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Author: dcraigen Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75833  
Subject: Annuities = Bad Choice For All? Date: 4/17/2008 5:03 PM
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I received a Fool email today about "Those Lying Annuity Salesmen". My question is regarding the annuity product (or similar products from others) from Prudential "Highest Daily Lifetime Seven". This one appears to have a guaranteed minimum earnings rate of 7%, or higher depending on the performance of your investment choices. With 7% minimum earnings guaranteed, what is wrong with this product for those of us who want minimum risk with some growth potential?
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Author: Hubris Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62285 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/17/2008 6:42 PM
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I received a Fool email today about "Those Lying Annuity Salesmen". My question is regarding the annuity product (or similar products from others) from Prudential "Highest Daily Lifetime Seven". This one appears to have a guaranteed minimum earnings rate of 7%


I haven't read the Fool email and I don't know anything about that specific annuity product but I will make a couple comments. An annuity is just a structure, there's nothing intrinsically evil about it and some type of annuity may be a good choice for some investors. That said, there are several potential pitfalls. There may be a sales load (commission) and high annual fees involved. You never want to pay a sales load, and you want to pay as little in fees as you can. The annuity will restrict you to specific choices of investments,and these may be bad and carry their own loads and fees. You need to look closely at what the annuity will let you invest in. And the more complicated structure of some annuities may make it hard for the investor to see what they are actually getting. Before you get involved with anything, read the actual prospectus closely and make sure you understand everything in it.

Other comments unrelated to annuities... Nobody can guarantee you an above market return at minimum risk. If someone promises that I pretty much stop reading right there, it's a sales pitch aimed at people who are more optimistic than experienced. And, as much as it pains me to say it, be careful with some of the Fool advice. Some things, especially aimed at less experienced investors, is spot-on "pay down your credit card debt" or "invest in no load, low annual fee index funds", but some of their specific advice is less consistent and I'd definitely run it by other people on the boards, as you are doing here.

Hope this helps,

Hubris

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62287 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/17/2008 9:59 PM
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Insurance companies can guarantee almost anything if the premiums are high enough.

Most variable annuities that promise high returns have caps of one sort or another that keep you from receiving the promised amount.

Annuities tend to be high commission products that benefit the salesman more than they do you. Most are never annuitized. As soon as the surrender period is over the salesman shows up on your doorstep wanting to sell you another "better" annuity (so he can collect another commission on the same money).

Immediate fixed annuities can play a role in some retirement plans. But most would be better off to invest their money in other plans and then buy a fixed annuity in retirement if you plan calls for it.

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62290 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 9:59 AM
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In return for that 7%, you don't get your principal back. Right? Recently I was buying credit union CDs for a guaranteed 5.1% and I am getting all my principal back at the end.

I'm sure you could do calculations that would compare the value you get if you invest say $200K this way, 7% per year for 25 years and you don't get your principal back in the end, to the value you get if you invest $200K for x rate of return over the same period but you do get your principal back.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62291 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 10:19 AM
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...Annuities = Bad Choice For All?...

That is sort of like saying doing drugs is a bad choice for all people.

Probably pretty true if you are talking about the annuities an insurance salesman sells, or the drugs a street dealer sells, but that doesn't tell the whole story. There are times when a doctor may prescribe a relatively dangerous drug, just like that there are times when a carefully selected annuity can be a good choice.

Part of the confusion is that there are at least a half a dozen financial products called "annuities" but they are so different that it would really be best if they all had different names.

While they have pros and cons, a traditional pension plans and social security are basically annuities.

Greg

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Author: dinkysue Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62293 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 11:33 AM
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In return for that 7%, you don't get your principal back. Right? Recently I was buying credit union CDs for a guaranteed 5.1% and I am getting all my principal back at the end.

I'm sure you could do calculations that would compare the value you get if you invest say $200K this way, 7% per year for 25 years and you don't get your principal back in the end, to the value you get if you invest $200K for x rate of return over the same period but you do get your principal back.


