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Author: tstalkin101 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Whats wrong with annuities Date: 2/29/2004 5:17 PM
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My mom is widowed and retiered. Living fine financially. BUT...I have heard so many neg. things about annuties. She has many of them. I asked her to ask her financial person what the fees are. She was told there are non. And was hinted at that there are some commissions,REG FLAG to me. She likes the security of them and the income they throw off. I don't like making other people rich off of her money. Paying a fee for services rendered is fine. What other alternatives can I learn about. She has some bonds and IRAs and owns a 500k house in calif. She's almost 71 and healthy (thank you God!)

Annuities ..YES or NO
Thanks for any help Fools!!
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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: 39536 of 75335
Subject: Re: Whats wrong with annuities Date: 2/29/2004 5:44 PM
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First, there's an annuities board in Fooldom where annuity information is collected.

http://fireboards.fool.com/Messages.asp?mid=20368186&bid=113191

It has been pointed out that annuities can be a good deal in some cases. The problem is that they have been heavily promoted especially to seniors who don't need them. Often their high commissions make them more attractive to the people who sell them than they are to those who buy them.

If you buy an annuity, Fools would suggest you get one from an organization like Vanguard, Fidelity, TRowe Price, or TIAA-CREF. They have low cost annuities with minimal penalties to move funds.

The major problems with annuities are these--

1. They are often expensive. High commissions are often paid to the people who sell them. These costs can eat heavily into returns for the first year.

2. Their restrictions and exit fees (ie surrender charges) make it costly to move your funds if performance proves to be unsatisfactory.

3. They offer potential for your invested funds to grow tax free, but they are often sold to people in the 15% tax bracket or lower. For these people annuities are not a good deal. The hassles far outweigh the advantages.

4. Your profits are taxed at ordinary rates when you take distributions.

5. Sale of annuities to seniors has been the subject of Attorney General Investigations in several states. The SEC has issued a recent cautionary note.

When annuities begin their payout stage they are said to be annuitized. You can buy immediate annuities to pay benefits. This is a way to invest the payout from a life insurance policy, or a 401K or IRA plan. The insurance company offers fixed monthly payments for a specified period, often for life, sometimes for life or to a surviving spouse, sometimes for a minimum number of payments. These various options cause the amount paid out to change. In other words, you pay an extra fee for most of these options.

Advantages--

1. You get larger monthly payouts from a given amount of money than you would get from investments (but the insurance company gets the whole premium and nothing is left for your heirs unless you have selected a minimum payment option).

2. You don't have to worry about your investments. The insurance company takes care of it. (Choose a reputable insurance company with a sound rating to avoid some of the worries.)

Disadvantages.

1. Payments are fixed for life (or the specified period). You have no protection from inflation.

2. There is no residual value for your heirs (except as above)

3. Your plan is fixed and is difficult and costly to change if your circumstances change.

As to alternatives, Fools would suggest investment in mutual funds such as an S&P 500 Index fund. This gives you maximum flexibility to deal with any situation. You are on your own to earn returns that meet your requirements. But costs are low and hassles are few.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39537 of 75335
Subject: Re: Whats wrong with annuities Date: 2/29/2004 7:52 PM
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Hi Paul,

Great post!!!!!!!!!

I just wanted to say hi. Caught one or more of your posts in my searching and wanted to drop in and say Hi.

Jean

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39539 of 75335
Subject: Re: Whats wrong with annuities Date: 2/29/2004 9:27 PM
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>>Annuities ..YES or NO

NO! It's impossible to know how good or bad your mother's annuities are- they are complex private contracts that could, for all we know, pay your mom a billion dollars when she turns 72.

But we can generalize. Most annuity contracts are tailored to benefit the insurance company, not the customer. The fees are high whether you see them directly through sales charges, or indirectly, through a low return on your investment.

I can tell you my own experience with my mother's money: after a divorce settlement and the sale of our family home last May, she found herself with a large amount of cash. Fortunately I got to her before the "financial planners" did, and invested her money in low fee Vanguard mutual funds, including their International Index, Small Cap Value, S&P 500, and their REIT and bond funds (she's 10-15 years away from retirement, so a heavy stock allocation is appropriate). Her portfolio has returned 34% since then.

It was critical to get her into a high growth protfolio- even if your investments return 10% per year, inflation and taxes bring that down to 4% or so. Is your mother earning enough from her annuities to outrun taxes and inflation?

Another investment rule is to keep it simple, and never buy anything you don't understand and can't easily research online. Mutual funds, CDs and stocks all fit this criterion. Do your mother's annuities?

