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Author: meowkittymeow Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Immediate Annuity for already-retired parents? Date: 6/27/2008 8:00 PM
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My parents (74 and 70) are confronted with the decision to buy an Immediate Fixed Annuity, and have asked me for advice. Problem is that I know nothing about annuities -- or, didn't know until yesterday as I started to research. I have found some helpful articles, but it is tough to find discussion of their circumstances (being already retired). I did note a couple articles that say such an annuity can make sense [e.g., http://www.fool.com/personal-finance/retirement/2006/10/24/g... --right here on Motley Fool].

Still, I wanted to ask Fooldom for any advice/tips. Here are the details.

The particular annuity in question is with Bankers Life and Casualty Company (yes, the salesman came calling; my parents already have a Long-Term Care policy with Bankers Life). It is called the "Bankers Security Builder Equity+" with a "Strong Guarantee." The annuity he is selling is an Immediate Annuity, with a rate tied to the S&P-500 index. He presented it as paying out at a "Participation Rate" of 85% of the index appreciation. [I note in the actual document that it really has a variable Participation Rate, resetting each year, initially not set until the annuity is funded, and with a minimum guaranteed rate of only 25%. This discrepancy is enough to make me seek some other company, even if my parents want to go ahead with an annuity. I looked at the website of the oft-recommended Vanguard, but can't figure out what is what there. At least, not without doing a lot more reading.] It appears to have no direct fees -- i.e., all their fees must be taken in the form of a lower payout ("Participation Rate").

The particular money is in an IRA (my father's). It is roughly $30K. It is currently in an array of 5 mutual funds (A shares), with a company called First Investors. Note that since my father is 74, he is already taking required minimum distributions from the IRA. (The salesman says that the RMD -- indeed any amount that my father decides -- can be withdrawn from the annuity annually, without penalty, because it is inside an IRA and the normal limitation on withdrawals [10%] is set aside. I don't see this anywhere in the very brief 1-page document, however.)

Finally, it is significant to note my parents' attitude toward this money. First, they want to protect the principal. So risk aversion is important, and thus an Immediate Fixed Annuity might make sense, since it guarantees the principal while also allowing them to participate in the S&P. Second, they don't actually need the money. With their pension and other income, they are doing fine. In fact, they have thus far been donating the distribution from this IRA. [I asked if they just wanted to donate the whole IRA, but they balked at that. I think that they like it as a security blanket, just in case, as well as to pass it on to their kids.]


I think that covers it. Any ideas are certainly appreciated.

Thanks,
Meow
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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63044 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/27/2008 8:17 PM
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The annuity he is selling is an Immediate Annuity, with a rate tied to the S&P-500 index. He presented it as paying out at a "Participation Rate" of 85% of the index appreciation.

IOW, this is not a true "immediate annunity" but is actually some variation of an indexed annuity.

Which, IMHO, is juat another variation of pulling the wool over the mark's eyes why you pick his pocket. What with all the caps and resets and guarantees, you get so dizzy that you don't realize what's happening.

What I have read about these is that the company keeps all of the S&P dividends and most of the S&P gains. The caps and floors and (virtually unmentioned) use of monthly rather than annual checkpoints have the effect of doing this.

Go to http://www.immediateannuities.com and plug in his data to get a quote.

they want to protect the principal. So risk aversion is important, and thus an Immediate Fixed Annuity might make sense, since it guarantees the principal while also allowing them to participate in the S&P.

This is not possible. You cannot have no risk AND get stock market returns. If thery really think they want to do this, they could put most of the money in a CD and some of it in the S&P500 index. That would duplicate this thing they are getting pushed on them, but without the (substantial) hidden fees.

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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: 63046 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/27/2008 10:32 PM
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Other people will have better information about annuities than I can provide, but here is my two cents worth.

…I looked at the website of the oft-recommended Vanguard, but can't figure out what is what there. At least, not without doing a lot more reading.] It appears to have no direct fees…

All investments will have associated expenses, but much of the "fees" you will see with a typical fund are really just commissions and profit for the funds owners and salespeople. Vanguard is unique among the large mutual fund companies in that its ownership is set up like a credit union in that the shareholders are the owners so they don't need to generate a profit. All the other large investment firms are owned by someone that is out to make a profit. This is why Vanguards fees are usually (but not always) the lowest.

Don't underestimate the impact of fees. For a typical stock and bond portfolio for a person who just retired, a reasonable withdraw rate is about 4% because of inflation and the possibility of a few bad years early in retirement. This means that a fee of "only" 1% is really 25% of the persons income since they can only withdraw 4% each year.

…Finally, it is significant to note my parents' attitude toward this money. First, they want to protect the principal. So risk aversion is important,…

The annuities they are looking at are issued by the company “Bankers Life and Casualty Company”. Most likely they had never heard of this company before. If this company runs into trouble, then there is a risk that they will loose all or part of their investment. With all the financial problems these days this is a very real risk. There may be some sort of private insurance that will supposedly cover the annuity in this situation, but the insurance companies that issues these they may be tied up in the sub-prime mess since they may have also insure sub-prince home mortgages.

… With their pension and other income, they are doing fine….

If an annuity is right for them, then the next question is when they should buy it. It could be that waiting until they are in their 80’s would result in a much larger payout when they need it.

