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No. of Recommendations: 1
Please have a look at this and perhaps suggest a short/quick response for me to my friend. I want only to give him a bit of good advice and then will separate myself from the matter. He's a big boy and can take care of himself. I have enough to do to take care of myself (and 2 cats) ;-)

I got an email from a friend (single, no children) this evening -- I don't know how much money he has but I know he inherited "some money" from a partner who died about 15 years ago (much older than my friend) and perhaps a bit from his mother. I suspect that he's taking money (as much as he needs) out of his stash (don't know if it can accurately be called "savings"). He did not have anything in IRAs (Roth or Traditional) and I'm not sure if he had money in a 401K. Lives in a co-op apt. w/ VERY reasonable maintenance. Mid-60s, laid off from support job with law firm, no pension. He might have enough that he's taking 2% or he might be taking 8% - no way of knowing.

Email 1:
Hi Dorothy, Since I value your opinion on these matters I wonder if you might tell me your thoughts on what I have been thinking of doing. I have been considering an immediate guaranteed life income annuity, and just wondering if you have any strong thoughts about annuities. AARP has been advertising one with NY Life, which is about 5%. Guaranteed life income (15 years) with payout of balance to beneficiary if I die before the amount I put in has not been paid.

Just wondering if you have any strong negative thoughts on annuities or positive. It would be the best I could do to set up kind of my own pension for life. Of course, it will not be inflation proof, but it would still be guaranteed income for life.


My response:
I strongly suggest you talk to Vanguard and NOT AARP. www.vanguard.com
Seriously I would not go with any other company.

I have considered an annuity but haven't yet done so because of interest rates being so
(Note: I learned this from this board. Thanks.)

My 2nd response:
One of the suggestions I've heard that I like is to set up a "CD Ladder" -- This gives you all the advantages of an annuity without the risks. After you look further we can go into the alternatives such as the ladder. (Note: I learned this from this board. Thanks.)

His response:
Hi Dorothy, and thanks for the quick response. I have been checking around with Fidelity, NY Life (the one being promoted by AARP), Dreyfus and JP Morgan. For the most part they all seem to be coming in at around 5% and I will have another go round on Wednesday with another advisor, and then I think I'll have heard enough on annuities.

There are about 3 types that are of interest, (fixed, variable and guaranteed) and I have been leaning toward the guaranteed fixed income variety. In addition to the fixed annuity, Fidelity, is also offering an inflation protected variable annuity that they say will not ever go below the initial rate of say 5%. If the market, over the course of a year, goes up, then the rate on the annuity goes up and can not go down again. Say it goes from 5% to 6%. 6% then becomes the new rate and it cannot go back to 5%. With this particular "model" there is an annual fee of about 1%.

Sooooo, one more sit down on Wednesday with an advisor and then we'll see. I am not entirely committed to this, but it would be really nice to have a stream of guaranteed income for life in addition to Social Security. The annuity I favor is a life time guarantee of income and also guaranteed for 15 years. If I die before the 15 year period is up, the balance of what has not been paid out to me, on my initial investment, will go to my estate. If I live beyond the 15 year period, then I "win the bet," continue to collect income, but nothing more will be paid out once I'm gone.
[Note: (Note: I learned enough from this board to know that what sounds too good to be true is too good to be true. Thanks.)
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No. of Recommendations: 7
Ask him to talk to Vanguard as you first suggested before going with any of the others he's talked to in order to compare. Advise him you've heard nothing but horror stories of hidden fees and of "guaranteed returns" that... aren't (see bold type below).

Reinforce the integrity of Vanguard and tell him he'll get the advice that is best for HIM.

Tell him that he has this backwards: AARP has been advertising one with NY Life NY Life has advertising one through AARP and AARP is getting a fee from NY Life to do so. From their ad in AARP Bulletin:

AARP has established the AARP Annuity Trust to hold group annuity contracts for the benefit of AARP members. AARP Lifetime Income Program products are provided by New York Life Insurance and Annuity Corporation (NYLIAC), not by AARP or its affiliates. Please contact NYLIAC directly for product details, including any limitations and exclusions. NYLIAC pays a royalty fee to AARP for the use of AARP's intellectual property. These fees are used for the general purposes of AARP.

The AARP Lifetime Income Program is underwritten by New York Life Insurance and Annuity Corporation (NYLIAC), a Delaware Corporation (NAIC #91596), Newark, DE 19713. AARP membership is required for Program eligibility. Guarantees are based on the claims-paying ability of NYLIAC. Specific products, features, and/or gifts not available in all states or countries. NYLIAC is licensed in all 50 states. (Group policy form IA-01, IA-02, and IA-04). New York Life Insurance and Annuity Corporation is a wholly owned subsidiary of New York Life Insurance Company.



