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My niece, who recently lost her husband to cancer, is being advised to consider selling some of her assets of various types and funding an annuity for her retirement (she's 64). She's asked for my advice.

I must admit I've never been involved with or researched the subject of annuities before. If anyone has some advice or knows where I can obtain good information on the subject, please point me in the right direction. Thanks.

Bill

P.S. While I've been a (very) long time Fool, I've never posted on nor visited this board before.
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Ugh, I fear even sticking my toe into this one as this board is knee-jerk against anything with the word annuity in it - is is like a religion here.

That being said, annuities make sense for a small segment of the population - maybe 10-25% of retirees.

There are two types of annuities - fixed and variable. Fixed annuities are fairly straight forward and operate in a similar manner to a tax deferred CD. I won't focus on them for this commentary. There are also immediate annuities that are very similar to annuitizing a lump sum pension but I don't think that is what is being recommended in this case.

The typical retiree that would benefit from a variable annuity:

Previously poor saving habits (not enough retirement dollars saved up to fund their retirement)
No pension
Risk adverse
Has other liquid assets (emergency funds)
Has need of current or future income that could not be guaranteed from investments.

My advice is for her to get multiple recommendations before signing anything. VAs are one of the most complicated retirement tools there are and are easily the most difficult to understand.

The following link would be a decent place to start to understand the terms, features, benefits, and restrictions of what is out there.

http://www.annuityfyi.com/annuityfyi_mission.html
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It's important to recall that the person advising her to get an annuity almost certainly will be making some type of commission on it. The salesman's primary interest is in his/her fee, not your niece. The hidden fees are huge in variable annuities. It's almost never a good idea to even consider a variable annuity. What's called a SPIA (single premium immediate annuity) can sometimes be a good move for a small class of folks. The older a person is, the higher the annual yield will be, so waiting as long as possible is almost always a good idea when looking at a SPIA. The fees for a SPIA are much lower than a variable annuity, and the fees and investment losses associated with a SPIA usually run somewhere between 20% and 30%. This means that the insurance company is taking this amount as it's fee for processing and administering the annuity, plus getting paid a mortality fee in case your niece lives beyond her life expectancy. As a general rule, and it's a fairly solid rule, a decent porfolio of equity and bond mutual funds should be better for your niece, plus she will maintain control over her principal for life. With an annuity, she loses access to the principal, unless she calls Mr. Cash on TV to get a lump sum payment after paying Mr. Cash a ton of money in fees. Keep in mind that your niece can always decide later (at 70, 75, 85, or 90) to put a portion of her principal in a SPIA, so the train is not getting ready to leave the station on her choices. In fact, the train never leaves the station if she waits. Some people are willing to give up a lot in commissions and fees in order to get a guaranteed monthly payment, and for those folks a SPIA might make some sense, but not a lot of sense. Regardless, she should keep at least 50% of her principal in her own portfolio, with no more than 50% going into an annuity. In fact, she can purchase multiple small annuities as the decades pass. The botton line is this: It's rarely a good idea to buy an annuity, and never buy anything other than a SPIA. Good luck.
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One of my rules is that you never buy any kind of investment vehicle from an insurance company. Their primary business is selling insurance. And, while your money is locked up essentially for life, the company can go about mismanagement and possibly fail altogether. Then you lose everything.

I agree that their primary concern is making big commissions and other fees off the financially naive.

If you want income, look into no load mutual funds (Vanguard) or buy high dividend paying stocks. That way your money is doing what you want it to do and is always available to you at the same time. You also don't pay high fees and commissions for essentially nothing.

AM
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I've never heard of a financial planner disclosing the high cost of a low-fee, low commission Single Premium Immediate Annuity (SPIA).

http://retireearlyhomepage.com/annuity_costs.html

intercst
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AngelMay,

One of my rules is that you never buy any kind of investment vehicle from an insurance company.

Our first IRAs were opened with USAA Insurance in annuities. I do not recall the original interest rate but 9 years later, 1991, it had dropped to around 7.6%. They have a 4.50% minimum rate which continues today.

