My parents are retiring, and want to put what little they have of an IRA and retirement plan (about $70K) into an annuity with an insurance salesman from their church. They had no idea what an annuity was, but did know something about a 3.5% fee. They couldn't tell me more except that he was promising (their words, not necesarily his) them $350/month in income (from $50k of the money. They had no idea what the investment vehicle was other than "mutual funds". My mother freaked out when she saw that she had "lost" $800 from her S&P 500 index fund. Her share (about $20K) she wants to "leave to the boys", so she seems somewhat open to long-term buy and hold.I am having a hard time explaining that annuities are probably not the investment vehicle for them. In about a year and a half they have to start taking minimum distributions. From the $50k they would like some income, but the $20k my mother wants to leave and grow. Any suggestions on what how to tell them about annuities? I am trying to get them to put it into Vanguard or other low-fee funds.Taylor
Any suggestionsTell your mother to spend the $20k on a once-in-a-lifetime adventure. She deserves it.If your parents want to make sure that their $70k stock portfolio will last their lifetime (the next 20 years or so), they can't withdraw more than 5% a year, adjusted for inflation, from it. That means they will start getting $3.5k/year, or about $290/month. The bad news is that it is less than $350/month the annuity salesman promised. The good news is that the money will increase, in the long-run and your mother will have more than $70k to "leave to her boys". Search back for messages with "total return" for more info.Regarding your mother freaking out when the value dropped. To convince my mother to invest in stocks, instead of CDs, I drew a slowly rising straight line, representing the return from a CD. I then drew a faster rising sinusoidal curve, representing the stock market, overlaying the CD line. The troughs would occasionally dip below the CD line. Eventually, I drew the entire curve above the CD line. I then asked my mother which final point she prefered. Inevitably, she picked the stock market curve, since it ended higher. This line, I told her, was the stock market behavior, with its ups and downs. Eventually, you come out ahead. It also helped that she trusted me to know what I was talking about, since I had been investing for a few years.The problem with the annuity, of course, if it's invested in mutual funds, the return is not guaranteed except at a rate of about 2 or 3%. Also, your parents would have to base it on both their lifetimes to make sure your mother continues to get a payment after your father dies (the probable case), which decreases the monthly payment. When both die, the payments stop. There is no inflation protection, and you have to rely on the insurance company staying solvent.Zev
The only one who gains from this is the insurance salesman. If your parents are worried about losing their money have them buy long term US Treasuries. They will get income and the money will there if they need it in the future.
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |