Bogleheads

[Rosie]

I'm very near retirement and will have to take a sizeable amount of money in my Deferred Retirement Option Plan and roll it into some other type investment. How much I roll over depends on the amount I use for debt relief.

I need to take a portion and pay down some debts in order to be able to live on my retirement benefit before SS becomes available. I'm 591/2.

I am being solicited to purchase an annuity which will give me a 10% bonus up front and guarantee of 8%. It is a 10 yr. annuity with the option to withdraw 10% a year.

I don't know what to do. I don't have a financial planner or advisor and don't want to be taken advantage of.

[KyleAAA]

These types of annuities are usually very, very bad deals. Without knowing the specifics of the annuity you've been offered, my default answer would be "no, run far, far away." But like I said, we don't know the details. I will say, however, that any "guarantee" of returns like the 8% guarantee you mentioned will probably be subject to so many conditions and exceptions it's not worth the paper it's printed on.

If you buy ANY sort of annuity at all it should probably be a Single Premium Immediate Annuity.

Most important: DO NOT BUY ANY INVESTMENT YOU DON'T COMPLETELY UNDERSTAND. Your financial advisor probably has his own best interests in mind, not yours. Do not take his word for anything. Do your own research.

[livesoft]

You should not purchase this particular annuity, but perhaps a single premium immediate annuity is in your future.

Here is a short discussion of about what I think is a similar annuity:
http://www.early-retirement.or....48973.html

Everyone responded to avoid this like the plague.

[ruralavalon]

[mephistophles]

Ask for a proposal that shows all the contract features, especially costs,surrender charges, sales loads, etc. Share that information on this board and you will get better answers. Fixed deferred annuities can be of high quality and can be part of a good investment program. Many fixed annuities are poor choices because of extremely high surrender charges and contract language which is poor.

I seriously doubt the 8% guarantee, so get us the facts.

[YDNAL]

[livesoft]

I wonder if the guarantee 8% return is after 10 years you are guaranteed to get back 8% more than you put in? That would be a pretty piss-poor rate of return.

[BruceM]

[Taylor Larimore]

Hi Rosie:

Welcome to the Bogleheads Forum!

My guess is that your first post here is going to save you lots of money. This Wall Street Journal article explains:

Annuity Fine Print: Guarantees Aren't Always Guaranteed

For what it's worth, I was once sold annuities (but not this kind).
_________________
Best wishes
Taylor

The Majesty of Simplicity

[kenbrumy]

Rosie,

I can assure that no one cares more about your money than you do. Bogleheading is nothing more than a journey of financial self-determination. Personal finance is not complicated and with a little reading you can outperform 80+% of Wall Streets "best and brightest." You'll also save all the money needed to support their lifestyle you'll pay in fees.

You were clearly offered a "deferred annuity." I personally believe anyone selling these sort of rip offs should have a spot reserved for them in Hades. You will find the "guarantee" to be rather limited and all the fabulous returns diluted by fees upon fees. All of the numbers thrown about are probably also dependent on your converting your pseudo profits into a SPIA at a later date at a very poor conversion price. I suggest you don't even bother wasting your time studying this sort of thing.

I'm a little concerned that you have debt at 59 1/2. You say you want to take money out of your savings to pay off this debt. Why not before now? The other thing is if you're continuing to work why not consider a lifestyle reduction and do the old "debt snowball."

Some people recommend buying a SPIA but I still don't think the insurance companies give a fair deal although it has gotten better in recent years. Even if they did, the hyper-low interest rates right now would give you permanently low historical returns. The payout for someone that is 60 is also very dismal. If you really want to consider SPIAs, wait until you're around 70. Of course, when you turn 70 I'll recommend you wait until you're 75.

The "guarantees" of any annuities are also dependent on voluntary funding of companies that sell annuities in your state and are limited to around $100,000 per annuity. Each state has their own law so I can't be more specific. If an insurance company fails, a typical state fund asses each company that sells into the state 2% of their average sales for the prior 5 years. If you do the math, you can see that a really large failure may exceed the maximum assessment. In fairness, of the dozens of insurance company failures since 1990 no one lost any money that I'm aware of if they stayed under the guaranty fund amount but many people buy more than that amount. They lose the value above the guaranty limit. Also, I don't believe that any insurance company is required to pay their assessment but if they don't they may be barred from future business in that state. Again, various guaranty funds can be different and I'm not a lawyer or other financial professional specializing in this area. I have heard of several stories of people taking many months to fully recover their money and I don't think anyone was very happy.

