My brother just bought a variable Annuity. The broker claims it has a 7% living guaranty which insures the annuity will grow at 7% per year regardless of how his mutual funds perform inside the annuity. Also a quarterly ratchet feature that locks in the performance of his mutual funds- he can use it to lock-in to determine his income stream.I told my brother about a recent Kenneth Fisher article which said the only people who make money on annuities are the insurance companies issuing them. My brother claims that only applies to equity index annuities and that his is a variable annuity.Ken Fisher pointed out that profits from annuitites are taxed as ordinary income instead of the 15% tax on capital gains and dividends. My brother claims he paid no fees for this product. It sounds too good to be true. He must leave it for 10 years but they guarantee a minimum of 7% a year. I'd like to know a little bit more about annuities like this if anyone has some info. Thanks
downisland: "My brother just bought a variable Annuity. The broker claims it has a 7% living guaranty which insures the annuity will grow at 7% per year regardless of how his mutual funds perform inside the annuity."I doubt it. Broker should be able to show the provision of the VA that issues this guaranty; my best guess, there is a short guarantee period.Also a quarterly ratchet feature that locks in the performance of his mutual funds- he can use it to lock-in to determine his income stream.I told my brother about a recent Kenneth Fisher article which said the only people who make money on annuities are the insurance companies issuing them. My brother claims that only applies to equity index annuities and that his is a variable annuity."Not correct."Ken Fisher pointed out that profits from annuitites are taxed as ordinary income instead of the 15% tax on capital gains and dividends. My brother claims he paid no fees for this product. It sounds too good to be true."He paid, one way or another."He must leave it for 10 years but they guarantee a minimum of 7% a year."What is he getting racked for fees and expenses during those 10 years?Here is a recent thread briefly discussing VA. http://boards.fool.com/Message.asp?mid=23093612 post 47754 on Ret. Inv. boardMost of the older discussions about VAs are on the insurance board.Regards, JAFO
hello downisland,what your brother recently purchased is a variable annuity with a GMIB (guaranteed minimum income benefit)rider. the basic concept is that with your initial deposit (lets say 100k) the company creates a "real" and "hypothetical" subaccount within your annuity. The "real" account is subject to market volatility so obviously your balance can go up or down and as such we don't know what the balance would be after 10yrs. on the other hand, you "hypothetical" account is predetermined from day 1 - in this case 7% compound each year which would leave you with 197k after the 10 yrs. after 10 years assuming you are of retirement age you have several options: 1. take the "real" account with a lump sum payment (your getting taxed on the whole thing i would not recommend it), take withdrawals on any schedule you like (monthly, annual), annuitize (would not recommend either), or transfer the balance completely to another account - depending on what your plans are for the money this last is usually the best option2. take the "hypothetical" account - however you MUST annuitize, your payment will be based on the 197k the key here is that you must be willing to take some risk with your money in order to outperform the "hypothetical" side. this rider costs 50 basis points usually plus all the other fees your looking at about 2.00 - 2.50 % in fees it's a very interesting product if you want additional details let me know. r
Thanks for the Information. So if the Variable Annuity guarantees my brother 7% but the fees are 2%, does that mean they are only really guaranteeing him 5%? That doesn't sound so great. Is it the chance you might make more? Then my brother should have investigated the fund, the managers etc, but that all changes anyway. I don't know. The $225,00 my brother used to buy the annuity product was some of his portion of an IRA account that we all inherited a seperate and equal share of from my late Father, so maybe the inherited IRA money part makes a difference? I would like to understand this product better. It is an ING product.
the 7% is net; this "hypothetical" side is more or less insurance...you dont want to ever have to trigger this option because keep in mind you are annuitizing to receive an income based on that 7% compound rate. your options would be very limited...but it does give you the peace of mind that you are guaranteed a MINIMUM income regardless of how the markets performed. yes there is the opportunity to do better...that actually is the goal. the fees are coming from the "real" account balance so in your brothers case the break even point is at about 9% real return (9% - 2% fees). If he does get that 9% he shouldnt even consider triggering the rider - he has just as much in the "real" account and he can do whatever he wants with it (take the whole thing at once if he so chooses) the downside is that you would have paid all the fees for an option that was never used. is the security of knowing your are guaranteed x amount of dollars worth the fees? you decideHypothetical @ 7%225000 initial dep. 240750 end yr 1257602 end yr 2275635 end yr 3294929 end yr 4315574 end yr 5337664 end yr 6361300 end yr 7386592 end yr 8413653 end yr 9442609 end yr 10its a minimum of 10 yrs but if he so chooses he can let it keep going.lets say he is now 55 and wants to retire at 65 and he triggers the rider ING (based on current annuitization tables) would give him aprox 25k a year for the rest of his life. hope this clears things up a bit more. r
Thanks again. You know, I was a practicing lawyer for many years and I'm not dumb but this was complicated for me, till you explained it.I'm now getting 11.7% per year on my Vanguard Index Fund for a 1% fee so I'm not sure what made my brother buy this. Thanks so much for trying to explain it. I guess what you said is that you're guaranteed 7% in the hypothetical "insurance" account but if you elect to take the hypothetical 7% account amount it will be amortized? As to the real account, which you can have outright, I guess you have to hope they'll out-perform the index funds? Does ING have an outstanding long record of such performance? Will it continue? I guess he's gambling on that.
hmm...the only thing you have to worry about as far as ING is their paying ability because they are the ones backing the 7% guarantee. Real account would just be market value. i doubt they only have proprietary funds in the VA...most likely they have other funds available as well. This type of product is more or less designed for protecting your nest egg and at the same time giving you the opportunity for an upside. if your comfortable with risk then this type of product wouldnt be for you - its one less % you have to worry about earning =)r
Hi Robertg1Would it be possible somehow for you to speak with my brother Chad, either electronically or otherwise. My poor brother spent quite a bit of time yesterday talking to his broker who really does't understand the product and reading the contract itself. Now he says he is more confused than ever. I've passed your comments on to him and they have helped him to be able to formulate his questions but I guess either his questions haven't been answered or he doesn't understand the answers. You really seem to understand this type of annuity. Thanks. Hope I'm not being a pest. Ellen
sure, let me know his email and i'll send him my contact info. r
Thanks. Chad's e-mail is: firstname.lastname@example.org I will tell him you'll be writing.
Thanks so much Robert. You were incredibly helpful to my brother Chad who now understands exzctly what he bought. May lots of good Karma come your way. Ellen
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