may be the right choice if it helps you meet your risk tolerance and you can sleep at night.

[Louis]

Come on, Dave, don't be a wimp. You don't need any of that Modern Portfolio Theory stuff ( Wiki MPT link (http://en.wikipedia.org/wiki/Modern_portfolio_theory) )

Put all your assets in the upper-right-hand-corner of the plot. In a couple years you can be just like J Howard Marshall ;)

http://upload.wikimedia.org/wikipedia/commons/e/e1/Markowitz_frontier.jpg

http://cdn.sheknows.com/articles/2011/06/anna-nicole-smith-j-howard-marshall.jpg

[54ny77]

Consider the FUBAR scenario: annuities are only as good as the credit risk of the entity that writes them. AIG almost going down is a pretty good example of that. Not to say that Pru's going away anytime soon, etc., but consider that many annuity sellers are LifeCo's that were traded to a private equity vehicle. Sure the state insurance regulators have a say in that and approving risk capital requirements, but....really? I'd rely on that guidance (or risk analysis) about as much as I do the mainsteam media for accurate news. There are a bunch of ways to transfer risk (credit, rate, etc) that an annuitant has no way of knowing or evaluating.

In other words, roll the friggin' dice and hope for the best.

[Mr. Pink]

Or, insurance companies are just upper crust gamblers. Sometimes you win, ........

AIG didn't lose. The American taxpayer covered their bets.