Need some help with annuities

[DrDan]

We are trying to get our investments better focussed so retirement is a bit more comfortable and we have more time to fight the evil repukes.

Got a pitch last night for a life insurance annuity. It does look attractive offering some annual tax breaks through return of equity. It also offers bonus money when the market performs well in the previous year.

The costs though appear to be a tad high - 2.5%.

Any thoughts on annuities? variable vs fixed? costs? attractive plans? plans to avoid? scams?

[scruffy]

1. I would be cautious about annuities

They do have their place but they are often misrepresented.

The big advantage to them is that the investments grow tax-deferred until you take the money out. A nice enough benefit, but because of the higher internal fees for the annuity, you need to keep your money in there for several years before you save enough in taxes to make up for those fees. Plus, when the $$ comes out, it is taxed as ordinary income as opposed to long term capital gains treatment of stocks or mutual funds. So again, you need to have the money in there for a long time to compensate for the difference in tax treatment.

Some variable annuities come with special guarantees - for instance, that you will be able to get back all of the money you put into the annuity, even if the stock market drops. Others out there guarantee that you will be able to withdraw a certain % of the account forever, even if the stock market drops. These guarantees are relatively new and pretty much untested . .. and they are also expensive. It's a pretty good deal for the insurance companies, who are betting that there won't be a prolonged downturn of the stock market and that they won't have to actually deliver on their guarantees.

If you annuitize an annuity - or if what you purchase is an immediate annuity - so that you are getting a stream of income from the insurance company - you are in essence giving the insurance company a large sum of money in order to guarantee that you receive income for the rest of your life. By giving up that large sum, you lose your flexibility with it - once you purchase the contract, it belongs to the insurance company and you don't get it back. Most of the time, the payments you receive are fixed, so over time they lose pace with inflation. I would rather keep the large sum of money and invest it in a diversified portfolio than give it to the insurance company!

Unless you are specifically looking for the special guarantees that variable annuities can offer - you want to avoid investing an IRA in one. Your IRA already gives you tax deferral, so you aren't accomplishing anything by having the annuity - but you ARE increasing your expenses.

At the risk of offending life insurance agents, I would talk to a professional who is able to offer other suggestions before making a final decision on an annuity.

[A HERETIC I AM]

2. Seconded.

Just as Scruffy points out, they can offer a guarantee of a payment stream for life but for most investors, it is never enough to live on and should only be thought of as a supplement. Some do have a death benefit and other features that make them look attractive but they are indeed CONTRACTS, not agreements.

Many new ones are offering up to 6% guaranteed increases each year regardless of market performance. They do that by taking a portion of your money and the money of other contract holders and investing in Treasuries and assorted high yield bonds. There is, after all, no way to be positive that equities will return 6% every year. Equities have historically averaged returns well above 6% but there have, of course, been down years as well.

Many of these things you can do yourself with professional guidance. They may have their place in your portfolio, but it is unlikely an Annuity should be most or all of it.

[question everything]

6. What about immediate annuity for retirees?

A friend just asked me about his 85 year old dad who is being offered annuities by the bank. First thing, I told him, is should be an immediate one, not a deferred, but am not sure about the rest.

[A HERETIC I AM]

7. It is my opinion that they should only be considered as a supplement for an 85 year old....

Think of them as a way to guarantee a payment for either life or a specific period.

Example;
Your friends father buys a "Life with 10 year period certain" SPIA - "Single Pay Immediate Annuity" for $100,000
The highest of the 7 quotes i received when i ran a hypo on this was $931/month payable to him.

So it guarantees he will get $931 each and every month for his life or for ten years, whichever is longer. If he dies in 3 years (Or 2 or 5 or whatever) a named beneficiary will continue to receive the payments until the ten year period runs out.(The "period Certain" portion) If he lives longer than the ten years, he will continue to receive the same payment until he passes away. (The "Life" portion)

$931 X 12 Months X 10 Years = $111,720 for an initial investment/payment of $100,000
A $50,000 figure run on the same quote system offers $465/mo

These products need to be looked at very carefully and be fully understood by the investor before making a purchase.

The above is not a solicitation to buy or a recommendation to purchase any particular securities. For illustration purposes only. The information above is meant to be very generic and not to be considered a specific quote for a specific Annuity Contract. Terms and payment schedules will vary depending on the size of the initial investment, the individual company issuing the Annuity and the age, sex and state of residence of the applicant.

Have to say that!

[question everything]

8. Thank you!

You are very good at explaining complex issues and examples are always helpful.

[A HERETIC I AM]

9. My pleasure.

PM me if you care to. I can be more specific in a PM than i can in a public post.

[DrDan]

3. scruffy and heretic - THANKS!

Even though only a portion (25% of so) of our portfolio was suggested for an annuity, I did not feel comfortable - primarily because, as you say, it was a contract. But to tell the truth, I had not thought of some of the other issues you have raised.

As suggested, I think other, more "professional" guidance is in our future.

Thanks.

I love this forum!!!!

[wakemeupwhenitsover]

4. If you decide to get a

'financial planner' here is a link with questions you might want to ask.

http://www.consumerfed.org/pdfs/Cutting_through_the_Confusion_Brochure.pdf

[wakemeupwhenitsover]

5. dupe