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

[MULTIZ321]

5 Ways Fixed Index Annuities Are The ''Swiss Army Knife" Of Retirement Planning.

5 Ways Fixed Index Annuities Are The “Swiss Army Knife” Of Retirement Planning

Could your retirement portfolio benefit from a fixed index annuity? Read here for more!

www.forbes.com

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Richard

 

[Timeshare Von]

I'm glad I did a search here on TUG on fixed index annuities (FIA), as David & I explore this as a possible retirement/investment strategy.

All of the threads & articles are dated (this one from 2020 is the most recent). I'm curious what people are thinking today and how their experience has been recently. I know it's easy to see "great returns" now because the indexes have been strong in recent years (and the past is not necessarily a predictor of the future) . . . but for us, a FIA seems to be a wise (and conservative) investment option.

 

[kwelty]

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Clark Howard is my go to source for personal finance and the below article tells why he considers annuities to be a poor choice.
"Money expert Clark Howard is passionate about many financial topics. But it’s hard to find something that gets him more riled than annuities; he considers “annuity” to be a curse word."

What Is an Annuity, and Why Does Clark Think They Stink?

An annuity is a confusing blend of insurance and investment products that are full of fees and sold in undesirable ways for big commissions.

clark.com

 

[Brett]

I'm glad I did a search here on TUG on fixed index annuities (FIA), as David & I explore this as a possible retirement/investment strategy.

All of the threads & articles are dated (this one from 2020 is the most recent). I'm curious what people are thinking today and how their experience has been recently. I know it's easy to see "great returns" now because the indexes have been strong in recent years (and the past is not necessarily a predictor of the future) . . . but for us, a FIA seems to be a wise (and conservative) investment option.

yes, be aware of annuity advertising because they carry large commissions and can be complicated but annuities can be a part of financial retirement planning.
I've been considering a fixed "single-premium immediate annuity" (or SPIA) for several years but haven't actually bought yet.

I started my annuity research with an annuity estimator from Schwab - scroll down the page. You don't have to fill in personal information, just dates and amounts
https://www.schwab.com/annuities/fixed-income-annuity-calculator

 

[VacationForever]

Don't buy any annuities with "variable" or "index" in the description. Those annuities come with high fees which go to the company and agents, taking about 3% off the gains per year. Instead look for MYGA (Multi-Year Guaranteed Annuities), Fixed Income Deferred Annuities (I have 2 term ones), or SPIA (Single Premium Immediate Annuities). These annuities pay the brokers one-time fee (insurance companies pay them), and after that the guaranteed returns can be calculated. My 2 fixed income deferred annuities have an internal return rate of >5.25% per year over the life of the term.

 

[Talent312]

My 2 fixed income deferred annuities have an internal return rate of >5.25% over the life of the term.

Congrats...
That's better than investment grade bonds and most other income products these days.

 

[Carolinian]

Annuities that are generally available are dollar denominated, and the dollar's buying power is declining, and the decline is likely to sharpen with the govenrment spending and debt we are accumulating. In the last three years, the buying power of the dollar has declined by about 20%. If I look back to when I was in high school, it has declined 90%. A dollar now buys what a dime did then.

The best hedge against a declining dollar is hard assets, and the best one of those we have found is rental residential real estate. In the last four years the market value of our properties has doubled and our rents have increased 40%. We also have a good stockpile of precious metals for diversitication, and that has also gained significantly against the dollar but does not produce an income stream.

If one goes with annuities, I wonder if there are any available denominated is more solid currencies like the Swiss franc or Norwegian kronor, countries with much much better budget and debt situations than the US. I remember when I was in high school and ran a mail order foreign coin business. At that time the Swiss franc was worth 23 US cents and the British pound $2.80. Now both are a little over $1.00. meaning that while the pound has declined substantially against the dollar, the Swiss franc has gained substantially on the dollar. Actually, all three currencies have declined in buying power. It is just that the Swiss franc has declined a lot less than the other two.

