[ 2020 ] 5 Ways Fixed Index Annuities Are The ''Swiss Army Knife" Of Retirement Planning

[WaikikiFirst]

when there is a word called "index", it is a high commission based product

Do you know the mechanics of how they try to track the index? IOW, what is actually in the annuity?

 

[VacationForever]

Do you know the mechanics of how they try to track the index? IOW, what is actually in the annuity?

In my earlier post, I mentioned that there are only a couple of types of annuities that are worth holding for fixed income - deferred fixed income annuity (term and lifetime), single premium immediate annuity and multi-year guaranteed annuity. The income stream is clearly defined, you know what you are getting each year. No gray areas.

Anything else with the word indexed or variable, it is a convulated way of trying to make money off you because there is no guaranteed income/benefits. They are typically capped at some low number, like annual growth is capped at 5% (even when market goes up 15%), and that it is protected in a down market to like 0 or -2 or whatever percentage. Then there are fees taken out to manage the account, so your 5% is now 2%, it's in those fine prints or non-print. Run!

 

[WaikikiFirst]

Got you. I'm just wondering about the inner-workings, because honestly, about these "high commission based product", it shouldn't be expensive to achieve that. It sounds like financial rocket-science I guess and the whole "match the stock mkt" would be good mkting to people who dont want to be "left out", but it just shouldn't be expensive to do. The expense is in insuring themselves against the "Black Swan" dive, but ... since nobody expects The Black Swan, it isn't actually all that expensive to insure yourself against it. I guess problem is like on Black Monday, 1987, the insurance doesn't seem to work on the fateful day.

Imagine an investment vehicle marketed as "tracking the SP500" having a net-net return of 2%/yr! Thanks

 

[Timeshare Von]

Remember that when there is a word called "index", it is a high commission based product at your expense. Every year they take at least 3 percent off your growth for commission

Not sure that this is true. The only fee accessed on the account was 1.2% . . . and there was no cap (upper ceiling) on earnings. So while the company may pay 3% commission (or whatever) . . . it wouldn't have been coming out of my personal account.

 

[VacationForever]

Not sure that this is true. The only fee accessed on the account was 1.2% . . . and there was no cap (upper ceiling) on earnings. So while the company may pay 3% commission (or whatever) . . . it wouldn't have been coming out of my personal account.

Didn't you just said that the salesperson would not put all these in writing? There are lots and lots of reports of "indexed" and "variable" annuities turning out not to be advertised. Be very careful.

 

[Passepartout]

If you purchase an annuity, be sure to check the rating of the underwriting insurance company backing it.
My 'Piece of the Rock's single premium annuities, purchased 23 years ago have been the single best retirement asset of my life.

Jim

 

[Timeshare Von]

Didn't you just said that the salesperson would not put all these in writing? There are lots and lots of reports of "indexed" and "variable" annuities turning out not to be advertised. Be very careful.

No I don't think I did. I eventually did receive the application with all of the fine print documented regarding the terms. What he was unwilling to do was run additional proformas for me, showing how this product would perform with a zero growth and a modest 2% growth.

And yes being careful has been my approach throughout this . . . and ultimately, we walked away because of what appeared to be the necessity to "fudge our assets & income" numbers to be accepted for the product being sold to us at the initial investment discussed.

 

[Timeshare Von]

If you purchase an annuity, be sure to check the rating of the underwriting insurance company backing it.
My 'Piece of the Rock's single premium annuities, purchased 23 years ago have been the single best retirement asset of my life.

Jim

Agreed . . . and had we been able to buy the product/contract at the initial level discussed without having to mess around with numbers that were not accurate, we would have proceeded. The company is rated A+ with over 125 years in business. We were confident in that aspect of the product. When it was all said and done, we are disappointed that we couldn't proceed comfortably without playing games with our numbers to be accepted.

 

[Retired2025 aka AlmostRetired]

I always thought of my IBM pension as an annuity, that was until IBM paid Prudential (50%) and MetLife (50%) to take over the obligation with a joint annuity. I now know more about how an annuity is insured if things go south with the company issuing it.

