Variable annuities Yes/No

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Carl Timken
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Variable annuities Yes/No

Post by Carl Timken » Thu Dec 03, 2015 11:29 pm

Hello, I am looking for some general advice about buying into a Variable annuity. My investment adviser (Northwest Mutual) has been been recommending a variable annuity over the last couple of years and I have so far resisted as the research I have done seems to point out that they are a bad investment choice, however during our last meeting he noted how annuities have had a bad rap and that Northwest Mutual has a superior product than the rest of the market and that I should really consider looking into them again. So my question is, are these a decent investment choice? or do I look to invest my money elsewhere?? I am a 50 year construction worker and plan on working for another 10 years. I have 4 kids and a stay at home wife and have approximately $700k that this firm oversees and also have about that same amount in my companies retirement plan. Any advice would be greatly appreciated.. Thank you in advance.

Pyrite
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Re: Variable annuities Yes/No

Post by Pyrite » Sat Dec 05, 2015 12:49 am

My answer: No. Variable annuities are both more expensive and more complicated than investing in low-cost index funds. Your adviser is pushing them because your adviser makes more money on them.

Here is a relevant blog post from a frequent poster on this site: "8 Reasons Why You Should Invest With Mutual Funds Instead Of A Variable Annuity"

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in_reality
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Re: Variable annuities Yes/No

Post by in_reality » Sat Dec 05, 2015 1:05 am

No - due to costs.

By the way, what are you paying your advisor and what funds does that advisor have you in?

If your advisor is like mine was (before I figured things out and stopped using the bad/expensive advice), then you are in funds that cost too much because the fund is paying the advisor to recommend them to you and both the fund and your advisor are taking a share that should go to your family.

I highly recommend you to list your funds (name and ER) and state what you are paying. In this format is best viewtopic.php?f=1&t=6212

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Re: Variable annuities Yes/No

Post by billfromct » Sat Dec 05, 2015 2:05 am

As I have said before, a variable annuity is the best way to convert long term capital gains (probably 15% Federal tax) to ordinary income (probably 25% Federal tax).

Your "investment advisor" (really a sales person) probably makes a 5%-8% commission on any variable annuity he/she sells. Plus the annual fees are probably in the 1.25%-1.75% or higher range. Did your "investment advisor" mention the annual fees or his/her commission? Northwest Mutual has to charge higher annual fees to offset your "Investment Advisor's" commission.

You didn't mention if you have a Roth IRA for yourself & your wife. The ability to fund a Roth IRA for yourself & your wife would start to phase out when your modified adjusted gross income hits $183k. You may want to fund a Roth IRA for yourself & your wife if you haven't done so already.

If you have $700k with Northwest Mutual, you are probably paying 1%-1.5% more per year in mutual fund fees than you would if you had your investments with a low cost investment compoany like Vanguard. Those high mutual fund fees would equate to an extra $7.0k-$10.5k/year in mutual fund fees then you would pay at Vanguard.

Did you pay a "load" (sales charge) when you bought the Northwest Mutual mutual funds? The "load" (sales charge) could be between 3%-5.75% of the original investment.

My suggestion would be to forget about the variable annuity with Northwest Mutual & invest any new money with Vanguard. You can call Vanguard & they will walk you through the process. This is especially important with $700k in the company retirement plan (401k?) which you may need to rollover when you retire. I'm sure your Northwest Mutual sales person, I mean Investment Advisor, is looking forward to get that money under his/her commission structure.

You may want to consider gradually (over 10 years if you have capital gains) moving the Northwest Mutual taxable investments over to Vanguard as well but you may have long/short-term capital gain tax implications. It would be best to have all your investment accounts (mutual funds, retirement accounts, etc.) under a low cost investment company like Vanguard when you retire.

Again after you retire & potentially have $1.5M with Northwest Mutual (if your Investment Advisor has his/her way), you could be paying $14.0k-$21.0k more per year in mutual fund fees compared to the Vanguard annual mutual fund fees.

bill

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Re: Variable annuities Yes/No

Post by itstoomuch » Sat Dec 05, 2015 2:37 am

Annuities are poor investment vehicles. They are primarily an Insurance income product.
IMO, VAs/annuities are mediocre for investments. But Indexes/MF are mediocre as pension income.
We (65/68) bought considerable deferred, GLWB annuities (2008-2012) as a way to secure a "pension" with a Market protection (see Vanguard VA with Secure Income™. ) We did not buy Vanguard because they had a noncompetitive product.
We extensively shopped. :sharebeer
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Variable annuities Yes/No

Post by SGM » Sat Dec 05, 2015 6:07 am

A few years ago, I was looking for additional tax deferred space and asked a Vanguard advisor if I should be purchasing a VA. He stated I would just be adding an additional layer of expense and advised against it.

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Re: Variable annuities Yes/No

Post by livesoft » Sat Dec 05, 2015 6:14 am

Folks are not being truthful enough. Here is the truth: Your NWM salesrep is hosing you. That means they are costing you real money that you could be using for your retirement and your family's future.