 

[sue1947]

I'm not a fan. Buy insurance from insurance companies, but not investments. The insurance companies are in the business of making money. There are costs involved like salaries and advertising and those costs are part of your purchase price. Cut out the middle man and create your own annuity where ALL of your money is working for you, not just the portion left over after you paid the commission and other fees. You take on more risk, but you pay heavily to pass that risk onto the insurance companies who will reduce the rate of return based on what they expect the market to return.

Put the same amount of money in a low cost (like Vanguard) index fund and set it up to make set periodic payments of any type you want. There are lots of online calculators to help figure out how long your money will last based on the payment level. The end result; you are in control of your money and can end it or reduce it or pause it at any time without surrender fees etc.

 

[Brett]

I'm not a fan. Buy insurance from insurance companies, but not investments. The insurance companies are in the business of making money. There are costs involved like salaries and advertising and those costs are part of your purchase price. Cut out the middle man and create your own annuity where ALL of your money is working for you, not just the portion left over after you paid the commission and other fees. You take on more risk, but you pay heavily to pass that risk onto the insurance companies who will reduce the rate of return based on what they expect the market to return.

Put the same amount of money in a low cost (like Vanguard) index fund and set it up to make set periodic payments of any type you want. There are lots of online calculators to help figure out how long your money will last based on the payment level. The end result; you are in control of your money and can end it or reduce it or pause it at any time without surrender fees etc.

Schwab has the same type of program - they call it "intelligent portfolio" https://www.schwab.com/automated-investing/retirement-income

But it's not quite the same as an annuity which can be designated/funded to last a beneficiaries lifetime

 

[wjpennington]

Annuities are attractive to people with zero tolerance for risk and limited knowledge of investing. Ironically, because annuities are very expensive, those same people, with a professional financial advisor using a proven wealth management firm, would be far better off financially in virtually every scenario. The bottom line is most people buying annuities are being taken advantage of, which is unnecessary with better retirement planning.

The insurance company that issues the annuity that is invested in the market, not you. Your returns are capped, so you miss out on market highs, but pay huge fees. You face massive surrender fees in addition to lack of flexibility and control. The high commission on annuities is why they are pushed so hard by predatory non-fiduciary advisors. The true beneficiary of is the salesperson. Maybe if you have zero impulse control and cant be trusted with money, an annuity might be for you.

 

[WaikikiFirst]

Never bought an annuity. Never looked into them much. This statement that the return of Index Annuities are somehow "tied to" the return of the SP500 leaves me with one simple question: Why not roll your own annuity?

Buy SPYs. Sell OTM calls on it over & over & over again. If SPY has risen enough that it will be Called from you, cover the call and sell another OTM one.
I have not read that this is exactly what the insurance company does, but it sure seems like the simple way to get there. It would be harder and less accurate to "get a return based on the SP500" by doing anything else than using THE SP500 and its options and its futures.
Could also use puts. google put-call parity, but then we'd spend more time discussing risk of exercise

Trading costs doing that are minimal. By choosing how far OTM & how far out til expiry the options are you can target a wide range of risk vs return, without any of these caveats about insurance companies (A) charging an arm & a leg and (B) changing terms as they see fit.

 

[Brett]

This Wall Street Journal financial reporter was going to buy annuities then something happened

https://humbledollar.com/2020/08/risking-my-life/

 

[Timeshare Von]

Thanks for the insight and opinions! I have of course done my due diligence and research, understanding each product is different and one size doesn't fit all. When it was all said and done, we opted not to make any changes in our retirement investment game plan. Some of the "features" which had us inclined to go in this direction, did in fact have some pretty high fees for the rider(s) to include them. Additionally, there was a lot of fine print that was glossed over totally, requiring me to ask about it . . . and find "the catch" in the contract. "Too good to be true" was the case . . . often I felt like maybe I was dealing with a timeshare salesman. <<ARGH>>

 

[TolmiePeak]

Thanks for the insight and opinions! I have of course done my due diligence and research, understanding each product is different and one size doesn't fit all. When it was all said and done, we opted not to make any changes in our retirement investment game plan. Some of the "features" which had us inclined to go in this direction, did in fact have some pretty high fees for the rider(s) to include them. Additionally, there was a lot of fine print that was glossed over totally, requiring me to ask about it . . . and find "the catch" in the contract. "Too good to be true" was the case . . . often I felt like maybe I was dealing with a timeshare salesman. <<ARGH>>

Timeshare salespeople that are good migrate into financial management. It is more lucrative and there are more people to fleece.

