Hard Lesson on Annuities

**disneysteve** · 10-26-2006, 08:36 AM

Re: Hard Lesson on Annuities

Thanks for posting this. So many people get ripped off on annuities. An annuity doesn't belong in a tax-deferred account since it is already tax-sheltered, but it happens all the time.

Annuities tend to have high expenses and commissions.

That said, annuities are growing in popularity as more and more folks reach retirement age with inadequate savings. By purchasing an annuity, they can at least guarantee a lifetime income that will never run out. So the field is growing, which means consumers need to be even more careful and educate themselves before investing.

**creditcardfree** · 10-26-2006, 08:37 AM

Re: Hard Lesson on Annuities

Originally posted by HalMd

Why do I feel an annuity was a poor choice? First, an annuity offers tax shelter, but the annuity was purchased in an IRA account which is already, by definition, tax sheltered.

That is the reason that I don't like them either.

So that you know you weren't the only one to make the mistake. My husband rolled his 401k money into an IRA annuity on the advise of his father. We were married at the time and I actually knew this was bad advice and told my husband. Unfortunately, he trusted his father so much he rolled it anyway. We actually pulled it out at a loss about 6 years later and still paid a surrender charge. It was a bad move all the way around.

The money is now at Vanguard and growing like a weed.

Thanks for sharing your lesson. Annuities are only for specific situations and are costly regardless.

**Elgin526** · 10-26-2006, 10:26 AM

Re: Hard Lesson on Annuities

When would an anuity be a good idea? I come from a long line of VERY long lived women (90+ in near perfect health) and my biggest concern is outliving my money. I only have 401k's and IRA's to fund my retirement, no pensions. While I intend to retire with enough money to see me through, you just never know. Is an anuity a good option as a part of a larger, well balanced portfolio? And is it better to wait until you're close to retirement to get one, or should you get one earlier?

**PRICEPLUS** · 10-26-2006, 10:28 AM

Re: Hard Lesson on Annuities

I had an annuity. I got rid of it. My "financial advisor:" got her commission selling the product. I deal with my own investing and financial affairs now!

**vsjhoc** · 10-26-2006, 10:47 AM

Re: Hard Lesson on Annuities

I fell for it too. Thanks AmEx! Fortunately it's not in an IRA. Only five more years to go to avoid the surrender charge!

**creditcardfree** · 10-26-2006, 12:29 PM

Re: Hard Lesson on Annuities

Originally posted by Elgin526

When would an anuity be a good idea? I come from a long line of VERY long lived women (90+ in near perfect health) and my biggest concern is outliving my money. I only have 401k's and IRA's to fund my retirement, no pensions. While I intend to retire with enough money to see me through, you just never know. Is an anuity a good option as a part of a larger, well balanced portfolio? And is it better to wait until you're close to retirement to get one, or should you get one earlier?

That is a good question. I think for me if I saw that my money wasn't going to last as long as I expected and was in good health, I would be looking for a annuity to help stretch the dollars I had left. So I think it would be sometime after retirement and even into the later years of retirement. That is my gut feeling about it.

It is true that they serve a purpose, this would be an example of one of them.

**greedy4chips** · 10-26-2006, 12:42 PM

Re: Hard Lesson on Annuities

I would like to hear anyone who doesn't have a commission coming from the sale of an annuity actually state the benefit of owning an annuity. I wouldn't hold my breath! I don't think there is one legitimate reason to buy an annuity versus a good financial plan.

Basically my plan to not outlive my savings is to put my retirement money away into risk free investments and to withdraw only what it earns or less. This may be impossible if you have too little money initially to invest, but if this is the case an annuity will not rescue you anyway!

Avoid annuities like the plague IMHO.

**scfr** · 10-26-2006, 01:18 PM

Re: Hard Lesson on Annuities

Thank you for sharing your hard-learned lesson.

A while back, at the advice of a banker, we met with a financial advisor who tried to sell us on a variable annuity. We said we'd think about it, went home, did a bit of research, and very quickly decided not only were we not interested but we wanted nothing more to do with that particular financial advisor. (Thank you Andrew Tobias!)