Can you report to us all the expenses and fees that you pay to have your money invested with this salesrep? Do you think it might be $20,000 a year plus taxes? If you could pay less than $3,000 a year in expenses and fees for better results, would you do that instead?
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Re: Variable annuities Yes/No

Post by nisiprius » Sat Dec 05, 2015 6:44 am

IMHO the best reason why you should not buy one is that you need to ask this question.

Variable annuities are extremely complicated, I would say obfuscated products. I once looked seriously at one because the salesperson was so insistent about its being more suitable for me, and I thought I should go ahead and dig into it because I might learn something. The information package weighed half a pound and he paid $5 in mailing charges to send it to me. The bulk of it was colorful nonsense on very heavyweight glossy pages that told me very little but had a lot of elderly couples skipping along beaches and smiling at computer screens with zigzaggy lines that only went up.

The meat of the information was a forty-page "prospectus" printed in small type on onionskin paper, and I tried to read it and understand what, exactly I was being sold. I couldn't. Of course it was complicated by the presence of various options and riders. That was actually one salient detail--the glossy stuff said that with this product whenever the market did well I could "give myself a raise" and various other things were mentioned, and I couldn't even figure out from the prospectus exactly which of the possible combinations of benefits and things matched the features the glossy brochure was describing! It would have taken a team of Ph.D's and MBA's a week to understand that prospectus, let alone figure out whether it was a good deal or compare it to anybody else's prospectus.

I couldn't figure out what my options really were for surrendering the thing and getting out of it if I wanted to and what it would cost me.

There were perhaps twenty choices of various seemingly-mutual-fund-like things, I forget what word was used for them, but they weren't mutual funds and didn't have ticker symbols and I couldn't look them up on Morningstar; the only information I had about them was a brief description in words, 1-3-5-10 year returns, and some bar charts showing annual returns.

I finally gave up and just tried to figure out what the fees were.

I couldn't even figure that out. There were at least seven different fees, for this, that, and the other.

You cannot be an informed purchaser of one of these products. You are necessarily relying on your adviser to explain it to you. Even if your adviser actually knows all the details, you are not going to take enough time to ask all the questions you need to ask and understand all the answers. You are trusting your adviser's judgement that it is a good choice for you, because there is no way you can actually figure it out for yourself.

The anecdotal evidence that advisers receive more money for selling variable annuities than for selling e.g. fixed annuities is very strong. Is your adviser a "fiduciary" (did he give you paperwork early in your relationship saying that he is) and thus pledged to act in your best interests? Do you pay him a fee? If not, have you asked him how he gets paid?

One other datum: there is a useful book which I recommend--try to get it through your library through interlibrary loan if necessary: Larry Swedroe and Jared Kizer's The Only Guide to Alternative Investments You Will Ever Need: The Good, the Flawed, the Bad, and the Ugly. As its title promises, various investments are described and categorized:

Image

(Never say never... In theory, the concept of variable annuities isn't altogether bad, and I do feel slightly hypocritical knocking variable annuities when one of the foundations of my retirement happens to be a TIAA-CREF plan that is, in fact, a kind of variable annuity... that said...)
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Re: Variable annuities Yes/No

Post by Jack FFR1846 » Sat Dec 05, 2015 7:21 am

If you have $700k with this clown, I see 2 obvious choices for you. You can either stay with him and take his advice knowing that your investment will immediately become a $600-$650k investment (because that advisor's kids are going to be going to expensive colleges and somebody has to pay) or you can leave his clown show and manage your own money in a low cost index portfolio at a place like Vanguard or Fidelity (in Spartan Advantage funds).
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Re: Variable annuities Yes/No

Post by SGM » Sat Dec 05, 2015 7:46 am

I agree this is an excellent reference book:Larry Swedroe and Jared Kizer's The Only Guide to Alternative Investments You Will Ever Need: The Good, the Flawed, the Bad, and the Ugly.

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Re: Variable annuities Yes/No

Post by Cigarman » Sat Dec 05, 2015 9:06 am

I have term insurance through NWM and am quite happy with it. Every year or so my advisor/agent calls me wanting to "review" my insurance. After about 10 years of this I finally succumbed to a meeting.

Not sure what the vehicle was that they were pushing but was shown a chart that if I put in $25k a year for 20 years, I would have $537k by the time I retired...enough said once the quick math was done.

Run, very fast, from whatever they are pushing.

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Re: Variable annuities Yes/No

Post by edge » Sat Dec 05, 2015 9:12 am

No. And you need to think about how much this adviser is costing you.

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Re: Variable annuities Yes/No

Post by jmetsrule » Sat Dec 05, 2015 9:14 am

So then would Tiaa-Cref's QREARX be the exception? It's a fairly well liked variable annuity, isn't it?

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Re: Variable annuities Yes/No

Post by The Wizard » Sat Dec 05, 2015 9:16 am

As Nisiprius alluded to, possibly the only "good" variable annuities are those offered by TIAA-CREF, which are not available to the general public.
The bulk of my retirement income derives from their VAs in lifetime payout mode...
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Re: Variable annuities Yes/No

Post by friar1610 » Sat Dec 05, 2015 10:19 am

As Buick (I think) used to advertise, "ask the man who owns one...."

