Fixed Index Annuity

[pepperbegs]

Someone in a bank was recommending I consider putting some money into a fixed index annuity.

Upside=no risk, no fees, and participate in market gains without losing on market losses.

Downside=must commit money for a least 8 years, upside is capped at something like 12%, and possible tax penalties for early withdrawals.

I'm rapidly approaching sixty and I would like to start setting things up for retirement.

Does anyone have experience with fixed index annuities?

 

[kranky]

Here's my take on it: don't do it.

Annuities are intentionally made complex because it keeps customers from understanding exactly how enormous the fees are. If they tell you there are no fees, all that means is they call it something else, but you can be sure they are making money no matter what the market does.

"Oh, there are no fees at all."
Expense charge?
"No, no expense charge."
Commission?
"There are no commissions."
Surrender charge if I want out in less than 20 years?
"Uh... well, there are no fees!"

The ONLY type of annuity I would consider is a Single-Premium Immediate Annuity (SPIA) because it is simple, easily understood, and you can comparison shop for them.

With an SPIA, you hand over a chunk of money, and they start paying you monthly, guaranteed until you die. There are tweaks available - second-to-die, inflation rider, etc. but the basic concept is the same.

And with an SPIA, you can buy from a place like Vanguard where the fees are very low.

I'm not suggesting an SPIA is right for you, but I know what the bank is recommending is almost certainly not in your best interest.

Do you have a 401k? IRA?

 

[sactoking]

There will be people posting right after me (and maybe before) who will say "NEVER buy an annuity". They're wrong, annuities do have uses. However, without a comprehensive examination of your financial condition it is impossible to say whether you fit one of the (limited) scenarios where annuities can be truly useful. Compounding this, annuities are often complex and confusing.

My advice: if you really want to pursue an annuity do so only with a for-fee adviser (as opposed to a commission-based adviser) or with a nonprofit adviser. Barring that, the old adage of "Never invest in something you don't understand" would apply.

 

[pepperbegs]

Thanks for the input.

This is the second time one of my banks have touted me toward some kind of annuity product. Is it because it gives them control of your money for a long period?

I did tell the adviser that I was leery of stocks until the Euro situation is resolved.

I do have a Roth and am vested in a defined benefit retirement plan.

 

[sactoking]

Yes, there is a temporal aspect to it. Deferred annuities often have quite long accumulation periods in which the bank/insurer can profit off of the uncredited interest earned.

Then there's also the fact that many annuities are rife with various fees, charges, and commissions that an investor who hasn't planned properly will likely trigger some sort of extraneous fee or fees at some point.

Add in the fact that annuities are, in certain respects, a risk-less product for the insurer (given separate accounts treatment and the law of large numbers) and many banks/insurers push them quite heavily, often to the purchaser's detriment.

 

[sjwaste]

I always heard "no annuities" too. But today I started doing some research. I want to put a small amount in trust for my soon-to-be-born daughter to have for retirement. A variable annuity seems like a perfectly good way to grow $10k or so long term, tax deferred.

 

[DaveSimmons]

I'm rapidly approaching sixty and I would like to start setting things up for retirement.

I'd put the money into a Vanguard Target <year> fund instead. Pick a year that gives you the % of bond funds that you're comfortable with now, and it will increase over time as you get closer to retirement.

If the bank is pushing that annuity, the chances are 99.9% that they make money on it directly or indirectly, and that the total hidden expenses you're paying are much much higher than with a Vanguard index fund, or Target <year> which is just a fund of index funds.

I always heard "no annuities" too. But today I started doing some research. I want to put a small amount in trust for my soon-to-be-born daughter to have for retirement. A variable annuity seems like a perfectly good way to grow $10k or so long term, tax deferred.

Have you maxed out your own 401k and Roth retirement savings? I'd do that first since they can immediately (Roth) or eventually (401k) go into low-expense stock index funds. Chances are good the annuities you're looking at have much higher fees and expenses and/or much lower expected returns over decades.

I'd also invest in college credits or similar education savings plans instead, but maybe you've found an annuity type that isn't a scam, besides the SPIA that kranky recommended.

 

[sjwaste]

Have you maxed out your own 401k and Roth retirement savings? I'd do that first since they can immediately (Roth) or eventually (401k) go into low-expense stock index funds. Chances are good the annuities you're looking at have much higher fees and expenses and/or much lower expected returns over decades.

I'd also invest in college credits or similar education savings plans instead, but maybe you've found an annuity type that isn't a scam, besides the SPIA that kranky recommended.

