Bogleheads

[jml39]

I am interested in this annuity because my 38 yr old son has recently closed his Vanguard IRA and that of his wife in favor of this product. He was in an appropriate Target Retirement Fund for his age, which of course dropped in value early this year. So he panicked just about the time he was approached by his friend who recently went to work for Met Life. The 6% guaranteed payout was the clincher for him, despite huge expenses of annuities. I found this review using Google:

http://www0.epinions.com/revie....7084341892

Can anyone comment on the down side of this product which would outweigh the guaranteed 6% payout?

[nisiprius]

[jml39]

This review never mention 'inflation indexed', only guaranteed 'at least 6%' interest annually. So your annuity account will always grow by at least 6% annually. In times of low interest rates and low inflation rates, that sounds good. That's the appeal right now. Not so in times of high interest rates and/or high inflation.

But what about when the underlying value of the funds in your account loses money? And after the huge expenses of the annuity and underlying funds, this could happen. Even if the annuity paid 6% of the value of your account after a yearly loss, that would necessarily mean you would get 6% of a reduced amount of underlying annuity value. Does that make sense? I'm trying to understand the pitfalls of this..

My guess is he hasn't read the prospectus, trusting his old high school friend's explanation instead.

[Oicuryy]

Hi jml39,

That review is about a Guaranteed Minimum Income Benefit (GMIB). Are you sure your son bought a GMIB?

IMO, the reviewer does not understand GMIBs. Here is a link to a Humberto Cruz article on GMIBs.
http://www.orlandosentinel.com....1273.story

Ron
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Money is fungible

[jml39]

Hi Ron, Thanks for responding. He said he was guaranteed 'at least 6%' payout. Since he is only 38 and will be employed a long time, he is assuming the 6% will accrue till he retires.
Can't read your suggested reading right now, am going out, but will read later today and get back. Cheers.

Joan

[nisiprius]

[bluemarlin08]

The guaranteed 6%ayout is being misrepresented, as previously posted it is GMIB.

[jml39]

Nisiprius, thanks for your suggestion. I'll bring it up, but doubt if it will be acted upon.

Also, I went to the Met Life site, and found out that the 6% guaranteed payout is a rider and costs .8% per year in addition to the 1.5% annuity expense, plus some added underlying fund expenses. That raises a red flag to me.

I'm continuing to look around for more info, just so I have it ready if I'm ever asked (but I probably won't be).

[subrosa]

From the review:

[nisiprius]

jml39, another thing to keep in mind--especially in situations where someone else is doing something suboptimal.

If someone you care about is investing in something seriously unsuitable--like putting half their nest egg into an individual REIT or going partners in a local restaurant with no experience running a small business--then one might consider intervening.

If someone you care about is investing in something reasonably sensible and reasonably suitable--just mediocre and overpriced and fee-ridden--that's not the end of the world. You intervene if someone is doing something wrong, you don't intervene just because you think they're overpaying, or you think something else is better, or it isn't the way you'd do it.

I still stand by my "get it in writing" suggestion because I'm worried that your son isn't getting what he think he's getting. But I think he's probably doing something that's well within the range of prudence and sanity. Not what I'd choose, not what you'd choose, not the best choice, but not by any means terrible.

It's like buying an overpriced car--as distinct from buying an unsafe car.

I totally agree with subrosa. A 2.3% expense ratio is insane. Remember, you pay it every year; if you invest for 30 years you pay that 2.3% thirty times. Do the math: the financial company ends up with more than half of the earnings. I'm not an absolutist about ERs. I don't honestly think the difference between 0.10% and 0.20% matters much. 0.50% is a little high. 1% is too high, but I've personally owned a fund that charged almost that much. 2%? No, no, no.
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[jml39]

That's exactly how I feel about it. And I didn't make a fuss, just politely disagreed. That's how it stands now. But those expenses are a killer!

So I'm concentrating my efforts on my daughter who is studying to be a paralegal so she can reenter the work force with a marketable skill after staying home for eleven years and raising four kids.

Sent her a copy of the new Boglehead Retirement planning book, and a copy of Coffeehouse Investor. That's my personal favorite for beginners. I just reread it and enjoyed it even more than the first time.

Anyway, thanks for all the input from everyone. I've got three kids, and my eldest is in the military and has the TSP and Vanguard for his wife's IRA and their 529 plans. So if my daughter reads the books and becomes a believer, two out of three converts ain't bad.

Joan

[Taylor Larimore]

Hi JM:

In Larry Swedroe's latest book, "The Only Guide to Alternative Investments," Larry divides investments into The Good, The Flawed, The Bad, and The Ugly.

Equity Indexed Annuities are among "The Ugly."
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Best wishes
Taylor

The Majesty of Simplicity