A family member is talking to an advisor about a fixed annuity even though they don't need the payout at this time. The husband will retire with a good retirement at 57(next year) and the wife(52) will continue to work for another few years. The also have a seperate IRA and considerable $$$ in ROTH IRAs. This fixed annunity idea seems to be coming from an advisor for their loaded funds in their IRA. I suggested a 'IN-KIND-Transfer' to VG.

Advise on why not to purchase a fix annuity at 55?

Tim

Please correct me if I make the wrong assumption, but I am assuming you mean an immediate annuity, purchased for a lump sum, which provides lifetime income.

The key phrase, IMO, is "they don't need the payout at this time". Why convert a lump sum into a lifetime payout if you don't need the income? Invest the lump sum according to a balanced asset allocation, and later, when and if the funds are needed, get the immediate annuity. I am a great believer in immediate annuities, in the right conditions and when needed.

The person could drop dead tomorrow - and the heirs get zero of the lump sum and no income.

The person could have a need or desire to spend a chunk of money on something.

Each year older will also increase the income from a given lump sum.

dan

tar42:

A family member is talking to an advisor about a fixed annuity even though they don't need the payout at this time. The husband will retire with a good retirement at 57(next year) and the wife(52) will continue to work for another few years. The also have a seperate IRA and considerable $$$ in ROTH IRAs. This fixed annunity idea seems to be coming from an advisor for their loaded funds in their IRA. I suggested a 'IN-KIND-Transfer' to VG.

Advise on why not to purchase a fix annuity at 55?

Tim

Hi Tim:

A fixed annuity is often sold as a CD-like investment. Many times, they come with "teaser rates" that are a bit higher than can be obtained elsewhere, and thus look attractive. Howver, these "teaser rates" are often only good for a short time (perhaps one year) while the surrender fee might be for five or seven years (or even longer). Thus the investor is stuck with a low-yielding investment after the first year, and they can't get out without paying a large surrender fee that negates or wipes out the previous teaser rate and perhaps even some of the principal. (The surrender fee is in place to protect the insurance company's outlay of the generous commission paid to the insurance agent who sold the annuity.)

Regards,

Mel

I was hoping for a response from you.........always on target. Isn't the purchase of this investment always better(if one is going to have a fixed annuity) later in life, especially when one doesn't need the payout now?

Take care

Tim

Sorry that I didn't explain that I was refferring to a FIX IMMEDIATE ANNUITY.

Tim

An annuity (tax deferred) inside a tax deferred fund (like a Roth, IRA, 401(k), etc) is being "sold" by an advisor (salesman) so he/she can earn a hefty commission in the range of 6-8%.  NO.

You also say these are heavy load funds he/she would be selling in order to by this annutity.   NO.

Get rid of that advisor (salesman).

I purchased an immediate annuity last year upon retirement (age 59).

You don't necessarily "loose" anything if you pass in the immediate future.  For instance, the annuity I purchased is for me/wife (jointly), with a life/28 year guarantee.  If both of us pass within the next 28 years (now 27), monthly payments will go to our estate receipients.

If we live longer than 28 years, we will contine to collect.

In our case, the immedate annuity (purchased with 10% of our retirement account balance) provides a good "base" for the future.  As we grow older, we can convert more of our joint account balances to additonal immediate annuities, if we wish.

Not for everybody, but for us (with a year of getting payments) it works...

- Ron 

tar42:

I was hoping for a response from you.........always on target. Isn't the purchase of this investment always better(if one is going to have a fixed annuity) later in life, especially when one doesn't need the payout now?

Take care

Tim

 

Hi Tim:

Some folks who need the current stream of income might find the immediate annuity fits their needs (see Ron's post above). However, your family member doesn't have any need for the income stream at this time, so there's really no reason to buy an immediate annuity at this time, since they'd get lower payments for life. And, should they die relatively soon, they'd lose the entire amount they invested in the immediate annuity, unless they chose some option (joint life expectancy, period certain) that would further reduce their payments.

In this case, my suggestion would be to wait until later in life, when/if they feel they need additional income. If so, the immediate annuity payments would be much higher because of their advanced age. And if they don't need additional income, the funds could be left to their heirs, rather than to the insurance company.

Finally, there's no need to stay with their current advisor, especially one who tries to sell them an annuity when they don't have any need for the income stream. It appears he/she's only looking for the commission they'd earn. IMO, your family members could/should do the transfer you suggested to Vanguard and save lots of money that they could better use to enjoy their retirement.