I own a Vanguard VA. I originally purchased it as a Fidelity VA years ago because it seemed to make sense. I subsequently did a transfer to Vanguard when I became a Boglehead. It has appreciated nicely over the years, both with Fido and with VG. It currently fills an important spot in my portfolio in that it will provide income for my wife if I predecease her. (I have a military pension but the SBP she will receive once I go is a lot less than what we receive while I am still kicking.) I have no plans to annuitize it during my lifetime as we don't really need the income. (If she predeceases me I have a Plan B that involves using it as a source for charitable contributions.) I have it invested in the clone of a VG Life-Cycle Fund and it just sits there year after year with no intervention on my part.

Neither Fido nor VG VAs have the disadvantages of many VAs out there such as, I suspect, Northwestern. (TIAA-CREF would be another "good" VA.)

All of that said, would I do I buy the annuity again if I could walk that dog back? No. The expenses are higher than I pay on standard VG mutual funds, so there is less overall left for me. And, as has been mentioned before, the tax hit when it is withdrawn/annuitized will be greater than if the money were just in taxable VG mutual funds. I agree with most of the other comments that have been made about why buying a VA is not a good idea. I believe that, having made this mistake of buying one in the first place, I have made the most out of mine (and I was fortunate not to initially buy one that was a real rip-off). But even though my experience has not been awful, I couldn't in good conscience recommend one to another Boglehead.
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Re: Variable annuities Yes/No

Post by retiredjg » Sat Dec 05, 2015 10:26 am

Carl Timken wrote:... and have approximately $700k that this firm oversees and also have about that same amount in my companies retirement plan. Any advice would be greatly appreciated.. Thank you in advance.

My advice is to consider getting away from a salesperson that would suggest a variable annuity. They are rarely in the best interest of the customer and they often pay a nice commission to the salesperson.

It is possible you can learn to manage your investments yourself. It is not that difficult. If you simply must retain an "advisor", you should move your money to an advisor who makes suggestions in your best interest, not a salesman selling a product.

You are probably paying a great deal in fees and have no idea where or why.

Start your education here. https://www.bogleheads.org/wiki/Getting_started People here can help you. At the very least, move your money to Vanguard where the advisors actually do advise and the costs are almost certainly much lower than you are currently paying.

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Re: Variable annuities Yes/No

Post by joebh » Sat Dec 05, 2015 10:35 am

Carl Timken wrote:during our last meeting he noted how annuities have had a bad rap and that Northwest Mutual has a superior product than the rest of the market and that I should really consider looking into them again.


Ask him how much of a commission he earns on the annuities he is recommending.

I used to purchased VAs, before I learned better.
Once the final surrender period expires next year, I'll be completely out.

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Re: Variable annuities Yes/No

Post by arcticpineapplecorp. » Sat Dec 05, 2015 10:44 am

One other thing to be aware of: when you ask how s/he gets paid, don't be surprised if s/he says "You don't pay me, the company does." I'm not saying Northwest Mutual encourages this, but it is a generally trained tactic that many annuity salespeople use. If you ever hear that line from a salesperson, you should walk away because you know s/he is not telling you the truth. And why would you want to do business with someone who doesn't tell you the truth?
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Re: Variable annuities Yes/No

Post by Swampy » Sat Dec 05, 2015 10:51 am

Carl, how much are you paying in advisory fee's and services each and every year? Personally, I took it as a source of great pride to be paying more in advisory fee's than many American's earned. It was a fools pride.

They've got $700K. I'm assuming he's your typical 1% guy plus any loads and higher fund expense ratio's/12b-1 fee's.

Now he really wants to screw you with a high commission annuity.

Your words:
...the research I have done seems to point out that they are a bad investment choice, however during our last meeting he noted how annuities have had a bad rap and that Northwest Mutual has a superior product than the rest of the market...


Yeah, sure. It's different this time around.

You said you have four kids. I'm sure the advisor wants to help put the kids through college - his kids.

If he calls, pressures, pesters or otherwise hounds you - WHO do you think he really has in mind? Don't think for a second you're going to miss an opportunity - even though he will do his best to convince you otherwise.

Do NOTHING with the advisor at all - but get an education for the next 2-3 months. Read "The Little Book of Common Sense Investing," "Don't Count On It" and "The Four Pillars of Investing." These books are readily available at most libraries. Unlike 99% of the financial books out there, these have merit.

Be forewarned. You may become nauseated, physically sick, lose sleep and go through a wide range of emotions when you realize just how big of a sucker you've been for a long time.

Then, and only then, will you become empowered.

Remember this - the advisor is NOT your friend.
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Re: Variable annuities Yes/No

Post by grok87 » Sat Dec 05, 2015 10:58 am

Agree with the general negative sentiment on Variable Annuities. However, like nisiprius I do have one with TIAA CREF- currently all in the Real Estate Fund.