 

[Brett]

Thanks for the insight and opinions! I have of course done my due diligence and research, understanding each product is different and one size doesn't fit all. When it was all said and done, we opted not to make any changes in our retirement investment game plan. Some of the "features" which had us inclined to go in this direction, did in fact have some pretty high fees for the rider(s) to include them. Additionally, there was a lot of fine print that was glossed over totally, requiring me to ask about it . . . and find "the catch" in the contract. "Too good to be true" was the case . . . often I felt like maybe I was dealing with a timeshare salesman. <<ARGH>>

yeah, people selling timeshares and annuities may have some similarities

 

[VacationForever]

yeah, people selling timeshares and annuities may have some similarities

Again, it's a broad stroke to paint about "annuities". Some types are bad and some types are good.

 

[Sandi Bo]

yeah, people selling timeshares and annuities may have some similarities

Boy do I agree with that!! I ended up in a MESS with my stepmothers things (I am POA). She has 7 annuities. She is 93 and has done nothing with any of them but 1 - only 1 is an IRA and so she had to take an RMD. So I knew about that one (because of the 1099-R she receives (I do her taxes).

We don't have any annuities - or life insurance for that matter. We had term policies that we cancelled when the house was paid off / kids were out of school. We've pretty much figured we need to finance/plan for our own retirement. Neither of us have pensions.

These annuities, my lord. 7 annuities, 3 different companies, the policies at one company have 'bonuses', the other 2 companies make no sense to keep the policies. Unfortunately I listened to a financial advisor (I entrusted to help me with these because I knew nothing about annuities). He recommended surrendering everything. When I got the checks and called them to review amounts, I had forfeited bonuses by taking the cash value. Very thankfully, I am able to reinstate them (one time for the life of the contract). It cost a lot of my time. I've also learned alot!!

And my latest thoughts have been - nope, never would I own a timeshare or an annuity - were it not for my father/step-mother. It feels very similar (sleazy) dealing with both. Then again, I would not know all these awesome people on TUG if I hadn't inherited timeshares. Now I can say the same for annuities!

I don't think you will meet a more conservation person than my step-mother. Born in 1931, on a farm, in the dust bowl, start of the depression. One of her policies has 1/2 the money in guaranteed interest of 3%, the other half is in the market with the possibility of earning 3.1% (and if I surrender that half of the money before Nov 20, she forfeits this years interest). How's that for risk taking!!!

These caps! OK, I'll stop....

 

[Brett]

Boy do I agree with that!! I ended up in a MESS with my stepmothers things (I am POA). She has 7 annuities. She is 93 and has done nothing with any of them but 1 - only 1 is an IRA and so she had to take an RMD. So I knew about that one (because of the 1099-R she receives (I do her taxes).

We don't have any annuities - or life insurance for that matter. We had term policies that we cancelled when the house was paid off / kids were out of school. We've pretty much figured we need to finance/plan for our own retirement. Neither of us have pensions.

These annuities, my lord. 7 annuities, 3 different companies, the policies at one company have 'bonuses', the other 2 companies make no sense to keep the policies. Unfortunately I listened to a financial advisor (I entrusted to help me with these because I knew nothing about annuities). He recommended surrendering everything. When I got the checks and called them to review amounts, I had forfeited bonuses by taking the cash value. Very thankfully, I am able to reinstate them (one time for the life of the contract). It cost a lot of my time. I've also learned alot!!

And my latest thoughts have been - nope, never would I own a timeshare or an annuity - were it not for my father/step-mother. It feels very similar (sleazy) dealing with both. Then again, I would not know all these awesome people on TUG if I hadn't inherited timeshares. Now I can say the same for annuities!