Finally, what happens to your mother's principal when she dies? Does it go to you, or the insurance company? If she's giving up her principal, she should demand a much higher rate of return than if she can cash out anytime, as she could with mutual funds.

Nick





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Author: tstalkin101 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39540 of 75335
Subject: Re: Whats wrong with annuities Date: 2/29/2004 9:58 PM
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Paul & Nick,

Thank you both very, very much. Your time given to me is beyond measure. I thank both you. Paul I followed your links all the way to the MSN site and then the spredsheet links. Stopping at every page and learning the pros and CONS. I obviously have more info to get about her specific annuities and so on. My needs now will focus on finding other income vehicles for her that she will feel safe with. She has made it clear that she didn't know what she would have done had she not had those annuities during the market down turn after 2000. So I'll be trying to find income producing vehicles that she will also feel safe with.

Thank you both,
Todd

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39541 of 75335
Subject: Re: Whats wrong with annuities Date: 3/1/2004 12:29 AM
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Todd,

Thanks, and good luck with your Mother's investments. Regarding your comment:

>>didn't know what she would have done had she not had those annuities during the market down turn after 2000

Keep in mind that those with long term, low fee, correctly asset allocated portfolios had little to fear from the 2000 downturn, because:

a) They'd been investing consistently for years/decades already, and had already benefited from the market explosion of the 80s and 90s.

b) If they were retired or near retirement like your mother, they had 50% or so of their financial wealth in bonds, which have done quite well over the past few years, as well as real estate and some cash.

c) Instead of fearing the market and switching to cash just when stock prices had become relatively cheap again, they stayed invested, and enjoyed the rise in stock prices last year. And they'll continue to enjoy them in the coming years/decades.

Nick

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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39550 of 75335
Subject: Re: Whats wrong with annuities Date: 3/1/2004 12:15 PM
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A big problem with annuities is that they can be bought and sold, and there are people who put pressure on you to sell you your annuity at a weak moment. Your mother is 71 -- too young to know yet if she will be affected by Alzheimer's or another form of dementia. Can you find a way to make sure she cannot sign the annuity away too easily? My mother is trying to find a way that she can tie up her paperwork, such that she has to get a physical to check for signs of dementia, confusion, etc. before any of her wills or other financial documents are changed. It may seem extreme, but having seen so many older women get cheated, she is feeling very cautious.

A friend of mine, awarded a lifetime annuity in her thirties, sold it after a year to pay for a crack habit. The money was soon gone. Her lawyer had tried to tie up the money, knowing of her issues, but ultimately she got around it.

This has been my main problem with annuities -- you think you have a lifetime income and then someone gets it away from you. If she does decide to go this route, can you talk frankly to her about issues that other people have experienced in this area or would she be offended? Unfortunately, when my mother tried to talk frankly with a friend who was scammed, the friend cut her off. Later, the friend was indeed diagnozed with Alzheimer's, and my mother has been assisting her friend's attorney in getting some of the money back from the con artists, but they will never get everything back.

I don't know much about the expenses, but I'm confident some of the other excellent posters here can help you with that.

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Author: tstalkin101 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39554 of 75335
Subject: Re: Whats wrong with annuities Date: 3/1/2004 12:31 PM
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Thanks robin

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39560 of 75335
Subject: Re: Whats wrong with annuities Date: 3/1/2004 2:42 PM
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tstalkin101, you asked:

<< My mom is widowed and retiered. Living fine financially. BUT...I have heard so many neg. things about annuties. She has many of them. I asked her to ask her financial person what the fees are. She was told there are non. And was hinted at that there are some commissions,REG FLAG to me. She likes the security of them and the income they throw off. I don't like making other people rich off of her money. Paying a fee for services rendered is fine. What other alternatives can I learn about. She has some bonds and IRAs and owns a 500k house in calif. She's almost 71 and healthy (thank you God!)

Annuities ..YES or NO
>>

My response would be . . .it DEPENDS.

You've already stated se likes the security of them, which would indicate he has fixed annuities that probably don't have high costs, if any, associated with them. And we may find other things she likes about them (see some advantages I've listed below).

Listing advantages and disadvantages in a vacuum is really pointless and has little validity. After all, just referring to “annuities” alone is not specific enough. Annuity contracts are not created equal and can be so different from one to another. Any real advantages or disadvantages really depend mostly on the application of any particular annuity and how one specific annuity compares to another within a specific set of issues. Maximizing return may not be the ONLY issue when contemplating the use an annuity.