So one issue i've been thinking about recently is whether i am subject to TIAA CREF's insolvency risk (pretty low as they are very highly rated). I've concluded that I am not, as I am in a variable annuity not a fixed annuity. Does that sound right?
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Re: Variable annuities Yes/No

Post by 2comma » Sat Dec 05, 2015 12:12 pm

Another vote for NO VA and start looking at getting yourself away from this goof. Here's my standard plug that you should figure out what this guy will cost you over your investment lifetime: http://buyupside.com/calculators/feesdec07.htm. What's he doing for you that's worth that? Investing is easy once you get some simple concepts down. You can get all the help you need right here for free.
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Re: Variable annuities Yes/No

Post by Mel Lindauer » Sat Dec 05, 2015 8:27 pm

I agree with all of those who advised against the high-cost VA that this guy is trying to sell you in order to earn a nice fat commission.

Here are some Forbes columns I wrote on variable annuities.

http://www.forbes.com/2010/06/04/variab ... dauer.html
http://www.forbes.com/2010/06/18/variab ... dauer.html
http://www.forbes.com/2010/07/02/variab ... dauer.html
http://www.forbes.com/2010/08/10/truth- ... dauer.html
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Re: Variable annuities Yes/No

Post by Grt2bOutdoors » Sat Dec 05, 2015 9:42 pm

Mama always said, nothing tastes better than homemade stuff. Home-made variable annuity: the 3 Fund Portfolio using Total Stock Market Index - Admiral class - expense ratio of .05 or 5bps, Total International Stock Market Index - .14 or 14 bps and Total Bond Market Index or Intermediate Tax-Exempt, all in cost is roughly .20 Now ask the nice NW Mutual representative what are the average expense ratio's of the funds in the variable annuity, then add the mortality expense charge on top of that, finally add the salesman's commission and assorted administrative charges, I'll bet dollars to donuts the all-in price is at least 1.50% if not higher. Like Mama said, nothing tastes better than homemade and nothing is cheaper, either! :)
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Re: Variable annuities Yes/No

Post by Bogle_Feet » Sun Dec 06, 2015 5:57 am

Carl Timken wrote:Hello, I am looking for some general advice about buying into a Variable annuity. My investment adviser (Northwest Mutual) has been been recommending a variable annuity over the last couple of years and I have so far resisted as the research I have done seems to point out that they are a bad investment choice, however during our last meeting he noted how annuities have had a bad rap and that Northwest Mutual has a superior product than the rest of the market and that I should really consider looking into them again. So my question is, are these a decent investment choice? or do I look to invest my money elsewhere?? I am a 50 year construction worker and plan on working for another 10 years. I have 4 kids and a stay at home wife and have approximately $700k that this firm oversees and also have about that same amount in my companies retirement plan. Any advice would be greatly appreciated.. Thank you in advance.

Your "investment adviser" is actually a SALESMAN who is putting his own best interests ahead of yours. The fact that he is recommending a variable annuity is proof of that. There is no head scratching here. VA's are some of the most expensive of all financial products. Whatever the surrender period may happen to be will give you a pretty good idea how much commission money he stands to earn. For example a 7 year surrender period indicates that he is going to earn 7% or close to a 7% commission. That's why he's trying so hard to get you to fall for his pitch.
VA's have absurdly high fees, they are illiquid and over taxed.
Again, stop working with this shark who calls himself an "investment adviser". He's a commission-hungry salesman and an insurance agent. Never mix insurance with investing. You should be investing in low cost stock and bond index funds like VOO and AGG. Open an account with AmeriTrade or E*Trade.
http://www.kiplinger.com/article/insura ... avoid.html
http://www.forbes.com/sites/feeonlyplan ... annuities/
http://yourinvestmentadvise.com/annuity-1.html

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Re: Variable annuities Yes/No

Post by Swampy » Sun Dec 06, 2015 6:24 am

Bogle-Feet wrote:

Your "investment adviser" is actually a SALESMAN who is putting his own best interests ahead of yours...stop working with this shark who calls himself an "investment adviser". He's a commission-hungry salesman and an insurance agent. Never mix insurance with investing.


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Re: Variable annuities Yes/No

Post by obgyn65 » Sun Dec 06, 2015 7:23 pm

Nope.
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Re: Variable annuities Yes/No

Post by Lieutenant.Columbo » Sat Dec 02, 2017 10:50 pm

itstoomuch wrote:
Sat Dec 05, 2015 2:37 am
Annuities are poor investment vehicles. They are primarily an Insurance income product.
IMO, VAs/annuities are mediocre for investments. But Indexes/MF are mediocre as pension income.
We (65/68) bought considerable deferred, GLWB annuities (2008-2012) as a way to secure a "pension" with a Market protection (see Vanguard VA with Secure Income™. ) We did not buy Vanguard because they had a noncompetitive product.
We extensively shopped. :sharebeer
itstoomuch, two questions:
1. are your GLWB annuities "variable" annuities?
2. if so, why did you choose "variable" over "indexed" (by inflation?) annuities?
thank you
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Re: Variable annuities Yes/No

Post by itstoomuch » Sun Dec 03, 2017 1:30 am

A blast from the past.

Today, I attended a TDAmeritrade class on beginning options trading with introduction to Income Strategies, Hedging Strategies, and Speculation Strategies.
It is 10 years ago when subprime lenders started to fail. It's 10 years ago when older bro was even more worried from his summer visit to see Mom.
It is 10 years ago when I started to think about exits and hedge strategies for the retirement funds.

1) first purchases were Variable GLWB. My FA introduced me to VAs in the spring 2008. I did due diligence.
2) FA didn't introduce FIa until 2012. I did my due diligence. The FIa had a different Income feature that made them attractive. By 2012, Annuity companies have changed their newer GLWB VAs to correct mispricings, option obligations, a long & strong bull market, and some questions on reserve requirements.

So, we just completed the 9th year in some of the GLWB VAs. We started withdrawals on FIa (5 yrs ownership, age 70 and RMD strategy) I am thnking about Income withdrawals in the GLWB VAs in 2018 or exiting some of the VAs. The Income withdrawals are excess to our needs because of an inheritance which we converted to recurring Income. Income withdrawals could improve our ability to better a home loan by showing income. If you review even Vanguards/TransAmerica-AXA' s GLWB VA, you will understand that there are two times in the Market when this type of annuity and various option strategies work better than other times.

YMMV :!: :!: :!:
You must do, your due diligence whether you stay in what you got, derisk (see Bond Tent & Bonds are Riskier than you Think, current threads ), change retirement investing to funding ratio, or other. I already understood options strategies and retirement funded ratio. Income annuities/pensions seem to work well as a substitute to option trading for insurance to the Market and income generation. The questions I had were: Could trading options do as well and How would annuities work in our retirement? :?: :?: :?: . GL :beer
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Variable annuities Yes/No

Post by Lieutenant.Columbo » Sun Dec 03, 2017 1:26 pm

itstoomuch wrote:
Sun Dec 03, 2017 1:30 am
A blast from the past.

Today, I attended a TDAmeritrade class on beginning options trading with introduction to Income Strategies, Hedging Strategies, and Speculation Strategies.
It is 10 years ago when subprime lenders started to fail. It's 10 years ago when older bro was even more worried from his summer visit to see Mom.
It is 10 years ago when I started to think about exits and hedge strategies for the retirement funds.

1) first purchases were Variable GLWB. My FA introduced me to VAs in the spring 2008. I did due diligence.
2) FA didn't introduce FIa until 2012. I did my due diligence. The FIa had a different Income feature that made them attractive. By 2012, Annuity companies have changed their newer GLWB VAs to correct mispricings, option obligations, a long & strong bull market, and some questions on reserve requirements.

So, we just completed the 9th year in some of the GLWB VAs. We started withdrawals on FIa (5 yrs ownership, age 70 and RMD strategy) I am thnking about Income withdrawals in the GLWB VAs in 2018 or exiting some of the VAs. The Income withdrawals are excess to our needs because of an inheritance which we converted to recurring Income. Income withdrawals could improve our ability to better a home loan by showing income. If you review even Vanguards/TransAmerica-AXA' s GLWB VA, you will understand that there are two times in the Market when this type of annuity and various option strategies work better than other times.

YMMV :!: :!: :!:
You must do, your due diligence whether you stay in what you got, derisk (see Bond Tent & Bonds are Riskier than you Think, current threads ), change retirement investing to funding ratio, or other. I already understood options strategies and retirement funded ratio. Income annuities/pensions seem to work well as a substitute to option trading for insurance to the Market and income generation. The questions I had were: Could trading options do as well and How would annuities work in our retirement? :?: :?: :?: . GL :beer
thank you for taking the time to explain your experience and opinions
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nedsaid
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Re: Variable annuities Yes/No

Post by nedsaid » Sun Dec 03, 2017 10:31 pm

Carl Timken wrote:
Thu Dec 03, 2015 11:29 pm
Hello, I am looking for some general advice about buying into a Variable annuity. My investment adviser (Northwest Mutual) has been been recommending a variable annuity over the last couple of years and I have so far resisted as the research I have done seems to point out that they are a bad investment choice, however during our last meeting he noted how annuities have had a bad rap and that Northwest Mutual has a superior product than the rest of the market and that I should really consider looking into them again. So my question is, are these a decent investment choice? or do I look to invest my money elsewhere?? I am a 50 year construction worker and plan on working for another 10 years. I have 4 kids and a stay at home wife and have approximately $700k that this firm oversees and also have about that same amount in my companies retirement plan. Any advice would be greatly appreciated.. Thank you in advance.
I would just say no. Northwestern Mutual has to buy the same stocks and bonds on the open market that any other investment company or individual can purchase. It does not have access to "magic" investments that somehow outperform everything else. Mostly what you purchase with a Variable Annuity is a tax shelter and additional layers of fees. I assume they have made a big pitch for Whole Life Insurance as well.

I would be interested to know that your financial advisor has you invested in. Hopefully, you are at least well diversified.
A fool and his money are good for business.

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Re: Variable annuities Yes/No

Post by technovelist » Sun Dec 03, 2017 11:03 pm

I am a computer programmer with some actuarial training who went to a college for "underachievers with high SAT scores".

A local CPA once tried to sell me a VA.

I could not understand the product.

Don't do it.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Variable annuities Yes/No

Post by Mel Lindauer » Sun Dec 03, 2017 11:39 pm

Here's a Forbes column I did some time ago on these things.

Annuities: Good, Bad Or Ugly?

https://www.forbes.com/2010/06/04/varia ... 2fb52f653e

SPOILER ALERT: Don't do it!
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birdy
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Re: Variable annuities Yes/No

Post by birdy » Mon Dec 04, 2017 12:01 am

Carl:

By now hopefully you will say NO to products intended to totally confuse you with BS! You have been given the answer to your question LOUD AND CLEAR!

birdy

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Re: Variable annuities Yes/No

Post by itstoomuch » Mon Dec 04, 2017 12:08 am

Carl, left the building 2 years ago today. He posted once and is gone.
YpostsMV :annoyed
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Variable annuities Yes/No

Post by smectym » Mon Dec 04, 2017 8:35 am

I’m like friar1610 above. Own a large Vanguard VA funded back in an earlier millennium. I bought it because we were maxed out on tax-deferred space in 401(k)/IRA.

I certainly haven’t lost money or gone broke because I purchased a Vanguard Variable Annuity. It keeps growing tax-deferred. Have already done several 1035 exchanges to create monthly “checks for life” (partial annuitization offers favorable tax treatment, as each payment us treated by IRS as partly taxable earnings and part tax-free return of principal). However, unlike 401(k) and IRA, with a VA there is no *requirement* to take distributions till age 85.

We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).

So, there are advantages. The idea that there are no advantages to lower-cost variable annuities such as those offered by Vanguard is mistaken. Some people hear the word “annuity” and see red, and can get a bit dogmatic in denouncing the product without troubling to make distinctions.

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).

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Re: Variable annuities Yes/No

Post by smitcat » Mon Dec 04, 2017 9:44 am

smectym wrote:
Mon Dec 04, 2017 8:35 am
I’m like friar1610 above. Own a large Vanguard VA funded back in an earlier millennium. I bought it because we were maxed out on tax-deferred space in 401(k)/IRA.

I certainly haven’t lost money or gone broke because I purchased a Vanguard Variable Annuity. It keeps growing tax-deferred. Have already done several 1035 exchanges to create monthly “checks for life” (partial annuitization offers favorable tax treatment, as each payment us treated by IRS as partly taxable earnings and part tax-free return of principal). However, unlike 401(k) and IRA, with a VA there is no *requirement* to take distributions till age 85.

We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).

So, there are advantages. The idea that there are no advantages to lower-cost variable annuities such as those offered by Vanguard is mistaken. Some people hear the word “annuity” and see red, and can get a bit dogmatic in denouncing the product without troubling to make distinctions.

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).
I have experienced much the same as you have , including this last statement.....
"However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds"

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Re: Variable annuities Yes/No

Post by Mel Lindauer » Mon Dec 04, 2017 11:09 am

smectym wrote:
Mon Dec 04, 2017 8:35 am
We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).
. . .

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).
At the time many folks, like you, purchase VAs with after-tax money, they also have the option of investing in a lower-cost, tax-efficient taxable account instead. In doing so, they can pay very little taxes on an annual basis and possibly escape taxes on the gains entirely at their death due to the stepped-up cost basis.

I do see that if you had it to do over, you'd probably choose this option. It's certainly the one I'd recommend in most cases.
Best Regards - Mel | | Semper Fi

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Re: Variable annuities Yes/No

Post by FBN2014 » Mon Dec 04, 2017 1:50 pm

The only VA that I would consider is one offered through Jefferson National a subsidiary of Nationwide Insurance. The costs are $240/year plus the expense ratio of the underlying mutual funds that you choose. They offer about 370 different choices including most of the well known fund families including Vanguard and DFA. There is no surrender fee or mortality and expense costs. Also there are no expensive income riders like most VAs have. It's a great product that I own and payouts for your beneficiaries can be stretched over their lifetime to mitigate the taxes due, very similar to the Stretch IRA.
Last edited by FBN2014 on Mon Dec 04, 2017 8:11 pm, edited 2 times in total.

KSActuary
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Re: Variable annuities Yes/No

Post by KSActuary » Mon Dec 04, 2017 2:09 pm

In general, VA products are complicated which leads many products being sold without full comprehension of the buyer. For this reason alone, I would stay away from them. Also, not exactly in the insurer's wheel house right now given how low interest rates. Looks like your NWM broker is trying to bring home some holiday cheer in the form of a commission.

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Re: Variable annuities Yes/No

Post by Mel Lindauer » Mon Dec 04, 2017 10:46 pm

KSActuary wrote:
Mon Dec 04, 2017 2:09 pm
In general, VA products are complicated which leads many products being sold without full comprehension of the buyer. For this reason alone, I would stay away from them. Also, not exactly in the insurer's wheel house right now given how low interest rates. Looks like your NWM broker is trying to bring home some holiday cheer in the form of a commission.
I would definitely agree with the part about "being sold without full comprehension of the buyer", but I'd also add "and very often being sold without full comprehension of the seller, too."

