# Question about annuities...please help



## Lucky#13

I know very little about retirement options such as annuities and IRA's. I know some of the basics but thats about it. My mom who is currently 61 was laid off from her job of 37 years but still recieved her pension in one lump sum of around $250,000. My dad had this money transfered into a regular IRA and it is just sitting there. My dad decided it might be best to put the money into an annuity so he called a financial advisor and he recommended a john hancock annuity called "john hancock venture opportunity" annuity. This is all the money my parents have for retirement. I don't know what to do but after reading about annuities it seems they have really high fees. I am also worried that after they die that john hancock will keep the remainder of the balance. Can anybody please help. I am so worried that they are going to make a bad decision and funny enough put me in charge of doing some research. My dad has a meeting with the joohn hancock rep on sept 30th. Do you guys think that this type of annuity is a good thing? What happens to the account balance if they were to die? I am thoroughly confused. Please excuse my ignorance and try not to make fun of it. Thanks in advance.


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## Madeline

Lucky, there a many different kinds of annuities...but yes, most all have high fees.  They are insurance products, and most have both a cash value and a "payable" value (meaning what they are projected to be worth if they remain in force).  These are complex instruments, and should not be bought until all the characteristics are understood.  

Generally speaking, it's unwise to use only one investment to hold a person's entire retirement  savings.  Even if the annuity is desirable, the investment should probably be less than 1/3 of the amount and the balance in stocks and the like.

There are some terrificly talented finance people on USMB who may help you, but if you cannot wait I recommend SuzeOrman.com for further research.


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## Lucky#13

Madeline said:


> Lucky, there a many different kinds of annuities...but yes, most all have high fees.  They are insurance products, and most have both a cash value and a "payable" value (meaning what they are projected to be worth if they remain in force).  These are complex instruments, and should not be bought until all the characteristics are understood.
> 
> Generally speaking, it's unwise to use only one investment to hold a person's entire retirement  savings.  Even if the annuity is desirable, the investment should probably be less than 1/3 of the amount and the balance in stocks and the like.
> 
> There are some terrificly talented finance people on USMB who may help you, but if you cannot wait I recommend SuzeOrman.com for further research.



Well thank you very much. You guys don't know how much I appreciate any kind of help. I have been up all night doing research and looking at the pros and cons. The annuity that john hancock offers charges a 3.5% sales charge up front and that seems like alot. Also noticed that annuities are taxed as income but mutual funds are taxed at capital gains rates. The problem I see with a mutual fund is it can lose money but the annuity guarantees that the principal will never be lost but the fees and charges are outrageous. I will go to suzeorman.com and see what I can find. Thank you so much for your time.


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## Madeline

You are welcome...and I believe that site lists financial advisors, or describes a way to find one you can rely on.  Might be worth a few hundred bucks to get personalized advice just for this point in time.


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## midcan5

Check into whether and how much the annuity is insured for in your state. We have one as part of our retirement fund. Rates are pretty good right now. I am talking to an investment person tomorrow and will run your question by them. 

Annuity Rates in 2010 lowest for 20 years


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## asterism

A better option for retirement funds at that age could be a mix of federal and tax free municipal bonds.  Those are what traditional investment advisors recommend for money needed to generate income now.  Be vary wary of high yield munis since they are higher risk.


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## midcan5

Another piece that may help. Talk to others, and take your time making a decision is best advice. 


Variable Annuities
A variable annuity is essentially an insurance contract joined at the hip with an investment product. Annuities function as tax-deferred savings vehicles with insurance-like properties; they use an insurance policy to provide the tax deferral. The insurance contract and investment product combine to offer the following features:

   1. Tax deferral on earnings.
   2. Ability to name beneficiaries to receive the balance remaining in the account on death.
   3. "Annuitization"--that is, the ability to receive payments for life based on your life expectancy.
   4. The guarantees provided in the insurance component. 

"Now it's time for some cautionary words about the purchase of annuities. Many experts feel that annuities are a poor choice for most people when examined in close detail. The following discussion compares an annuity to an index fund (see also the article on index funds elsewhere in this FAQ)."

Invest FAQ: Insurance: Annuities


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## Madeline

midcan5 said:


> Check into whether and how much the annuity is insured for in your state. We have one as part of our retirement fund. Rates are pretty good right now. I am talking to an investment person tomorrow and will run your question by them.
> 
> Annuity Rates in 2010 lowest for 20 years



Here's a nuance to note:  If a state has a guarantee fund for annunities, does it protect the payable value or the cash value?  In many "variable annuities", meaning annuities whose performance is tied to the stock market, the guarantee usually only runs to the cash value...and in a new product (one you have not held long) that cash value might be less than 10% of the initial premium.

Also, never buy any insurance product SOLELY for the alleged tax advantages, especially not with retirement assets.  If it is going to be used as an investment, evaluate as an investment.  Tax advantages can be had in a variety of different planning scenarios; tax sheltering _already_  tax exempt or tax sheltered income makes absolutely no sense.


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## Lucky#13

Thank you guys again for the help. Reps to all of you. I am still doing the research and welcome as much input as you guys feel free to share. Thanks again.


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## midcan5

Follow up from my comment above. The recommended portion of a portfolio according to the money manager I spoke to is 30%. Reason is fluidity and diversification. Ours grew 2.5% in four months and requires minimum commitment of four years. But we did a smaller amount to gauge results. I specifically asked about John Hancock and got, 'they used to be good, but got in trouble in '08' as many did - take that with the usual grain of salt. Ours is in Jackson by the way, we are currently eligible for 5% yearly withdrawal. https://www.jackson.com/Index.jsp

The piece below is interesting (May 2008???), but '85' for the one plan seems a bit extreme unless you still carry a mortgage etc at that age. My mom is near 90 but since 85 or so just doesn't do what she once did, so lots of money is sorta meaningless - she doesn't have lots anyway lol. But thank the Dems for medicare even though I can see it is abused for the old timers in lots of ways, but mom has needed it recently even though she is a tough old codger.  

The question for me would be, does this fit into [your] lifestyle, our portfolio is diversified with what is considered moderate conservative, but even in this category it fluctuates. Talk to lots, they'd love to take your money, but you can eventually learn best choices. 

Living Long, Living Well

"To find out the latest in offerings, we turned to The Hartford, John Hancock and New York Life to see what their most recent product introductions in this space look like and which investors might benefit from insuring for longevity.

The Hartford is offering two products, Hartford Income Security (HIS is their pure longevity insurance product, which begins payouts at age 85) and the Hartford Income Annuity (HIA), which allows investors to begin taking income at their discretion, beginning at age 65.  Weve seen a lot of interest recently in all guaranteed-payout products given the market recently, says Scott Sanderson, vice president of marketing at The Hartford. Weve all seen the numbers, but it really hits home when you see friends or family who have retired at the wrong time. If you take more than 4.5% or 5% out of your regular retirement accounts annually and live a long life, youre going to run out of money, especially if you retire at the wrong time.

The HIS product answers the challenge to provide pure longevity insurance, and we think the best deal is the product in its purest form. The payouts begin at age 85 and the elections you make regarding payouts are irrevocable, but you can buy a facility care rider that will allow you to begin taking payouts early if you certify you need facility-based care."

*Since payouts on both products are identical at age 85 (when the HIS product kicks in), it really makes sense to use the HIA product, which gives investors earlier access to their money. So, what will The Hartford pay a man who at age 65 invests $100,000? Depending on when the man starts payments, heres what hell get for the rest of his life:

 Starting at age 65, $681 a month;
 Starting at age 75, $1,800 a month;
 Starting at age 85, $7,638 a month."*


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## william the wie

I have seen zero bad advice so far on this thread so in your shoes I would stick to:

A) the above.

B) Looking at alternatives such as reverse mortgages and sticking excess income into a joint Roth.

Keep the investing philosophy as simple as possible and within the circle of competence of your parents. That last part is extremely important Warren Buffet reportedly lost around 30 tons worth of one dollar bills when he ventured briefly into the FOREX market. The actual dollar figure an estimated 1 billion is likely to be shrugged off but if you say 30 tons of dollars your parents will find the cautionary tale easier to understand and apply.


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## Gadawg73

Wait AS LONG as you can to purchase the annuity. The older you are the more the monthly payments.
Keep in mind now is the absolute worst market to buy annuities.


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## Madeline

Gadawg73 said:


> Wait AS LONG as you can to purchase the annuity. The older you are the more the monthly payments.
> Keep in mind now is the absolute worst market to buy annuities.



Not all annuities, Gadawg.  Stock prices are down and can reasonably be expected to go up.  This is a terrible time to buy a fixed annuity....who will want a 2.5% ROI when stocks are performing at 9% again?  But a variable annuity (one which pays more if the investments it is reliant on go up) might be a good idea.

_Might._


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## Douger

Home | Euro Pacific Capital


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## Madeline

Douger said:


> Home | Euro Pacific Capital



I would never -- ever ever ever -- recommend a client of mine move his money off-shore.  Doing so has to be considered so speculative it's akin to gambling, unless a person has the funds and knowledge to actually BE in Europe a lot.


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## MaggieMae

Madeline said:


> Lucky, there a many different kinds of annuities...but yes, most all have high fees.  They are insurance products, and most have both a cash value and a "payable" value (meaning what they are projected to be worth if they remain in force).  These are complex instruments, and should not be bought until all the characteristics are understood.
> 
> Generally speaking, it's unwise to use only one investment to hold a person's entire retirement  savings.  Even if the annuity is desirable, the investment should probably be less than 1/3 of the amount and the balance in stocks and the like.
> 
> There are some terrificly talented finance people on USMB who may help you, but if you cannot wait I recommend SuzeOrman.com for further research.



You beat me to it. Suze Orman HATES annunities, which are what financial advisors will push because their own commissions are high on those types of accounts.


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## Madeline

I know of nothing but horror stories a la annuities, Maggie, but I was trying to be unbiased, especially since some other posters seem to like them.


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## MaggieMae

Madeline said:


> I know of nothing but horror stories a la annuities, Maggie, but I was trying to be unbiased, especially since some other posters seem to like them.