Regards,

Mel

Hi Tim:

You have received good replies.  Other considerations:

1.  Currently, interest rates are very low.  Immediate fixed annuities are based, in part, on current interest rates (usually 10-year rates).  This is probably not a good time to buy a lifetime annuity if one can wait.

 2. The cost and lifetime income of immediate annuities can be very different between companies (and rates change often).  Accordingly,  it is very important to get current competitive prices.  I used www.immediateannuities.com to compare costs and company strength.  We wanted to buy Vanguard annuities, but we found two strong companies from the above website  with lower premiums (or higher monthly income). We  ended-up purchasing two annuities from them (in our early 80s).

3. All states guarantee annuities--usually up to $100,000. 

4.  This is a link to Bob's Financial Website which has good information about "Immediate Annuities in Retirement":

 http://bobsfiles.home.att.net/AnnuityLinks.html

 Best wishes.
Taylor

Thanks all for the great replies. It just confirms what I related to them. Now to get them to transfer to VG. I related to them on my experiences and great debates on different holdings when with XYZ and told them they can avoid any future contact with the advisor by letting VG reps handle the transfer(as I did).

Have a great weekend

Tim.

rebe945:

Taylor, nice link to Bob Brinkers site.  I do much self instruction from his sites. Rich

Just to be clear. I am in no way affiliated with Bob Brinker or his website:

 http://www.bobbrinker.com/

bob90245 ( Webmaster at http://bobsfiles.home.att.net/finance.html )

bob90245:

rebe945:

Taylor, nice link to Bob Brinkers site.  I do much self instruction from his sites. Rich

 

Just to be clear. I am in no way affiliated with Bob Brinker or his website:

bob90245 ( Webmaster at http://bobsfiles.home.att.net/finance.html )

Thanks for clearing that up, Bob. I had planned to do so, but I'm glad you beat me to it.

Best regards,

Mel

Hi Taylor,

May I ask how you personally decided on an annuity?

Chin

Hi Chin:

I was once licenced to sell annuities (I never did) and I have long been intrigued with lifetime annuities--the only financial instrument  that guarantees the highest  lifetime income.

Walter Updegrave of Money magazine wrote a good article about using a lifetime annuity in retirement.  The article includes a chart by Ibbotson Associates showing that a portfolio with 25% or 50% invested in a lifetime annuity has greater survivability than a portfolio without a lifetime annuity.  Here is a link:

http://money.cnn.com/2006/09/07/pf/retirement/retire0610_updegrave.moneymag/index.htm

The uninformed public think of "annuities" as a single product. This is incorrect.  There are hundred's of different type annuities, and most  have multiple variations.  I think most annuities are terrible products and are so complex that few people understand them--except the insurance company who made them complex so prospects will not know they are being fleeced.    I have an Equitable Variable Deferred Annuity Prospectus that is 176 pages! 

The immediate lifetime annuity is different. It is relatively simple to understand, variations are  few, and prices are competitive and available.  We have two Single Premium Joint Lifetime immediate annuities.  Our AVIVA contract is 4 pages; our Genworth contract is 8 pages.

I think (based on research) it is usually best to wait until 70 or 80 before buying an annuity.  If you die earlier you won't need it.  If you wait, and are in poor health, you probably won't need it either.  By waiting you get a  higher guaranteed income and  inflation is less of a problem.  Also, the taxable portion of the monthly income is smaller. We are in our early 80s.

One advantage of  annuities that is seldom mentioned is that we are not concerned about stock market fluctuation for the annuitized part of our portfolio.  We went with two companies for the safety of diversification.

A primary reason we purchased the annuities is that with a guaranteed lifetime income  we felt we could give more to our heirs now instead of having them wait until we are gone. 

:We know the time will come when we will be unable to manage our simple portfolio.   An annuity has no management responsibility (except taxes).  One less thing to spend  valuable time thinking about.

I hope this answers your question.

Best wishes.
Taylor

Taylor

A couple of added points to your great discussion of life annuities.

Every state that I've read about carries a Life and Health Guaranty fund that will protect life (including annuity) insurance holders up to $100,000, but this is typically only for fixed products For example, in Oregon, the guaranty fund specifically excludes all variable products.

Also, some states allow insurers to pass through 'extrordinary' expenses to current life annuity holders. The conditions, as I understand them, must be dire, but I suspect its there to help forego bankruptcy and the state guaranty fund from picking up the tab. Now, I've never read of this having happened, but if my understanding is correct, in states that allow insurers to do this, the lifetime annuity payment truly isn't guaranteed.