However, I can assure you that the seller does know what his/her fat commission will be if they can dump this on some trusting soul.
Best Regards - Mel | | Semper Fi

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Re: Variable annuities Yes/No

Post by Lieutenant.Columbo » Mon Dec 04, 2017 10:50 pm

Mel Lindauer wrote:
Mon Dec 04, 2017 10:46 pm
KSActuary wrote:
Mon Dec 04, 2017 2:09 pm
In general, VA products are complicated which leads many products being sold without full comprehension of the buyer. For this reason alone, I would stay away from them. Also, not exactly in the insurer's wheel house right now given how low interest rates. Looks like your NWM broker is trying to bring home some holiday cheer in the form of a commission.
I would definitely agree with the part about "being sold without full comprehension of the buyer", but I'd also add "and very often being sold without full comprehension of the seller, too."

However, I can assure you that the seller does know what his/her fat commission will be if they can dump this on some trusting soul.
this commission is taken off the premium from the get-go, correct? how much do these commissions tend to run?
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Re: Variable annuities Yes/No

Post by KSActuary » Mon Dec 04, 2017 11:17 pm

As with all things, it depends. The industry has made some changes to the commissions charged for these annuities as some insurers offer annuity products where there is no up-front commission but, rather an advisory-like fee each year of 1% or so. I would guess that most annuities are still sold where the up-front commissions can be as high as 7% - 10%.

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Re: Variable annuities Yes/No

Post by Mel Lindauer » Wed Dec 06, 2017 9:08 pm

KSActuary wrote:
Mon Dec 04, 2017 11:17 pm
As with all things, it depends. The industry has made some changes to the commissions charged for these annuities as some insurers offer annuity products where there is no up-front commission but, rather an advisory-like fee each year of 1% or so. I would guess that most annuities are still sold where the up-front commissions can be as high as 7% - 10%.
I'd add that the longer the surrender period, the higher the commission will normally be. And, the more complex the annuity is, the higher the commission will normally be.
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Re: Variable annuities Yes/No

Post by KSActuary » Fri Dec 08, 2017 12:29 am

Mel Lindauer wrote:
Wed Dec 06, 2017 9:08 pm
KSActuary wrote:
Mon Dec 04, 2017 11:17 pm
As with all things, it depends. The industry has made some changes to the commissions charged for these annuities as some insurers offer annuity products where there is no up-front commission but, rather an advisory-like fee each year of 1% or so. I would guess that most annuities are still sold where the up-front commissions can be as high as 7% - 10%.
I'd add that the longer the surrender period, the higher the commission will normally be. And, the more complex the annuity is, the higher the commission will normally be.
Agreed.

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Re: Variable annuities Yes/No

Post by Lieutenant.Columbo » Fri Dec 08, 2017 2:41 pm

KSActuary wrote:
Fri Dec 08, 2017 12:29 am
Mel Lindauer wrote:
Wed Dec 06, 2017 9:08 pm
KSActuary wrote:
Mon Dec 04, 2017 11:17 pm
As with all things, it depends. The industry has made some changes to the commissions charged for these annuities as some insurers offer annuity products where there is no up-front commission but, rather an advisory-like fee each year of 1% or so. I would guess that most annuities are still sold where the up-front commissions can be as high as 7% - 10%.
I'd add that the longer the surrender period, the higher the commission will normally be. And, the more complex the annuity is, the higher the commission will normally be.
Agreed.
when is a surrender period too long?
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Re: Variable annuities Yes/No

Post by misterlucky » Fri Dec 08, 2017 5:40 pm

smectym wrote: ↑Mon Dec 04, 2017 8:35 am
I’m like friar1610 above. Own a large Vanguard VA funded back in an earlier millennium. I bought it because we were maxed out on tax-deferred space in 401(k)/IRA.

I certainly haven’t lost money or gone broke because I purchased a Vanguard Variable Annuity. It keeps growing tax-deferred. Have already done several 1035 exchanges to create monthly “checks for life” (partial annuitization offers favorable tax treatment, as each payment us treated by IRS as partly taxable earnings and part tax-free return of principal). However, unlike 401(k) and IRA, with a VA there is no *requirement* to take distributions till age 85.

We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).

So, there are advantages. The idea that there are no advantages to lower-cost variable annuities such as those offered by Vanguard is mistaken. Some people hear the word “annuity” and see red, and can get a bit dogmatic in denouncing the product without troubling to make distinctions.

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).
I'm similar to smectym's approach. I have Vanguard VA's purchased for asset protection features when I was performing surgery in a high malpractice lawsuit environment. Funding regular index funds in a standard taxable account alone posed a risk. Fortunately I never was sued. Now that I'm retired in my early 60's, I wonder if there's any wisdom in exploring whether to close out the annuities, pay the income tax on the gain (especially if tax rates are lower next year), and buy regular VG index funds? Advantages would be to take advantage of estate step-up basis, avoid required distributions at 85, have slightly lower yearly fees. Disadvantages include paying tax and decreasing balances, yearly tax on fund distributions, losing tax deferral.
(I know there are many variables and assumptions about future tax rules, but I'd be interested in the BH consensus. What do you think Mel?)

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Re: Variable annuities Yes/No

Post by Mel Lindauer » Fri Dec 08, 2017 7:54 pm

misterlucky wrote:
Fri Dec 08, 2017 5:40 pm
smectym wrote: ↑Mon Dec 04, 2017 8:35 am
I’m like friar1610 above. Own a large Vanguard VA funded back in an earlier millennium. I bought it because we were maxed out on tax-deferred space in 401(k)/IRA.

I certainly haven’t lost money or gone broke because I purchased a Vanguard Variable Annuity. It keeps growing tax-deferred. Have already done several 1035 exchanges to create monthly “checks for life” (partial annuitization offers favorable tax treatment, as each payment us treated by IRS as partly taxable earnings and part tax-free return of principal). However, unlike 401(k) and IRA, with a VA there is no *requirement* to take distributions till age 85.

We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).

So, there are advantages. The idea that there are no advantages to lower-cost variable annuities such as those offered by Vanguard is mistaken. Some people hear the word “annuity” and see red, and can get a bit dogmatic in denouncing the product without troubling to make distinctions.

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).
I'm similar to smectym's approach. I have Vanguard VA's purchased for asset protection features when I was performing surgery in a high malpractice lawsuit environment. Funding regular index funds in a standard taxable account alone posed a risk. Fortunately I never was sued. Now that I'm retired in my early 60's, I wonder if there's any wisdom in exploring whether to close out the annuities, pay the income tax on the gain (especially if tax rates are lower next year), and buy regular VG index funds? Advantages would be to take advantage of estate step-up basis, avoid required distributions at 85, have slightly lower yearly fees. Disadvantages include paying tax and decreasing balances, yearly tax on fund distributions, losing tax deferral.
(I know there are many variables and assumptions about future tax rules, but I'd be interested in the BH consensus. What do you think Mel?)
You purchased your VA for one of the few reasons where they actually make sense (asset protection). Hopefully it was a low-cost VA, such as those that Vanguard offers.

There are too many variables to make a recommendation, and you've listed the pros and cons. I guess at this point it becomes a math problem (how much do I pay now, how much do I save in lower-cost, tax-efficient funds and how much do I save if I plan to use the stepped-up cost basis which avoids the big hit on gains over a long period of time, how much will my heirs pay in taxes if I leave the annuity to them, etc.).

Since you're retired, you may be in a lower tax bracket now than you will be when your RMDs kick in at 70.5, so that's something to consider, too.

Good luck in whatever you decide.
Best Regards - Mel | | Semper Fi

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Re: Variable annuities Yes/No

Post by technovelist » Fri Dec 08, 2017 8:05 pm

misterlucky wrote:
Fri Dec 08, 2017 5:40 pm
smectym wrote: ↑Mon Dec 04, 2017 8:35 am
I’m like friar1610 above. Own a large Vanguard VA funded back in an earlier millennium. I bought it because we were maxed out on tax-deferred space in 401(k)/IRA.

I certainly haven’t lost money or gone broke because I purchased a Vanguard Variable Annuity. It keeps growing tax-deferred. Have already done several 1035 exchanges to create monthly “checks for life” (partial annuitization offers favorable tax treatment, as each payment us treated by IRS as partly taxable earnings and part tax-free return of principal). However, unlike 401(k) and IRA, with a VA there is no *requirement* to take distributions till age 85.

We use the space for bond allocation, to sidestep one of the major raps against VA’s: losing favorable tax treatment of equity capital gains and dividends. (But—a point VA-haters sometimes fail to acknowledge in the same breath—the identical problem exists with 401(k)’s and IRA’s).

So, there are advantages. The idea that there are no advantages to lower-cost variable annuities such as those offered by Vanguard is mistaken. Some people hear the word “annuity” and see red, and can get a bit dogmatic in denouncing the product without troubling to make distinctions.

However, having said as much, yes, if doing it over again probably would have been wiser to simply invest after-tax in index funds. While Vanguard VA’s are cheap compared to the VA universe, still more expensive than index funds (or ETF’s—which didn’t exist when we opened our VA).
I'm similar to smectym's approach. I have Vanguard VA's purchased for asset protection features when I was performing surgery in a high malpractice lawsuit environment. Funding regular index funds in a standard taxable account alone posed a risk. Fortunately I never was sued. Now that I'm retired in my early 60's, I wonder if there's any wisdom in exploring whether to close out the annuities, pay the income tax on the gain (especially if tax rates are lower next year), and buy regular VG index funds? Advantages would be to take advantage of estate step-up basis, avoid required distributions at 85, have slightly lower yearly fees. Disadvantages include paying tax and decreasing balances, yearly tax on fund distributions, losing tax deferral.
(I know there are many variables and assumptions about future tax rules, but I'd be interested in the BH consensus. What do you think Mel?)
If you have enough money to essentially create your own "index fund" with stocks that don't pay out much in dividends, then that might be a way to proceed (after cashing out the VA). That would allow you to decide when to sell and leave your heirs with a step-up in basis (under current tax law), while reducing the current taxes due to dividends.

But I would wait until I see how the new tax law shakes out first, because that could change the calculations substantially.
In theory, theory and practice are identical. In practice, they often differ.

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misterlucky
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Re: Variable annuities Yes/No

Post by misterlucky » Sat Dec 09, 2017 3:50 pm

Ok thanks posters.

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Re: Variable annuities Yes/No

Post by rvjudy » Sat Dec 09, 2017 4:36 pm

You can extend the age for required distributions from your Vanguard variable annuity from age 85 to 99 -- just give them a call.

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