They may want to look at the Vanguard Target Retirement Income Fund (VTINX) as an alternative.

Greg

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63047 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/27/2008 11:03 PM
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meowkittymeow asks,

My parents (74 and 70) are confronted with the decision to buy an Immediate Fixed Annuity, and have asked me for advice.

Before you cut a big check to an annuity salesman, you should see if doing a Social Security Withdrawal of Application would give your parents a larger monthly benefit than buying a commercial annuity.

http://www.retireearlyhomepage.com/cheap_annuity.html

and

http://kiplinger.com/magazine/archives/2008/07/secret_ways_t...

intercst

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63052 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/28/2008 10:09 AM
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I do not think that option is possible after age 70 1/2 which is the mandatory age for take SS. But I may be wrong.

Gordon
Atlanta

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Author: PayingFool Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63054 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/28/2008 12:47 PM
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I do not think that option is possible after age 70 1/2 which is the mandatory age for take SS. But I may be wrong.


You are. There is no mandatory age for taking SS. You have to apply to begin receiving SS benefits. Don't want them? Don't apply.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63055 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/28/2008 1:56 PM
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TwoCybers writes,

I do not think that option is possible after age 70 1/2 which is the mandatory age for take SS. But I may be wrong.

I'm pretty sure you can do the Withdrawal of Application at any age, but the increase in benefits stops at age 70, so a 72-year-old would have to pay back 10 years worth of benefits to get the same increase that a 70-year-old would get for paying back only 8 years of SS benefits. Depending on the cost of a commercial annuity, it might still make financial sense for a 71-year-old or a 72-year-old.

intercst

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63056 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/28/2008 7:49 PM
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meowkittymeow: "My parents (74 and 70) are confronted with the decision to buy an Immediate Fixed Annuity,"

Why?

"The particular money is in an IRA (my father's)."

So why move it to an annuity? What purpose is served?

"and have asked me for advice."

Good. I will defer to the others as to the details.

"The particular annuity in question is with Bankers Life and Casualty Company (yes, the salesman came calling; my parents already have a Long-Term Care policy with Bankers Life). It is called the "Bankers Security Builder Equity+" with a "Strong Guarantee." The annuity he is selling is an Immediate Annuity, with a rate tied to the S&P-500 index. He presented it as paying out at a "Participation Rate" of 85% of the index appreciation. [I note in the actual document that it really has a variable Participation Rate, resetting each year, initially not set until the annuity is funded, and with a minimum guaranteed rate of only 25%. This discrepancy is enough to make me seek some other company, even if my parents want to go ahead with an annuity. I looked at the website of the oft-recommended Vanguard, but can't figure out what is what there. At least, not without doing a lot more reading.] It appears to have no direct fees -- i.e., all their fees must be taken in the form of a lower payout ("Participation Rate")."

You may want to cross post on the Insurance Board.

Regards, JAFO

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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: 63059 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/29/2008 9:47 AM
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First, of all there is nothing wrong with buying an immediate fixed annuity. Adding an immmediate fixed annuity to an investment portfolio can increase your withdrawal rate.

This product is an equity-indexed annuity. Go to the SEC website and there is a particular warning about EIAs.

EIAs are a marketing gimmick. While technically it is a fixed annuity that is merely a sleight-of-hand that allows insurance agents to sell EIAs. If EIAs were registered as variable annuities they would go away tomorrow

In the investing world, rarely can you say never. However with EIAs they are never in the consumer's best interest.

If your parents want to give their money away, be my guest.

buzman

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Author: meowkittymeow Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 63073 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/30/2008 1:27 AM
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Thanks to all who offered helpful pointers. (It's amazing how much easier the search for information is when you finally get the *name* of the thing -- "equity-indexed annuity".)

A quick summary of the problems with these annuities (in general):
1. early withdrawal penalties can be excessive; the time period that your money is thus stuck in the policy can be a couple decades; (you can lose principal by early withdrawal).
2. tricky methods of calculating any increase in the stock index -- methods that significantly limit your possible returns.
3. any guarantee is only as good as the company that offers it to you
4. salesmen who don't tell you what the thing actually is


This particular annuity does appear to avoid some of the worst excesses -- eg, up to 10% of the initial amount can be withdrawn per year w/o penalty.

But there's still lots to not like. Limited truthfulness is a big one.

My parents will not be buying into this one.

Thanks,
Meow

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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: 63074 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 6/30/2008 10:47 AM
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As an advisor that sometimes sells annuities, I would agree with your conclusion.

If they need immediate income (which is what an immediate annuity is designed to do), it is typically to replace or duplicate a pension.

Pensions don't generally fluctuate their payments - except to occasionally give a small increase due to inflation or cost of living (depending on the company).

An equity indexed annuity - which is what this sounds like - is more for accumulation than it is for distribution.

If they need immediate guaranteed income, I would look to a company that has a policy specifically for such. I would also look for the option of "period certain" so that if both parents go early, the estate doesn't lose those payments for a few years.

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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: 63084 of 74759
Subject: Re: Immediate Annuity for already-retired parent Date: 7/1/2008 9:28 AM
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"An equity indexed annuity - which is what this sounds like - is more for accumulation than it is for distribution."

Accumulation for the insurance company and its salesmen.

buzman

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