And I look at straight life annuities like I look at advertisements for eyeglasses. You've seen the ad that offers the buyer a set of frames and lenses, from their huge selection, for $99.99. But everything else is an add-on option. So by the time you're added the no-line bifocal, the lighter and tougher plastic, the UV coating, the non-polarization, the lifetime warranty, and so on......you're now into the eyeglasses you really want for $400. Simple life annuities do this through the joint survivor benefit, the death benefit, guaranteed period certain, inflation adjustments, a variable componenet, and so forth. But if the consumer has the strength to just say no, then I would agree that a life annuity could well provide the fixed income part of one's investments, providing its a strong underwriter.

BruceM

Thanks for a great explaination.......I will send this on to the couple I was referring to in the initial post.

Tim 

orygunduck:

Taylor

A couple of added points to your great discussion of life annuities.

Every state that I've read about carries a Life and Health Guaranty fund that will protect life (including annuity) insurance holders up to $100,000, but this is typically only for fixed products For example, in Oregon, the guaranty fund specifically excludes all variable products.

Also, some states allow insurers to pass through 'extraordinary' expenses to current life annuity holders. The conditions, as I understand them, must be dire, but I suspect its there to help forego bankruptcy and the state guaranty fund from picking up the tab. Now, I've never read of this having happened, but if my understanding is correct, in states that allow insurers to do this, the lifetime annuity payment truly isn't guaranteed.

And I look at straight life annuities like I look at advertisements for eyeglasses. You've seen the ad that offers the buyer a set of frames and lenses, from their huge selection, for $99.99. But everything else is an add-on option. So by the time you're added the no-line bifocal, the lighter and tougher plastic, the UV coating, the non-polarization, the lifetime warranty, and so on......you're now into the eyeglasses you really want for $400. Simple life annuities do this through the joint survivor benefit, the death benefit, guaranteed period certain, inflation adjustments, a variable componenet, and so forth. But if the consumer has the strength to just say no, then I would agree that a life annuity could well provide the fixed income part of one's investments, providing its a strong underwriter.

BruceM

All good points, Bruce. Perhaps the most important advice, though, is your final sentence about selecting a "strong underwriter", since an investor's undisturbed stream of income is inexorably tied to that insurance company's strength.

Regards,

Mel

Taylor, I was responding to your post. Also, Bruce, had some good additional thougthts. Thanks all

Tim

Thanks Taylor,

I am thinking of my mom and dad who is 39 ;), and he is 80. (notice the little winky-smiley on Mom's age)

Dad handle's the finances, and is currently not comfortable with anything over CDs. He wants to make sure the money is there for Mom.

I do need something very simple for him to consider, and guaranteed.

How much at 80 for him, and let's say around 75 for a hypothetical wife -- not my Mom of course ;), could they expect to draw from a $200,000 investment? -- that is the most they could have insured by the Gov, right?

Thanks again,

Chin

Thanks to you as well Bruce. I'll have to look at this for NC.

Chin

Hi Chin:

 How much at 80 for him, and let's say around 75 for a hypothetical wife -- not my Mom of course ;), could they expect to draw from a $200,000 investment?

You can get exact current figures from Vanguard using the link below:

http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote

That is the most they could have insured by the Gov, right?

Every state has their own rules as shown below:

http://www.immediateannuities.com/guaranty_liability/guaranty.htm

Best wishes.
Taylor

chinwhisker:

How much at 80 for him, and let's say around 75 for a hypothetical wife -- not my Mom of course ;), could they expect to draw from a $200,000 investment? -- that is the most they could have insured by the Gov, right?

Thanks again,

Chin

Hi Chin:

As Taylor pointed out, each state has its own limits (normally around $100,000), so it's advisable to buy a number of $100,000 annuities rather than one big one, since there's less likelihood of multiple companies going broke during the annuity period and needing the state's guarantee to bail them out. Kind of like spreading your money around at different banks to make sure you have FDIC insurance.

Thus, Taylor has two $100,000 policies, since he only wanted to annuitize $200,000, not because that's the limit. So, if someone wanted to annuitize $500,000, they'd probably want to have five $100,000 annuities, each from a different insurance company.

Best regards,

Mel

Thanks Taylor, and good insight Mel. I was wondering if they could do more.

After writing my last reply, I thought of all the help you two have offered over the years here, all I have put you through ;), and I think a word of gratitude is in order.

You've been good to me, and I am glad Y'all are back over this way some now.