However, I must respectfully disagree with some of the previous posters and say that I do believe there are special circumstances when a FIXED-INCOME annuity might be a smart move. Here is a specific example from my life, and I'm sure there are other cases where it would be a good idea: I have a brother who is developmentally disabled and at some point is going to need financial support from me or my other siblings (probably gonna be me tho). Per my will, a trust will be established for him when I die. I have directed the trustee to look in to a fixed-income annuity. That is one way to make sure my brother has some money coming in for the rest of his life, without requiring the trustee to spend a lot of time actively managing the money. I have left the decision to the trustee, and they will decide whether an annuity is the best course when I do kick the bucket. [I have actually requested a charitable fixed-income annuity, as a way of leaving some money to my charity of choice in addition to providing for my brother.]

**vsjhoc** · 10-26-2006, 02:02 PM

Re: Hard Lesson on Annuities

Originally posted by greedy4chips

Basically my plan to not outlive my savings is to put my retirement money away into risk free investments and to withdraw only what it earns or less.

What's a risk free investment that will earn enough for you to live on?

**HalMd** · 10-26-2006, 02:16 PM

Re: Hard Lesson on Annuities

Originally posted by vsjhoc

What's a risk free investment that will earn enough for you to live on?

I suspect the poster means lower risk investments like CDs and bond funds.

There are formulas for how much is "safe" to take from your retirement each year during retirement to outlive your money. Surely taking out only the interest portion is one way to do it.

However, keep in mind that, if you live 30 years in retirement, the interest may stay the same each year, but due to inflation those dollars won't go as far.

**disneysteve** · 10-26-2006, 04:36 PM

Re: Hard Lesson on Annuities

Originally posted by HalMd

I suspect the poster means lower risk investments like CDs and bond funds.

There are formulas for how much is "safe" to take from your retirement each year during retirement to outlive your money. Surely taking out only the interest portion is one way to do it.

However, keep in mind that, if you live 30 years in retirement, the interest may stay the same each year, but due to inflation those dollars won't go as far.

There is no such thing as a risk-free investment. There are two kinds of risk. Most people think of investment risk, meaning the investment could lose money. But they forget about inflation risk. The risk that the buying power of the money could be eroded over time. Let's say you put your money in CDs earning 5%. Taxes eat up 1/4 of that, or 1.25%. Inflation takes another 3%, leaving you with a net gain of 0.75%. And if inflation ticks up a little, you'd actually be losing money without spending a penny. There'd be very little interest available to spend and you couldn't touch the principal because then you'd really be in the hole.

The usual advice for retirement spending is 4% of your principal in year one, adjusted for inflation each subsequent year. Hopefully, your accounts will be earning 7% or more. By limiting spending to 4%, you account for taxes and inflation.

**greedy4chips** · 10-26-2006, 06:18 PM

Re: Hard Lesson on Annuities

Yes I did mean Cds and Bonds for a risk free type of investment. If inflation and taxes are a factor then every investment is at risk of not keeping pace regardless of earnings. Either Brazil or Venezuala had 2000% inflation in the 80's from what I remember hearing on the news.

Annuities have such a bad reputation because of the high commission fees. If I needed a stable earnings for the rest of my life I would just put all my money into CDs and any interest earned would go to me on a monthly basis instead of reinvested into the CD. Obviously I would have to have enough money to generate the needed income to live this way without touching the principle to gurantee being able to outlive the money. If not then I would have to tap into the principle, but that creates a declining principle and possible interest earnings.

All this is of course subject to interest rates on CDs and if they drop too low then we will have to take on additional risk to ensure enough growth to cover our income needs.

If I had $1 million in CDs right now I could live very well on the interest alone. That would not however be enough for me to completely retire on. Considering I am 39, I believe I would need 2-3 million in CDs to allow me to still grow the principle while living off a portion of the interest for the rest of my life.

**Broken Arrow** · 10-28-2006, 08:43 PM

Re: Hard Lesson on Annuities

This is an excellent thread. Thank you for sharing your experiences.

**greedy4chips** · 10-30-2006, 06:58 PM

Re: Hard Lesson on Annuities

Clark Howard explored this topic extensively today on his radio show. Clark doesn't like annuities and challenged anyone to call him and sell him on the positive side of an annuity. I wish I could have heard the whole show....perhaps he archives it.

Hard Lesson on Annuities