[Rosie]

[nisiprius]

I have a single premium immediate annuity myself--two of them, actually--which are insurance products that make payments for life, not for ten years. So I am not hostile to insurance products.

By all means, if you have detailed information on this product, post it--including the company and the exact name of the product and its description--and we'll all be glad to help you figure out what it is, exactly, that you are being offered. If the person soliciting you has not given you something detailed and precise--in some cases it would be called a "prospectus"--ask him. If he brushes you off and just wants to talk about it, and not show you the legalese until you're ready to sign, that is a great big red flag.

It might even be a good idea to tell the person soliciting you that you want the details because you are asking people about it in an online forum. He won't like that, of course, but if he's honest he'll accept it and give the details. If he acts angry and refuses, that's a true warning sign and you should say no and good riddance.

The best piece of advice I have is that, like many things in life, you should never purchase anything like that if someone else approaches you with it.

What they are offering may be good, bad, or indifferent--usually indifferent, and usually not very well aligned with your needs. What you should do is listen, but say "no" firmly. Turn down the particular offer. Whatever it is, it is not some uniquely great once-in-a-lifetime opportunity.

If this kind of annuity, or an SPIA, or whole life insurance, or whatever is actually sensible for you, it is going to be just as sensible six months from now. Gear up your sales resistance, make the salesperson go away, then read up on that kind of investment and if it does seem to make sense you go shopping for it.

If anyone tries to pressure you with some variation on "limited time offer," run.

Buy your investments. Do not ever let someone sell them to you. Even at their best, the pitch always contains half-truths. It's sort of like someone trying to sell you a quart of chocolate milk for $2 by saying "it's healthy, it contains protein, you need 64 ounces of water a day and this supplies 1/4 of your daily need." It could all be true and chocolate milk isn't the worst thing in the world you could buy, but regular milk for $4 a gallon might be better and tap water might be better still.

One thing is for sure. Whatever this thing is, it is not a bank CD, and there is nothing that is at all like a bank CD that is going to earn 8%.
_________________
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.

[natureexplorer]

[p07mauro]

Many good ideas here for you Rosie.but a few errors to note.My brother is a financial regulator ( which helps ) and he steered me to the annuities I own.First a single premium annuity is generally not a security so there is no prospectus to read.Its simply a deal (contract to get payments for life in exchange for lump sum) you actually may be too young to get a good deal on those. I did my own research and went with the academic studies from Wharton School of business and also Ibbotson associates owned by morningstar.They both help you pick if you should own any kind of an annuity to guarantee your income or your income growth.Easy to find online.I bought two annuities one for today (immediate) and one for tomorrow (deferred) and my deferred annuity does have that minimum 7.5% growth on income.Not as high as the 8% you found but I like the deal.These things are complex and I would go with the advice from the WSJ (also leslie Scism) get some advice you can trust.She wrote a good piece called "long derided" about annuities saving many nesteggs.Lastly dont rely on AM best. use the COMDEX ratings which is the weighted group of S+P,Moodyys,Best, and Fitch rating servcies.Best alone is insuffcieint.Hope this helps it took me 6 months to figure it all aout.

[Mel Lindauer]

[maxfax]

I don't see the point of an annuity that ends in 10 years. Do you really plan to be dead by then?

I am in favour of annuities with real guaranteed payments till death. But the pricing of these is really not great before age 65.

This is because the products get the $$ to pay the higher-than-market 'return' by having other people in the cohort die. E.g. if they pay 8% when market rates are 4%, they need 4% of their customers to die each year.

That does not start happening until about age 85. So in the interval between purchase and 85 , the insurance company is going into the hole. The earlier you buy the annuity the greater the risk for them and the higher price you will have to pay.

Wait until you are 65 and then buy a proper annuity.

[mephistophles]

There is a lot of 'misinformation' in this thread. First, as usual, posters confuse deferred annuities (DA) with immediate annuities. Fact, high quality fixed deferred annuities can be a good choice for part of your program, depending on your circumstances. Fact, fixed immediate income annuities (SPIA) can be a good choice for part of your program, depending on your circumstances. Fact, there are high cost, low quality annuities that should not be part of anyone's program, regardless of your circumstances.

[Snowjob]

whoops wrong thread...