Annuities are insured by the state. Each state has a nonprofit guaranty organization that insurance companies must join. If a member company fails, the other companies in the guaranty association help pay the outstanding claims. Most states have a capped payment of $250,000. The max of any state is 500,000. If your annuity needed to be covered at 65, with a max of 250,000, you would only get 1650 a month annuity. This cap is total for your relationship with the insurance company and covers other annuities, life insurance, etc.. What, is the chance of an insurance company running into financial challenges? I would think small based on what little I know now about the future, but it is something to think about.

Just an FYI, a pension is guaranteed by the Pension Benefit Guaranty Corporation (PBGC) which covers all private pension plans. There are limits to payments but it would cover my full pension from IBM.

 

[Brett]

I always thought of my IBM pension as an annuity, that was until IBM paid Prudential (50%) and MetLife (50%) to take over the obligation with a joint annuity. I now know more about how an annuity is insured if things go south with the company issuing it.

Annuities are insured by the state. Each state has a nonprofit guaranty organization that insurance companies must join. If a member company fails, the other companies in the guaranty association help pay the outstanding claims. Most states have a capped payment of $250,000. The max of any state is 500,000. If your annuity needed to be covered at 65, with a max of 250,000, you would only get 1650 a month annuity. This cap is total for your relationship with the insurance company and covers other annuities, life insurance, etc.. What, is the chance of an insurance company running into financial challenges? I would think small based on what little I know now about the future, but it is something to think about.

Just an FYI, a pension is guaranteed by the Pension Benefit Guaranty Corporation (PBGC) which covers all private pension plans. There are limits to payments but it would cover my full pension from IBM.

yes, it's a good thing the PBGC and states insure a portion of private corporate pensions
(with financial help from the feds for underfunded pension plans https://www.pbgc.gov/american-rescue-plan-act-of-2021

 

[Carolinian]

I have yet to see an annuity dendominated in anything but US dollars, but tjere tjere are ;ole;u sp,e avao;ab;e abrpad. The prospect for the US dollar going forward is also a risk given our high debt, high deficit, end of the petrodollar, etc. In the last four years, the dollar has lost anywhere from 17% to 23% depending on which analyst you look at. Looking back further, today's dollar is worth about what a dime was back when I was in high school. Putting money longterm into something that is dollar denominated is a risk in and of itself. If you could get an annuity in something like Swiss francs, that would be better. When I was growing up, the Swiss franc was 23 cents and now it is $1.17. Yes, it has lost buying power, too, but not nearly as much as the dollar. Best of all is physical assets.

 

[Sandi Bo]

I don't know if anyone needs to hear this... but part of the motivation for dealing with these annuities today was to minimize taxing overall on the proceeds.

There were seven annuities, some in my step-mother's name and some in her trust. For those in her name, the beneficiary is her trust. At surface level, that sounds great, right?

If the annuities were surrendered today, and monies kept in (or distributed to) her trust, they would be taxed at her personal income tax level. If they are surrendered after she passes, they will be taxed at the trust rate:

personal rates:
- range 12-24% for single, up to $191K
trust rates:
- over $15,200 37%

For the annuities that we are not surrendering today, I changed the beneficiaries directly to the beneficiaries of the trust (instead of to the trust which would then distribute to those same beneficiaries). That should save some tax dollars, and also allow beneficiaries to choose how to receive their proceeds.

 

[wjpennington]

And this morning, the roller coaster ride continued. I post this follow-up (hopefully the last) so others may be enlightened and be wary if they pursue any investment product.

So when the policy application arrived electronically to me yesterday, the assets numbers for our household (DH & me) were inflated by nearly double! When I contacted the agent to let him know and to give him the correct numbers, he said he would get the revisions to me today. The email I received was to inform me that if we change (CORRECT) the numbers, there was a likelihood I would be denied the policy due to "suitability" as determined by the insurance company. While he had alluded to this last night by phone, his thought was to include the value of our primary residence . . . to which I read to him that the application clearly states "do not include primary residence" in the reported household assets.