I want to park $10K as a one time investment for my daughter (due in a few weeks), so while I'm not maxing out my own retirement savings, it's still something I want to do. I'm looking at Fidelity's VA offerings, since all of my retirement, brokerage and even cash management is parked there anyway (their cash accounts are awesome, without any fees). The fee structure is fairly simple - their fund fees apply (most Fidelity funds offered for the VA are under 1% expense) plus an annual fee of 0.25%. Depending on the fund subaccounts, I can still get out for under 1% total, which I don't think is a bad deal in the VA world. Plus, they have a few target funds, so I could park the money and forget it.

I'd be putting this VA in a spendthrift trust with disbursements beginning sometime after age 59 1/2 (for tax reasons, as best I understand them, I just started researching). Basically, I'm thinking that if I can get 10% returns (on average), she'd have about 5M for retirement (about 200k in today's dollars?). I'm betting on inflation staying under control and tax treatment not changing significantly, but it'd be nice to provide my kid with that - it's probably not enough to fully retire on, but if she makes good choices, it'd a nice supplement.

If I'm not mistaken, you're active on FWF as well and know a whole lot more than me. Do you think I'm better off doing something else? Would it be better to just use a brokerage account and pay the taxes as I go? I haven't yet researched how capital gains treatment works in trust, or if it's better than a VA (tax deferred) over a 60 year horizon. I'm just a noob lawyer that can handle creating the trust and my own basic finances

 

[DaveSimmons]

No, I'm not on FWF but you might remember me from tossing my two cents into other stock / retirement threads here. Either that or from such films as The Fantabulous Contraption of Professor Horatio Hufnagel . . . .

The fee structure is fairly simple - their fund fees apply (most Fidelity funds offered for the VA are under 1% expense) ...

That actually sounds pretty good. I'd thought this was with Shady Bank Inc. rather than a good investment company like Fidelity.

You'd come out a little better using your own retirement accounts and losing the 0.25% fee, but if this is something you really want to do and want to keep the money separate, I'll stop trying to talk you out of it

OP should still run away from his bank's investment advice though.

 

[pepperbegs]

I'd put the money into a Vanguard Target <year> fund instead. Pick a year that gives you the % of bond funds that you're comfortable with now, and it will increase over time as you get closer to retirement.

If the bank is pushing that annuity, the chances are 99.9% that they make money on it directly or indirectly, and that the total hidden expenses you're paying are much much higher than with a Vanguard index fund, or Target <year> which is just a fund of index funds.



Have you maxed out your own 401k and Roth retirement savings? I'd do that first since they can immediately (Roth) or eventually (401k) go into low-expense stock index funds. Chances are good the annuities you're looking at have much higher fees and expenses and/or much lower expected returns over decades.

I'd also invest in college credits or similar education savings plans instead, but maybe you've found an annuity type that isn't a scam, besides the SPIA that kranky recommended.

Thanks for the ideas. I have my Roth at Vanguard and have had no problems.

I would basically like to stay risk adverse for a while. A target fund with Vanguard might be the ticket.

 

[Tech-Head]

Someone in a bank was recommending I consider putting some money into a fixed index annuity.

Upside=no risk, no fees, and participate in market gains without losing on market losses.

Downside=must commit money for a least 8 years, upside is capped at something like 12%, and possible tax penalties for early withdrawals.

I'm rapidly approaching sixty and I would like to start setting things up for retirement.

I don't even know where to being. Just a terrible place to put your money.
First of all that bank employee is a salesman -- not someone who legally works for you. NEVER go to a salesman to personalized advice on selecting investments or planning your financial future.
The risk is that you're putting all of your eggs in one insurance company basket. The bank salesman and the insurance company are not doing this for charity. Your participation rate is calculated by subtracting all of the expenses, lavish commission paid to the bank salesman, etc. In other words it is not without fees.
Did this salesman tell you that your gains will be taxed at a higher rate? No.
Did this salesman tell you that you can't "rebalance" an index annuity? No.
It's very easy to beat an index annuity.
http://www.yourinvestmentadvise.com/annuity-1.html

If the bank is pushing that annuity, the chances are 99.9% that they make money on it directly or indirectly

They make huge commissions! If the surrender period is 8 years then they are making about 7% of what you invest. Then they earn a 1/4% "trailer fee" each year that you remain invested. Pretty lucrative... for THEM!

Please don't bump old threads
-ViRGE