I have nearly cleaned them out 3 times, 1991, 2001 and late 2008 to push into stock. I transferred money back into them from sales and dividends each time. Today they are 21.5% of our portfolio. I use them as most of the cash/bond position of our portfolio.

In 1996, a financial adviser recommended I close them. Didn't happen. (His other lame advice was to sell INTC, MSFT, CSCO, KO and other "questionable" stocks)

Gene
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Bill beyond the subject of yes or not to this or that annuity, more information is needed before anybody can make decent recommendation. To make an analogy to something you understand better I will use automobiles.

Somebody's transportation method has been lost. They never did any driving and don't know the difference between an Indy Racer, a Hummer or a Prius -- all of which are automobiles. Some person has just recommended purchase of Chevy Suburban or a never buying a car and depending on public transportation & Taxis.

The Suburban could be great if the person owned horses and large dogs -- think hauling a horse trailer. It could be a disaster if the individual lived in Manhattan or South Boston. Similarly in rural Kansas there is not a lot of public transit and maybe few taxis.

Questions -

Does she have any social security benefits earned herself, but not collected? Does she have any income (don't forget survivor benefits)?

What are her annual living costs divided by the amount of her assists? (If she is spending 3% of the asset value things are dramatically different than if she is spending 10% or the asset value.)

Normally from your post one might assume her health is such she will live to at least the typical life expectancy of a 64 year old female -- which undoubtedly is over 25 years. But maybe not.

One reason to be very careful is the potential for inflation is great in the next couple of decades. I would not be surprised to see gasoline at $10 a gallon and hamburger at $12 a pound in 20 years. Anybody making investment decisions today that does not seriously consider inflation risk in my mind is a fool.

Gordon
Atlanta
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TwoCybers writes,

.....Somebody's transportation method has been lost. They never did any driving and don't know the difference between an Indy Racer, a Hummer or a Prius -- all of which are automobiles. Some person has just recommended purchase of Chevy Suburban or a never buying a car and depending on public transportation & Taxis.

The Suburban could be great if the person owned horses and large dogs -- think hauling a horse trailer. It could be a disaster if the individual lived in Manhattan or South Boston. Similarly in rural Kansas there is not a lot of public transit and maybe few taxis.

One reason to be very careful is the potential for inflation is great in the next couple of decades. I would not be surprised to see gasoline at $10 a gallon and hamburger at $12 a pound in 20 years. Anybody making investment decisions today that does not seriously consider inflation risk in my mind is a fool.

</snip>


If it comes to that, the guy in your example will have to sell the Suburban and eat the dogs.

intersct
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They have a 4.50% minimum rate which continues today.

Hold onto that sucker!

I would have to beat people off with a stick if I could offer something that good today.
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...My niece, who recently lost her husband ....


It is often recommended that after something like the loss of a spouse that no big decisions be made for a year unless there is some compelling reason to do something now. There is no reason to hurry up and buy an annuity now. It will likely be impossible or very expensive to get out of if she decides something else would be better. They will still be available a year or two from now and they may even pay a lot more then if interest rates go up.

If an annuity is right for her then they are very complex financial instruments so before she spends a lot on one she should have a fee only financial that she is paying help her select one. Note: a "fee based" financial advisor is much different than a fee only financial advisor since they can still be paid to put you in poor investment choices.

Delaying when she starts social security is essentially like buying a government guaranteed inflation adjusted annuity so that would likely be better than buying a commercial annuity.
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Some person has just recommended purchase of Chevy Suburban or a never buying a car and depending on public transportation & Taxis.

Gordon, I think your general points hold. And they are important ones.

But I wonder whether that's the sort of case we're dealing with here -- or whether it's more a case of: The guy at the Chevy dealership (whom I shall refer to as my transportation advisor) has advised me to buy a Chevy Suburban.

culcha
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Bill

As others have said, it is most likely a salesman who is making this recommendation, not someone who 'advises'.