I don't think you will meet a more conservation person than my step-mother. Born in 1931, on a farm, in the dust bowl, start of the depression. One of her policies has 1/2 the money in guaranteed interest of 3%, the other half is in the market with the possibility of earning 3.1% (and if I surrender that half of the money before Nov 20, she forfeits this years interest). How's that for risk taking!!!

These caps! OK, I'll stop....

But the concept of a fixed annuity is still valid for retirement planning. My Mother had 4 annuities (state and federal, two private) and it worked out well for her, she lived to almost 100.

 

[Timeshare Von]

Thanks for the insight and opinions! I have of course done my due diligence and research, understanding each product is different and one size doesn't fit all. When it was all said and done, we opted not to make any changes in our retirement investment game plan. Some of the "features" which had us inclined to go in this direction, did in fact have some pretty high fees for the rider(s) to include them. Additionally, there was a lot of fine print that was glossed over totally, requiring me to ask about it . . . and find "the catch" in the contract. "Too good to be true" was the case . . . often I felt like maybe I was dealing with a timeshare salesman. <<ARGH>

WHEW . . . what an informational roller coaster. After having a good friend who used to sell insurance and annuities look at everything, it appears I misinterpreted a couple of things. With clarification & written reassurances from the sales agent involved, we ARE proceeding with this fixed index annuity.

With a 20% premium bonus, 1.2% fee for the enhanced benefits rider and no upper end earnings cap (with a no loss guarantee during market downturns) . . . this really is a very good policy that fits our long-term investment and retirement plans.

 

[joestein]

Annuities that are generally available are dollar denominated, and the dollar's buying power is declining, and the decline is likely to sharpen with the govenrment spending and debt we are accumulating. In the last three years, the buying power of the dollar has declined by about 20%. If I look back to when I was in high school, it has declined 90%. A dollar now buys what a dime did then.

The best hedge against a declining dollar is hard assets, and the best one of those we have found is rental residential real estate. In the last four years the market value of our properties has doubled and our rents have increased 40%. We also have a good stockpile of precious metals for diversitication, and that has also gained significantly against the dollar but does not produce an income stream.

If one goes with annuities, I wonder if there are any available denominated is more solid currencies like the Swiss franc or Norwegian kronor, countries with much much better budget and debt situations than the US. I remember when I was in high school and ran a mail order foreign coin business. At that time the Swiss franc was worth 23 US cents and the British pound $2.80. Now both are a little over $1.00. meaning that while the pound has declined substantially against the dollar, the Swiss franc has gained substantially on the dollar. Actually, all three currencies have declined in buying power. It is just that the Swiss franc has declined a lot less than the other two.

Property values doubled the last 4 years... what about the 15 years before that?

 

[Sandi Bo]

But the concept of a fixed annuity is still valid for retirement planning. My Mother had 4 annuities (state and federal, two private) and it worked out well for her, she lived to almost 100.

My thoughts, still lots of ignorance here, is what a shame she didn't annuitize any of her policies. I can find out now what they would pay here (annually for life) at 93 - but guessing she could have annuitized for life at 65 and done well?

 

[Brett]

My thoughts, still lots of ignorance here, is what a shame she didn't annuitize any of her policies. I can find out now what they would pay here (annually for life) at 93 - but guessing she could have annuitized for life at 65 and done well?

The policies were "annuitized" - two of the larger annuities were pension plans from State and Federal government (part of my father's pension)
She collected annuity payments for more than half a century !

 

[Timeshare Von]

WHEW . . . what an informational roller coaster. After having a good friend who used to sell insurance and annuities look at everything, it appears I misinterpreted a couple of things. With clarification & written reassurances from the sales agent involved, we ARE proceeding with this fixed index annuity.

With a 20% premium bonus, 1.2% fee for the enhanced benefits rider and no upper end earnings cap (with a no loss guarantee during market downturns) . . . this really is a very good policy that fits our long-term investment and retirement plans.

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.

 

[VacationForever]

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

 

[WaikikiFirst]

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

"If they get rejected, I ---- at my job" ... maybe the funniest scene in a hilarious film