I tried it on my little financial calculator which sometimes works. I used a present value of $200,000, an annual payment of $14,000 (7% of the principal), a time period of 25 years with a future value of 0. This came out to be an interest rate of 4.86%. Sort of like a 25 year reverse mortgage. Might be an ok deal in some instances but not for me. I believe a real 7% might start to get my interest. 5% on a FDIC insured CD would be better but then the time frame becomes a problem as it is with the annuity.

Dinkysue

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62296 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 1:11 PM
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>>I tried it on my little financial calculator which sometimes works. I used a present value of $200,000, an annual payment of $14,000 (7% of the principal), a time period of 25 years with a future value of 0. This came out to be an interest rate of 4.86%. Sort of like a 25 year reverse mortgage. Might be an ok deal in some instances but not for me. I believe a real 7% might start to get my interest. 5% on a FDIC insured CD would be better but then the time frame becomes a problem as it is with the annuity.<<

As does the flexibility. If you still have the lump sum, it could do something else for you. Sure, you'd pay penalties if you took it out of CDs early, but if you have a real emergency, you hardly care about that.

I was pretty sure that if I suggested this, someone would do the PVA math and see just what this annuity is really worth. And that assumes that the 7% is net of fees and hidden costs, too. Assuming that an insurance company fails to tack on fees and hidden costs is like assuming cocaine is uncut just because a drug dealer says so.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62297 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 1:53 PM
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5% on a FDIC insured CD would be better but then the time frame becomes a problem as it is with the annuity.

Is someone offering a 25 yr CD at 5% these days?

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62298 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 2:08 PM
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I occasionally sell annuities.

Roughly 5-10% of my investment sales comes from various annuities, both fixed and variable. All of the ones I sell pay commission.

They do have their place in the financial spectrum - but obviously they are not for everyone.

I view annuities the same way I view life insurance. You buy life insurance generally for two reasons, to replace the income from a lost loved one or to set aside a portion of money for your estate. Some will buy a small policy to cover final expenses but those are generally very small policies.

Annuities are a form of insurance. I generally recommend them only under two scenarios - where a person needs guaranteed income and/or where a person wants to guarantee a future amount (death benefit or otherwise).

If you are not trying to guarantee either of those two, then you likely will receive no benefit from an annuity.

Various riders can guarantee income, growth, and death benefits but all come at a cost that will reduce the overall performance of the same investments held outside of an annuity.

I am not specifically familiar with the one you mention but I have seen it advertised in many publications. My guess is that it will guarantee a WITHDRAWAL of 7% of the maximum account value. Note a WITHDRAWAL is a guarantee that you will get your money back, it is not the same as INCOME.

Generally, GMWB (guarantee minimum withdrawal benefits) will pay out a fixed percentage based on various account values (in this case, highest yearly value?) over a set number of years. If you are getting 7%, that typically will mean payments over the next 14.2 years (14.2 x 7% = 100% --- all your money back). If you have a 5% GMWB, then you get payments for the next 20 years.

Note, they are not providing a guarantee that your money, your principle, will grow by 7%. That is a very common confusion.

Again, unless you are planning to use this money for guaranteed income in the future, this is not likely for you.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62301 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 6:11 PM
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In return for that 7%, you don't get your principal back. Right?

---------------------------------------------------------------------
Not exactly you could get more than your principal back.

Buying an annuity does not mean your principal vanishes...it could...but not necessarily.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62302 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 6:14 PM
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Unless you annuitize the balance may be greater than zero in 25 years.

I am NO fan of 7% guarantee and the premise is a crock...like someone else said the riders make them so different.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62307 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/18/2008 11:14 PM
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....Annuities are a form of insurance. I generally recommend them only under two scenarios - where a person needs guaranteed income and/or where a person wants to guarantee a future amount (death benefit or otherwise).....

I’m not finance pro but I’ve also read of situations where the tax benefits would make a LOW COST annuity a sensible choice for a person with a very high net worth that is in a high tax bracket.

For the older person who is trying to insure that they don’t outlive their money, if a low cost annuity makes sense then they should also look at WHEN to buy it. For example if someone is 70, and looking at buying an annuity to cover their expenses if they happen to live to be 105, then they should also look at keeping their money invested until they are 85, and buying an annuity then. They should also look at buying a series of smaller annuities, say at the ages of 70, 75, 80, and 85 instead of buying one big one. This would also allow then to buy annuities with different companies so that if one annuity company got into trouble, they wouldn’t risk loosing their life savings.

Interest rates are one of the factors that determine how much the annuity pays. The interest rates are still near generational lows, which generally speaking makes it an unfavorable time to buy some types of annuities.

Greg

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Author: ltangel Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62310 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/19/2008 11:17 AM
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Any suggestions for how to handle an annuity that I can draw from at 591/2? I havehad it 15 years .I currently have a Roth IRA and treasuries as well as savings account. Do not need the annuity for the two reasons you listed. But thought it would be a great place to park monies tax-deferred for awhile. Thank you.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62311 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/19/2008 11:38 AM
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>> Any suggestions for how to handle an annuity that I can draw from at 591/2? I havehad it 15 years .I currently have a Roth IRA and treasuries as well as savings account. <<

First of all, while I'm not prepared to say an annuity *never* makes sense, I'd say that they only make sense for a few people under a very limited set of circumstances.

First question: Have you absolutely maxed out all other tax-deferred investment/savings vehicles available to you? (These include things like IRAs, 401Ks, 403Bs, 457s, HSAs and perhaps 529s if your personal circumstances warrant.)

Second question: What is your combined state/federal tax bracket?

Except in limited circumstances (for example, older folks with genetic longevity who are afraid of outliving their savings), this type of deferred annuity can only make sense for someone in a very high tax bracket who has exhausted every other possible way to shield some of their income from taxes. For just about anyone else, in my opinion it's a non-starter.

#29

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Author: DorothyM Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62315 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/20/2008 11:10 PM
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... But most would be better off to invest their money in other plans and then buy a fixed annuity in retirement if you plan calls for it.

Under what circumstances would a fixed annuity in retirement be a reasonable/rational choice?

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62316 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 9:06 AM
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>> Under what circumstances would a fixed annuity in retirement be a reasonable/rational choice? <<

I'd say here's a sample profile:

* Complete fear of the stock market and unwillingness to put any of one's savings into it

* No heirs or not concerned with leaving any of their retirement savings to their estate

* In very good health

* History of family longevity

* Enough savings to allow the annuity payments to cover all reasonable inflation-adjusted living expenses in addition to Social Security and pensions

In other words, someone who currently just puts all their money into CDs, won't invest it, isn't worried about passing it to their estate, and who lives in fear of outliving it.

I think if a retiree meets ALL of these criteria, they MIGHT be a candidate for a SPIA or something like that. And even there, the concern might be inflation protection so they may need to have other ways to protect against its ravages, too.

#29

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62317 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 11:23 AM
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I’m not finance pro but I’ve also read of situations where the tax benefits would make a LOW COST annuity a sensible choice for a person with a very high net worth that is in a high tax bracket.

Only if they plan to never use the money. Then they are basically estate planning.

If they plan to use the money, and their taxes (or tax bracket) has no changes in the future, they are just delaying the taxes. It certainly can be of some benefit but I generally would have a person in munis than buy an annuity for tax deferral. There is a very good chance taxes will be higher in the future so they could be waiving current low taxes for future higher taxes.

Interest rates are one of the factors that determine how much the annuity pays. The interest rates are still near generational lows, which generally speaking makes it an unfavorable time to buy some types of annuities.

Don't confuse a variable annuity with riders as being the same thing as an immediate annuity. What the OP posted was a VA with a rider that generally does not require annuitization.

It is quite uncommon for annuities to actually be annuitized these days. Most people take income out under either a rider or free withdrawal percentage. Few give up access to their principle in the form of annuitization.

Interest rates generally don't apply when discussing riders that guarantee either income or withdrawals for a VA. That 7% mentioned will be the same now that rates are low as it was when rates were high as it is paid for by an annual fee on the underlying investments.

Which means (ceteris paribus) that these programs generally become much more popular when rates are low than when they are high.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62319 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 11:29 AM
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<Any suggestions for how to handle an annuity that I can draw from at 591/2? I havehad it 15 years .I currently have a Roth IRA and treasuries as well as savings account. Do not need the annuity for the two reasons you listed. But thought it would be a great place to park monies tax-deferred for awhile. Thank you. >



Determine your cost basis. If you have had it for 15 yrs, you likely have a big amount that is taxable.

Once you are ready to retire and start using some of your retirement accounts, I would pull money from this before you pull from any IRA accounts. Eventually, you will get down to the cost basis and then you can cash it in and pay no taxes on the principle.

In the meantime - and if you have a few years until you get 59 1/2, you might want to shop around for an annuity that will do exactly what you want it to do - some have no guarantees and simply charge a small amount for the M&E (basically a guarantee on your original deposit in case of death). Just be sure to not lock yourself in past the age at which you would like to cash this in or take out a substantial amount.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62320 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 11:59 AM
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I would expand on Ziggy's reply a bit:

*Complete fear of the stock market and unwillingness to put any of one's savings into it

That is a big part of it. Again, annuities are a form of insurance. The riders often buy piece of mind for the investor. Much like any other form of insurance, most people will get back less than what they pay for the insurance but if you happen to be the one unlucky one that has their house burn down, that insurance will be well worth it.

Far too many people fear that house burning down. Emotion often drives these products - sometimes fairly, often times unfairly in the case of pushy sales agents.

* No heirs or not concerned with leaving any of their retirement savings to their estate

There needs to be some clarification here. MOST ANNUITIES ARE NEVER ANNUITIZED. Even those that are, can often provide some income or death benefit to an heir.

These days, many annuities are bought for the purpose of giving a larger sum to a beneficiary. It is the riders that provide that guarantee. I know of one that will guarantee a growth of the death benefit of 8-9% a year with a cap at 85. Not a bad option for a risk adverse person that would not otherwise qualify for life insurance.

SPIAs are always an option to replace or supplement a pension but there are not a lot of requests these days for such due to the potential loss of all the principle.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62321 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 12:02 PM
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Oh, one more:

If you planned poorly for retirement, an annuity may give you a higher income than what you may be able to get under the "safe Withdrawal" amount often mentioned.

That is a reason I will often see from clients. They say they need $X from their investment and I am forced to tell them that if they take that much from any normal investment, their money will likely only last them 15 yrs or less (or some other time frame).

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62322 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 12:09 PM
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>> That is a big part of it. Again, annuities are a form of insurance. The riders often buy piece of mind for the investor. Much like any other form of insurance, most people will get back less than what they pay for the insurance but if you happen to be the one unlucky one that has their house burn down, that insurance will be well worth it.

Far too many people fear that house burning down. Emotion often drives these products - sometimes fairly, often times unfairly in the case of pushy sales agents.
<<

Correct. And in reality, many people will overpay for "insurance" when they are sufficiently afraid. Heck, I look at buying Treasuries instead of high-grade corporates -- even with a 200+ basis point difference in yield -- as a form of insurance against default. And right now, the price of that insurance (in terms of reduced yield) is VERY high, something like 2% of principal amount per year at the current spreads.

An annuity -- particularly one that's annuitized and has no cash value upon death like an SPIA -- is a costly form of insurance against outliving your money. But depending on just how fearful someone is, even a very high premium might be something *they* would be willing to pay.

#29

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62323 of 75833
Subject: Re: Annuities = Bad Choice For All? Date: 4/21/2008 1:18 PM
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"Under what circumstances would a fixed annuity in retirement be a reasonable/rational choice?"

Others have covered it pretty well, but you do get higher income from a given amount of money. The insurance company takes the risk to make sure the money lasts for the contract period often for life. The money is professionally managed, so one does not have to worry about it. That can be an advantage for the elderly or disabled who might not be able to manage their own funds.

The major disadvantage is that on the "for life" contracts, the insurance company takes what ever is left over. So heirs get nothing.

Also most policies pay a fixed amount for their term. Hence, you have no provision for inflation.

All of the deficiencies mentioned are addressed in some contracts, but that means higher cost (smaller initial monthly payout for a given amount invested).

But maintaining most funds in equities (preferably mutual funds) and then buying additional fixed annuities as expenses rise can deal with the problem too.

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