Chin

chinwhisker:

Thanks Taylor, and good insight Mel. I was wondering if they could do more.

After writing my last reply, I thought of all the help you two have offered over the years here, all I have put you through ;), and I think a word of gratitude is in order.

You've been good to me, and I am glad Y'all are back over this way some now.

Chin

Hi Chin:

Thanks for the kind words. AFAIC, you're no trouble at all. You're both well-informed and persistent, two traits I admire. Hopefully we'll get to meet in person at some point in time.

I consider you and Bill (bilperk) to be two of the stalwarts and voices of reason on the forum. Both your and Bill's BS meters are great at sniffing out the smelly stuff and responding in a much kinder, gentler way than I'm able to.

Keep up the good work! Taylor and I will be around as long as there are investors who need help, regardless of which forum they choose to post on. You and Bill make major contributions in that area, too, so hopefully together we can make a difference.

Best regards,

Mel

Mel Lindauer:

Hi Chin:

Thanks for the kind words. AFAIC, you're no trouble at all. You're both well-informed and persistent, two traits I admire. Hopefully we'll get to meet in person at some point in time.

I consider you and Bill (bilperk) to be two of the stalwarts and voices of reason on the forum. Both your and Bill's BS meters are great at sniffing out the smelly stuff and responding in a much kinder, gentler way than I'm able to.

Keep up the good work! Taylor and I will be around as long as there are investors who need help, regardless of which forum they choose to post on. You and Bill make major contributions in that area, too, so hopefully together we can make a difference.

Best regards,

Mel

See!

After all I have put you through, I'm thinking in particular the I-bonds debate, you still come back with something like this.

But, yes, it is this knowledge and persistency I appreciate from you as well as other Diehards who have been forced out to the Bogleheads. Speaking of which, I do miss Larry too. I just don't have time to post on both boards, and the most lost sheep are here.

I guess I'll just have to go to one of your little meetings. Is it OK I show up in blue jeans and a t-shirt? Dress shirts get wrinkled in the saddle bags, and I don't think I can afford the gas in my old truck. ;o)

Chin

chinwhisker:

I guess I'll just have to go to one of your little meetings. Is it OK I show up in blue jeans and a t-shirt? Dress shirts get wrinkled in the saddle bags, and I don't think I can afford the gas in my old truck. ;o)

Chin

Jeans and a t-shirt would be fine for some of the events, Chin. Might look a bit out of place for the banquet However, knowing you, that probably would't matter one bit!

And you'd get a chance to meet and put faces on a lot of the names you're probably already familiar with (Jack Bogle, Bill Bernstein, Rick Ferri, Larry Swedroe, Bill Schultheis, Professor Ed Tower from Duke, Sue Stevens, M* Darrin, Christine Benz from M*) and, of course, Taylor and Michael, as well as about 130 others who's names you may recognize from their posts on the forums.

Diehards VII in San Diego in September is already sold out, but we'll be holding Diehards VIII in Dallas in 2009. Start saving up some gas money and invest it wisely so you won't be saddle sore when you get there! :-)

Best regards,

Mel

Mel Lindauer:

chinwhisker:

I guess I'll just have to go to one of your little meetings. Is it OK I show up in blue jeans and a t-shirt? Dress shirts get wrinkled in the saddle bags, and I don't think I can afford the gas in my old truck. ;o)

Chin

Jeans and a t-shirt would be fine for some of the events, Chin. Might look a bit out of place for the banquet However, knowing you, that probably would't matter one bit!

And you'd get a chance to meet and put faces on a lot of the names you're probably already familiar with (Jack Bogle, Bill Bernstein, Rick Ferri, Larry Swedroe, Bill Schultheis, Professor Ed Tower from Duke, Sue Stevens, M* Darrin, Christine Benz from M*) and, of course, Taylor and Michael, as well as about 130 others who's names you may recognize from their posts on the forums.

Diehards VII in San Diego in September is already sold out, but we'll be holding Diehards VIII in Dallas in 2009. Start saving up some gas money and invest it wisely so you won't be saddle sore when you get there! :-)

Best regards,

Mel

 

Hi Mel,

I was kidding, and was talking about my bike as opposed to my horse. ;o),

However, if it is going to be in Texas, I might actually consider coming down early, leave late, ride my bike, and stop buy Louisiana for some gumbo.

Still just joking, but hmmm?

Oh, and yeah, I'm pretty sure Wifey has a decent knit shirt in the black hole that has swallowed up all my good stuff. ;o),

Chin