Additionally, while the initial proforma document looks very attractive (based on the most recent 10 years indices) . . . when I asked for the numbers to be run in a "worst case scenario" (no annual growth with the 1.2% charges assessed) . . . and a very modest 2% annual growth less the 1.2% charges . . . he balked and said he would not run such additional scenarios for us.

I simply cannot get past feeling this is not above board and too slippery. While there would be options (like appealing such a determination from the insurance company) . . . the locked in terms sold to us in the presentation 3 weeks ago, and presented in the application & contract language, is changing effective tomorrow (8/29) which leads to more feelings like we need to RUSH today to get it done, but it might not go the way we expect it to if we have to appeal a denial.

I'm just done with it, and told him in writing a few minutes ago that while we appreciate his time over the past few weeks, we're walking away from it.

1 the promise of no losses and no cap on growth falls into the impossibly too good to be true category. Variable annuities are the gift that keeps on giving to unscrupulous advisors. 1.2% fee alone is a substantial cost, but I bet that was just one fee, and there were hidden baked in ones they weren't telling you about. The fact that "there is a change tomorrow" is the absolute proof that this slimeball was scamming from the start. The limited example using a great 10 year bull market run, and no other projection...Well, welcome to the world of annuities. Yes, maybe for some few people with assuredly long lives, perfect health, and plenty of other resources, a fixed annuity might be ok, for every other average Joe, the risk isn't worth it, nor the effort to weed out the swarm of bad actors looking to swindle you. It is like finding a timeshare salesman who doesn't lie; in theory they are out there, but is it worth the effort of finding them?
Go grab the bogleheads guide to investing. A simple 3 fund portfolio you can create yourself without any of these parasites will give you a far better future than worrying about annuities. Invest in the things insurance companies invest in--they pay out your annuity and still make a profit even if you live to a ripe old age. That's where you want your money.

 

[Brett]

1 the promise of no losses and no cap on growth falls into the impossibly too good to be true category. Variable annuities are the gift that keeps on giving to unscrupulous advisors. 1.2% fee alone is a substantial cost, but I bet that was just one fee, and there were hidden baked in ones they weren't telling you about. The fact that "there is a change tomorrow" is the absolute proof that this slimeball was scamming from the start. The limited example using a great 10 year bull market run, and no other projection...Well, welcome to the world of annuities. Yes, maybe for some few people with assuredly long lives, perfect health, and plenty of other resources, a fixed annuity might be ok, for every other average Joe, the risk isn't worth it, nor the effort to weed out the swarm of bad actors looking to swindle you. It is like finding a timeshare salesman who doesn't lie; in theory they are out there, but is it worth the effort of finding them?
Go grab the bogleheads guide to investing. A simple 3 fund portfolio you can create yourself without any of these parasites will give you a far better future than worrying about annuities. Invest in the things insurance companies invest in--they pay out your annuity and still make a profit even if you live to a ripe old age. That's where you want your money.

yes, it's better to "roll your own" annuity and www.bogleheads.org is a good guide but there are still valid reasons for having an annuity in retirement /estate planning

 

[Timeshare Von]

Well interestingly enough, the salesman did contact us shortly have Labor Day saying he felt he could really help us and if we were interested, he'd run a risk analysis assessment and run the scenarios that the week prior he refused to. Yeah . . . a polite "no thank you" was given to him.

 

[Timeshare Von]

Circling back to this discussion as a follow-up. Last month we did carve out roughly 20% of our total retirement next egg (traditional IRAs) and opened up a 6 year with Jackson Annuities. The product we bought was a registered index-linked annuity. As an insurance contract, it gave us the choice of how to prioritize our growth opportunities while limiting the amount of loss we're willing to take on. Like other annuities, there are steep penalties if we have to fully surrender the contract before the end of the 6 years. On the other hand, we can take up to 10%/year out with no penalty.

Since we're still relatively early in our retirement window, we feel the 6 years is a safe investment for our situation. I'm just happy that after nearly 2 years of research and meetings, we finally pulled the trigger on something that should outperform what we were doing, with no upfront or management fees.