Tell him since he's not totally committed to this, he should take his time to get it right.

Tell him all you learned from this board. Particularly: I learned enough from this board to know that what sounds too good to be true is too good to be true. See bold type above :-)

Invite him to The Fool to learn more.
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No. of Recommendations: 3
A few ideas on how to approach this;


1) Just like with a major medical decision, getting a second opinion is a good idea. Before he buys anything it would be very good to have a different fee only financial advisor who is paid by the hour, not commission, take a look at the proposal.

2) If he has not started social security yet, then delaying the start of social security, or suspending social security to get a larger monthly check is in essence buying annuity. This is usually better than an annuity that could be purchased for the same amount.

3) If his is dealing with a large amount then buying several annuities from different companies will reduce the impact if one of the companies issuing the annuity goes belly up.

4) If an annuity is right for him, then the question becomes when is the right time to buy it. If waits until he is older then the cost/payment will be much better. Right now interest rates are still near generational lows and interest rates are a major component in determining the cost of an annuity which makes it a risky time to buy an annuity. If he waits until he his older to buy one, then in addition to getting a better payment because he is older, the interest rates may be higher then too.

Greg
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2) If he has not started social security yet, then delaying the start of social security, or suspending social security to get a larger monthly check is in essence buying annuity. This is usually better than an annuity that could be purchased for the same amount.

He was just short of normal retirement age when he was laid off -- He started SS immediately.

I have to be careful not to get myself too personally involved in this. But I think I've had two really interesting and, at the risk of being hyperbolic, terrific responses. This afternoon I'll cut and paste a response and perhaps post it here.

Thanks...
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A couple of suggestions --
Your recommendation to check with Vanguard is good, but, I suggest you also check with http://www.immediateannuities.com/ At that site you can input some data and it will return annuity information. Vanguard is good but not the only game in town.
Your friend might consider dividing his "stash" into piles and put a portion into an annuity now and plan to put another portion in several years from now.

Bob
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No. of Recommendations: 4
I have been checking around with Fidelity, NY Life (the one being promoted by AARP), Dreyfus and JP Morgan. For the most part they all seem to be coming in at around 5% and I will have another go round on Wednesday with another advisor, and then I think I'll have heard enough on annuities.

This is like wondering if you need a car, so first you ask the Ford dealer, and then the Buick dealer, and then the Lexus dealer... guess what, they all think you need a car! And they have the car you need!
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There is nothing wrong with a fixed life annuity from a reputable insurer with a long history of providing such things and a sound credit rating from places like A.M.Best or S&P credit rating services.

A couple of other points you may wish to pass along:

The person who has proposed this option is NOT an advisor, anymore than the guy at the car dealership is his Transportation Consultant. He's a sales rep. Nothing particularly wrong with being a sales rep and earning your income from the commissions on what you talk others into buying...but its NOT an advisory relationship.

The sales rep will be happy to tell him the "Good Stuff" about this particular life annuity with a 'Period Certain' (this is the technical name for what you are referring to as the 'guarantee'). But what the sales rep is NOT going to offer is any of the "Bad Stuff"....so here's some of it...

1. Zero flexibility once the annuity starts
2. Nothing left if he dies prior to his life expectancy. The 15 year 'period certain' will provide a continued income stream to his designated beneficiary for the remainder of the 15 years, but sometimes this remaining payment stream may be reduced under certain conditions. He should try to find specific language in the annuity contract that guarantees that under no circumstances would the remaining annuity payments be reduced, including due to the cause of death, market conditions, etc, and make sure the beneficiary knows this. BTW, why does he think he needs income continuation should he die early. This may be an expensive 'add on' to a simple life annuity that he really doesn't need, but the sales rep may be recommending because it fattens his commission.
3. No adjustment for cost of living. Inflation adjusted life annuities are available, but they are usually capped at a max adjustment per year and an overall life cap. And they can be VERY expensive.
4. If the insurer goes bust (is taken over by the state insurance regulators), his fixed payment amount may be reduced.

BruceM
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a sound credit rating from places like A.M.Best

Do be sure that the company you are dealing with is listed in AM Best.

And don't be surprised to find that companies like Vanguard are not listed in AM Best. Instead they too are resellers of annuities offered by major companies and then rebranded. I think someone mentioned before that Vanguard's annuities come from (as I recall) Ohio Life Insurance Co.

Before you sign, before you commit your funds, make sure you understand all the details including who stands behind the contract.
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