Some of the following links may help in understanding some of the issues involved with annuities:

http://www.savewealth.com/retirement/annuities/history/

http://www.grouphealthplans.com/why_fixed_annuities_are_better_than_CDs.htm

http://www.nasmd.org/Annuities%20Workgroup%20Product_October%202003.pdf

http://www.americanheart.org/presenter.jhtml?identifier=957

http://www.bsc.edu/communications/southern/fall03/pages/pg41.pdf

http://www.businessweek.com/@@Lq5HCYcQ0rKlMQ0A/magazine/content/02_30/b3793621.htm

http://www.fpanet.org/journal/articles/2003_Issues/jfp0203-art2.cfm

http://www.navanet.org/res/outlook/2003_articles/Examining_Sabatini.pdf


If you just want to look at some advantages and disadvantages of the annuities in a generic sense, which may or may not even be an issue:

Advantages:

Guarantees are provided
No limit on contributions
Tax Deferred
Unlimited Income (can't outlive the income)
Guaranteed minimum return
Has liquidity
Can change from one annuity to another with no taxes or penalties
Transfer avoids probate
Heirs can receive a guaranteed income for life
Creditor protection
Investments managed for you
Bonus Credits
Not all income received is taxable income.
Medical conditions and produce larger income flows
Can lower one's income tax bracket
No taxation on asset allocation rebalancing
Can reduce portfolio risk and volatility
Augments charitable giving along with reducing taxes and increasing returns
Provides asset protection for Medicaid under current rules.


Disadvantages:

Most have ongoing fees and expenses
Lose control of investment decisions
Requires a long term commitment
Not staying with the commitment has high costs (early exit costs)
No turning back once annuitized
Taxes are ordinary income taxes, not long-term capital gains rates
Their individuality makes them complex
Too many features make them hard to understand
Most of the features are not free


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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: 39573 of 75335
Subject: Re: Whats wrong with annuities Date: 3/1/2004 7:22 PM
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pauleckler: "When annuities begin their payout stage they are said to be annuitized. You can buy immediate annuities to pay benefits. This is a way to invest the payout from a life insurance policy, or a 401K or IRA plan. The insurance company offers fixed monthly payments for a specified period, often for life, sometimes for life or to a surviving spouse, sometimes for a minimum number of payments. These various options cause the amount paid out to change. In other words, you pay an extra fee for most of these options.

. . .

Disadvantages.

1. Payments are fixed for life (or the specified period). You have no protection from inflation."


While I really liked your response, it is my understanding that some issuers offer annual inflation adjustments, but at a price, and net result is not significantly different that "SWR" per REHP except that you trade away all upside for "guarantee" from issuer.

Regards, JAFO
(posted before reading entire thread)



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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: 39612 of 75335
Subject: Re: Whats wrong with annuities Date: 3/2/2004 4:09 PM
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Thanks JAFO and thanks to TTRoberts.

I know we have some pros who post routinely on these boards, and I clearly am not one. I am merely an experienced investor (who tries to share what he has learned without getting in over his head too often).

As TT pointed out, annuities are out there with numerous special features. That makes it difficult to generalize. All we can hope to do is make Fools aware so they know what questions to ask if they find themself in need of these services.

They tell me insurance companies are clever about coming up with special features that make their policies unique. Its a selling point the salesman can promote. It makes it difficult for the potential buyer to compare their product with that offered by the competition. It often gets them the business.

Those extra features can be nice, but its almost hopeless for individuals to figure out the cash value of the features. (Professional actuaries do this and even insurance companies have only a handfull of them.) Is the feature a good deal? No one knows. But the salesman is good at taking you into a hypothetical situation and then charging you a bit more for protection against that risk.

Policies that only pay under highly specific circumstances are inexpensive. But the odds of collecting are tiny. So it becomes almost like a lottery ticket.

You can do this with annuities too. Buyer beware.

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Author: steve2004 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39710 of 75335
Subject: Re: Whats wrong with annuities Date: 3/5/2004 9:24 PM
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It looks like you've gotten lots of helpful information.
One thing I did not see mentioned was that using an on-line
annuity calculator can show you the payout differences between
various annuity contracts that you might buy from a specific annuity seller.
I found this quite helpful in getting a basic picture about annuities.
It might even help you gain an understanding of whether
the annuities you mentioned are good/bad/indifferent when compared
to other companies' offerings. I don't know how many calculators
are on the Web but while following some Fool's recommendation
to read Warren Buffett's annual letters to his stockholders,
I found the annuities calculator at: www.brkdirect.com

This is my first post ever, after having used a 30 day trial membership
and then happily signed up. Don't know a thing about
Berkshire other than what I've read during the 30 days
but it would not surprise me if the Berkshire Direct annuities
were a well above average deal.