How relevant an 'annuity' (and there are many different kinds of 'annuities') is to the financial needs of your niece depends on several factors, to include:

1. The amount involved
2. Whether she requires the inheritance to support her retirement lifestyle or it is an added amount that she doesn't require.
3. Her personal goals and need for cash flow, including potential future long term care.
4. Her willingness to take investment risk
5. When she needs it to start working for her
6. Whether it is important to leave a legacy to heirs

I would suggest, as others have, that she make an appointment with a local Fee-Only CFP or CPA/PFS financial planner. You can find these by googling NAPFA or the Garrett Financial Planning Network. Her "work up" (data collection and analysis) will cost several hundred bucks, but you can be assured that it will be objective and in her best interest....not the best interest of the salesman, which I'm sure is what she's getting now.

BruceM
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the car comments were 100% fiction - just to make an analogy in terms of cars which I assumed the OP had.

Gordon
Atlanta
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My niece, who recently lost her husband to cancer, is being advised to consider selling some of her assets of various types and funding an annuity for her retirement (she's 64). She's asked for my advice.

Having been there, done that at age 56, I'll put in my two cents worth in which may be worth what you paid for it. I got all kinds of advice(often conflicting). I would suggest she start with any company her husband worked for prior to his death for any life insurance, pension and/or health insurance benefits. She will also need to see what's in any 401ks or IRAs.

It can take months for all the medical bills to settle and the end of life ones are the ones in my experience that were least likely to be correct so she should carefully review them all(even though there's likely to be a desire to just get them wrapped up). She will need to take care of her own health insurance until she qualifies for Medicare(in my case, the company paid for six months and the cost to continue coverage was about the same as street price so I kept it).

Then she should contact social security to get an estimate of any benefits. and to go ahead and get the $255 death benefit. I dealt with SSA both in preparation for long term disability and for the death benefit. (At 60, I will get an estimate of benefits at that and then various ages for collecting on his or my record). I found them both helpful and easy to deal with(and I had to do things multiple times due to changing circumstances).

I don't know who is doing the advising or to what assets they may be referring but I did pay for a review and financial plan. I also chose to pay to have some of my assets managed. (There's a thread about it up there somewhere- about 18 months - 2 years back.)

I'm not a fan of single topic discussions. It's entirely possible that an annuity might be a good choice. Without other information, there's no way to tell - things like do they have children & what ages, what does she want to do in terms of will and estate plan(if philanthropy is involved, it puts annuities in a different light).
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Bill,
Reallyalldone had a good take on what is involved in getting everything together before making an annuity decision. Your niece may also be eligible for her husband's SocSecurity payments now while holding off on taking her own benefits until she is 66 or 70 depending on which is more. All these decisions should be reviewed with an advisor as discussed above and she should see how much income she would need to live on without counting market-based income (which can change).

When I went through the evaluation process, I decided that one or two annuities was right for me, each with a rider that lets me have a Lifetime Income Benefit -- this let the Account Value still go up at times as long as I defer taking turning on the benefit and allowing the guaranteed growth work as well. In any event, with the different types of annuities on the market the purpose would be only if she needs some 'guaranteed' pension-like income (in addition to the SocSec and what other incomes she has) and purchased from a highly rated insurance company. Annuities are designed for either long-term or short-term holds/access -- she should look at a variety of options and think about being diversified a bit. Note that as many said there are fees and the monies used are not really liquid tho' some plans allow withdrawals up to a certain amount with no additional penalities or charges -- the purpose in this case is the "pension" not growth.

As someone indicated, if she goes that route she should not put all her funds into annuities anyway -- the writer above suggested a max of 50% of assets in annuities -- and she can use the rest for stock/bond dividend / growth investing. That is my bias as well for balanced peace of mind plus growth (tho' others may have differing opinions and many in the MF community are against annuities due to the fees involved). Much depends on her circumstances and requirements. Hope these opinions helped as well. Best wishes.

Regina
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As someone indicated, if she goes that route she should not put all her funds into annuities anyway -- the writer above suggested a max of 50% of assets in annuities



Thunk!
I think I just fainted.

AM
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