I think the advice is to thoroughly read the fine print. Suze also says that if an annunity is the FIRST option presented to a new client by a financial advisor, run for the hills.


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## midcan5

Everything I read about annuities is basically negative which considering most financial advice is a bit bewildering. But everything I read about annuities assumes the annuity is done poorly and has poor returns. They also assume the 'market' is going to grow at a stable rate. So I remain skeptical of all this information. Consider the MIT guy who figured Social Security did better than investing in the market, and you see the dilemma. Don't look at the market as a cash cow as 2008 destroyed many years of growth, and I'm sure many will never recover. It does make me wonder if we should ditch our small annuity after the committed time. 


"Investors who bought annuities and then died within the next two months probably got their money's worth. But considering the fact that over the long term the stock market will deliver positive returns, most folks need this insurance about as much as a duck needs a paddle to swim. While all variable annuities come with a standard death benefit, the average price for additional death benefits is 0.43%, according to Morningstar."

'Switch to a Low-Fee Variable Annuity'

*Now, if you've read all this and still want to buy an annuity, do yourself a favor and buy one with low costs and good investment options. Investors who already own run-of-the-mill high-priced annuities should consider a tax-free transfer  called a 1035 exchange  to a better quality, low-fee annuity. Just be sure to confirm that your surrender charges have expired before you make the switch."*

What's Wrong With Variable Annuities - Personal Finance - Retirement - SmartMoney.com

The worst retirement investment you can make - MSN Money


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## Madeline

midcan, I'll admit I am biased against annuities. I am not fond of using any insurance product as an investment...I think insurance performs best when purchased as insurance.  In it's purest form, an annuity is insurance against the risk that you will outlive your assets.

I fail to see what a variable annuity has to offer to a retiring person.  The IRA or 401(k) where the assets were previously on deposit was a tax sheltering device; the client doesn't need a second one.  The ability to pay out more or less depending on the performance of whatever stock fund is selected seems redundant; surely, it'd be less expensive just to invest in that fund directly?

What chaps me the most is the myriad clauses that run up the actual cost or bring down the return; few purchasers realize they are there until they go into effect.  And then of course, you have bought 30 years or so of a promise to pay from an insurance company, with little recourse if the company fails before you die.

I'll admit it; I just do not like insurance above and beyond the coverage a person needs for risk management.


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## California Girl

The absolute last thing to do is to ask a bunch of strangers on a message board. Get professional help.


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## Madeline

The Op has, CG, long ago.  The rest of us are just bullshitting about investing.


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## Gadawg73

A man that waits until late 60s and early 70s in the mid 1980s and then converted their TIAA or CREF investments into annuities with a survivor benefit AND the survivor, the wife, is still living at age 88 and will most likely live another 10 years -then it was a good investment.
Dad did that, died this past May and my mother collects 4K a month until she dies.
But that is the RARE case. I agree 100% that in this market annuities SUCK.


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## sjay

So far all you've gotten is that annuities have high fees and that is correct.  No one has advised you what to invest in.Here is my advice to you and your parents,first of all pick a large mutual fund company with index funds that have low management fees and no sales commissions. Vanguard or fidelity would be my choices,next comes asset allocation.   25% total index stock fund, 20% international index fund and 15% commodities index fund. For the 40% cash portion I would put 20%  into a bond index fund (interm. range) and the other 20% get brokerage CDs tru  Vanguard  $10,000 for a one-year CD, $10,000 for a two-year CD, 10kfor three yr cd,10k for 4yrcd and 10k for 5 yr cd, that way youhave one CD expire every year and renew it for five years  eventually you have five five-year CDs with one  expiring every year and you also make a play on interest rates as they go up. The balance of 200k goes in your money market fund and start dollar cost averaging into the four index funds mentioned above. Dollar cost averaging should be done once or twice monthly(automated) to be done in identical increments to be completed in about two years.cost averaging is a huge advantage because you wind up buying fewer expensive shares and more cheaper shares it's like timing the market correctly. Now once the money is all in these funds, other thing  is to  rebalance, once or twice a year.In other words if a certain fund outperforms you sell shares and buy shares of the other fund or funds that have dropped below their original allocations,you have maintain original allocations this is similar to taking profits( automatically)You have to remember the index funds outperform 80% of your professional brokers and money managers year in year out and you also save a lot of costs involving commisions and management fees.


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## william the wie

There are legitimate arguments about allocation fractions but generally sjay has a very good alternative for you, if your parents can and will put it on automatic pilot. The problem with a Browne portfolio, the plain vanilla version being equal portions: cash; precious metals; real estate; bonds and stocks; is that rebalancing sounds stupid. It works quite well but selling winners and buying losers takes discipline most people don't have.


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## PC_Geek

Hire a fee-only registered investment adviser. Anybody and everybody else will sell you inferior products like annuities. Hope you didn't make the mistake of locking your money up in an annuity prison. Forbes magazine says "We dont recommend an allocation to annuities for ANY portion of your portfolio.". The article in Forbes was called "The false promises of annuities and annuity calculators."


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## Politico

Wow holy four years old Batman. You don't invest in annuities at 61. Problem solved.


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