Good luck to you and your mom.

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Author: TourDeFarce Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39734 of 75335
Subject: Re: Whats wrong with annuities Date: 3/8/2004 12:10 AM
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I would like to add that the www.brkdirect.com calculators can be helpful when computing the relative values of pension annuities offered by an employer. For example, let's say your employer offers the option of a monthly annuity or a one time lump-sum payment. You can plug in the figures for the annuity, determine it's current "street value" and compare it to what your employer is offering.

Also, note that some annuities offer survivor benefits (but reduce payments accordingly). I have been told that in general</> it's best not to take this option but instead take out term life to cover the survivor.

TDeF



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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: 39739 of 75335
Subject: Re: Whats wrong with annuities Date: 3/8/2004 10:41 AM
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TourDeFarce: "I would like to add that the www.brkdirect.com calculators can be helpful when computing the relative values of pension annuities offered by an employer. For example, let's say your employer offers the option of a monthly annuity or a one time lump-sum payment. You can plug in the figures for the annuity, determine it's current "street value" and compare it to what your employer is offering."

Excellent suggestion.

"Also, note that some annuities offer survivor benefits (but reduce payments accordingly). I have been told that in general</> it's best not to take this option but instead take out term life to cover the survivor."

Run the numbers.

Also, how do you cover the risk of outliving the term of the term insurance and how do you cover the expense of late in life in insurance (whether term or permanent)?

Regards, JAFO



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39742 of 75335
Subject: Re: Whats wrong with annuities Date: 3/8/2004 12:32 PM
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TourDeFarce, writes:

<< Also, note that some annuities offer survivor benefits (but reduce payments accordingly). I have been told that in general</> it's best not to take this option but instead take out term life to cover the survivor. >>

JAFO31 responds:

<< Run the numbers.

Also, how do you cover the risk of outliving the term of the term insurance and how do you cover the expense of late in life in insurance (whether term or permanent)?
>>

Good points JAFO. The numbers should definitely be run on a case-by-case basis as in some cases it may work well and in others it may not come close to being a viable option.

Term life insurance is really not the solution as premiums would become far too expensive even if one plans a term + side-fund program. The solution tends to be that of using a permanent policy. But . . . the time to buy the policy is not at the time of retirement when one is then taking that retirement benefit. If one is in a retirement program like this (a defined benefit program for example), the time to consider permanent life insurance in order to take the maximum retirement benefit would be 10 to 15 years or earlier prior to taking the retirement income. The objective would be to end up with a life insurance policy that you don't have to pay for any longer upon taking the maximum income. This way the cost of insurance is not affecting cash flow. Then the survivor is guaranteed a way to continue the same income.

One could also buy a paid-up policy at the time of retirement. But not that many people have saved enough cash to do that at that point, which often makes this an unacceptable solution.

This technique is often referred to in the life insurance industry as a Pension Maximization Plan. It's not a planning technique that works out well in ALL cases. So, as JAFO says . . . one should “run the number” in order to see how it might work in any particular case.


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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39744 of 75335
Subject: Re: Whats wrong with annuities Date: 3/8/2004 1:50 PM
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Term life insurance is really not the solution as premiums would become far too expensive even if one plans a term + side-fund program.

I'm sorry, but this is complete BS. You can buy plenty of term insurance for a fraction of the cost of the other fee/commission generating policies that financial advisors so like to peddle on unsuspecting suckers. If you need some life insurance, buy term. When you no longer need it, stop buying it. Invest the difference in premiums in SP500 and you'll end up far ahead of where the financial advisors would leave you after they've sucked your blood dry.

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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: 39745 of 75335
Subject: Re: Whats wrong with annuities Date: 3/8/2004 1:54 PM
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ResNullius:

<<<<Term life insurance is really not the solution as premiums would become far too expensive even if one plans a term + side-fund program.>>>>

"I'm sorry, but this is complete BS. You can buy plenty of term insurance for a fraction of the cost of the other fee/commission generating policies that financial advisors so like to peddle on unsuspecting suckers. If you need some life insurance, buy term. When you no longer need it, stop buying it. Invest the difference in premiums in SP500 and you'll end up far ahead of where the financial advisors would leave you after they've sucked your blood dry."

Did you even read the context of this thread, or did you just react viscerally?

The OP was talking about retirees and pension choices (not taking dual life to cover other spouse), so insurance would be purchased by 65 year old and would be needed until either insured or other spouse, who was being protected, died.

So assume that 65 YO male and his 63 YO spouse, both of in good health and with life expectancies of 20+ years, could profitably buy term and invest the difference until one of them dies.

Regards, JAFO


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