Parent's Retirement - Annuities, Seeking Advice

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ArgentWren
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Parent's Retirement - Annuities, Seeking Advice

Post by ArgentWren »

Hello. First time posting, but I've been following posts for some time and reading books. I'm still new to this, so please forgive any egregious misconceptions in this post.

I'm relatively young (still under 30) and when my parents started investing, I was not well versed nor well read on the topic. They have a financial adviser who has been handling their money. They are now 52/58 and want to retire at 56/62 or a year or so after, if possible. Unfortunately, they are also not well versed in retirement and went with their adviser's plan of placing all their retirement portfolio into annuities.

This is their current portfolio:

================

58 yo Parent
Individual Non Qualified Account
400k (Guaranteed Withdrawal Balance) - Jackson National Annuity
40k (Guaranteed Withdrawal Balance) - Brighthouse Annuity

Traditional IRA
70k (Guaranteed Withdrawal Balance) - Jackson National Annuity

Roth IRA
8k (Guaranteed Withdrawal Balance) - Jackson National Annuity

52 yo Parent
Individual Non Qualified Account
40k (Guaranteed Withdrawal Balance) - Jackson National Annuity

Traditional IRA
200k (Guaranteed Withdrawal Balance) - Jackson National Annuity

Cash:
100k, I've asked them to hold on investing this for the time being
400k in real estate value of their home

===============

Jackson National Annuity - Variable Annuity. These have both Lifeguard (0.9% fee) and Death Benefit (0.7% fee) Riders. They have an average M&E of 1.5%, Admin Fee of 0.15%. The average expense ratio of the subaccount is about 1%. (This all adds up to about 4.3%). I cannot drop the riders.

Reading this annuity with the riders and going through the prospectus, it basically seems to read that there is a guaranteed SIMPLE interest rate of 6% on the income benefit base. If the market increase of the cash value (minus fees) outperforms, then this is locked in as the new value of the benefit base, but if not, the benefit base increases at a simple interest rate (not compounded) of 6%.

If they take out disbursements from the annuity between 59 1/2 to 64, they get 4% of the Guaranteed Withdrawal Balance. If they do it after 65, they get 5% of the Guaranteed Withdrawal Balance.

The annuity guarantees lifetime income payments. There does not appear to be any commentary on increasing value during disbursement to account for inflation.

There is 11k of surrender fees on the 200k and 400k annuities (total 22k fees) that will expire in a year or so.

I'll skip the Brighthouse annuity in favor of brevity, since it's a small part of the portfolio. It has no surrender fees.



My issue is multifold here. I'm not entirely sure how to advise them, and I'm not terribly familiar with annuities. First, they are extremely risk adverse, especially this close to retirement, which I understand. But the simple interest increases don't seem to be the best use of their money. Furthermore, the annuities themselves have very high fees, so the likelihood of their market cash value beating their benefit base value is much less likely. They're also very close to retirement and while they're willing to negotiate a few years, or maybe even waiting till the older of the two is 65, they don't want to work well into their 60s.

I feel like their adviser didn't do them justice when they started investing a decade ago, and now they're locked into these annuities that don't make good use of their money. Given they are so close to wanting to retire, should I just stick with the annuities? Should I pull the money out and renegotiate the annuities? (they would pay income tax on the non-qualified in that case, wouldn't they?) Should I take the 100k of cash and try to cover the gaps with a low cost index fund, or move all the money to low cost index funds? Is it not as big a deal as it seems?

Any advice is appreciated, and I apologize for the long first post. My own money is all in low-cost index funds with Vanguard, but I am at a slight loss as to how to best advise my family when they are already invested this way.
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David Jay
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by David Jay »

Welcome to the forum!
ArgentWren wrote: Fri Feb 28, 2020 11:58 pmI feel like their adviser didn't do them justice when they started investing a decade ago...
Their advisor is, to be blunt, seeking his own financial interest over the interest of your parents.

1. Such a high percentage (essentially all) of their assets should never have been placed in annuities, but their advisor likely made 8% on every dollar they placed into the variable annuities.

2. It is pretty much financial malpractice to place qualified funds (traditional IRA and Roth IRA funds) inside annuity wrappers. They are paying 4% for no real benefit.

3. The income riders likely only come into play only if they annuitize. As you noticed, annuitized payouts are not inflation protected. The very best inflation protected income stream available is to live off of their portfolio in early retirement and have the high earner of the couple delay SS until age 70.

I would dump the advisor and cash out all annuities within IRAs immediately. Perhaps wait one year to clear the fees for your parent’s peace of mind about the fees (but in actuality will pay more in fees this year than the $11,000). There are plenty of nice, safe investments for them to place their money in - say something like Vanguard LifeStrategy Income which is only 20% stocks.

Withdrawals from the taxable (non-qualified) annuities need to be managed more carefully. I would ask for the basis information on each one to understand how much of each annuity will be taxable.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
ArgentWren
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by ArgentWren »

Thank you. I agree with your analysis and appreciate you taking the time to look over the data I posted.

Unfortunately, their major concern at this point is if they pull all the money out of the annuities and place it in something like Vanguard LifeStrategy Income, with being so close to retirement, is the risk too high for the time period they would be investing for before they started trying to pull out income? IE, if I were to pull their funds, place them in Vanguard LifeStrategy Income, they are concerned the loss might be so high in the event of a bad turn in the market they would significantly delay retirement.

No one can predict the market, and Vanguard LifeStrategy Income is only 20% stock, so should I just have a plan B backup in the case of a poor market trend? Or is the Vanguard LifeStrategy Income safe enough that any delay in retirement might only be a couple years one way or another that could be covered in cash?
mhalley
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by mhalley »

Plan B is for a one night stand, not an investment policy statement. I think the 100% annuities is almost criminal, you might consider complaining to someone. 20% might not keep up with inflation, so 30% is a more reasonable stock aa. Rick Ferri discusses the 30/70 portfolio for retirees here. He discusses potential of loss.
https://www.forbes.com/sites/rickferri/ ... 4aa0765dae
Finra complaint
https://www.finra.org/investors/have-pr ... -complaint
I suppose they could do a 1035 exchange to cheaper annuity at vanguard if not willing to get out of them completely.
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Stinky
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by Stinky »

David Jay wrote: Sat Feb 29, 2020 12:19 pm
I would dump the advisor and cash out all annuities within IRAs immediately. Perhaps wait one year to clear the fees for your parent’s peace of mind about the fees (but in actuality will pay more in fees this year than the $11,000). There are plenty of nice, safe investments for them to place their money in - say something like Vanguard LifeStrategy Income which is only 20% stocks.

Withdrawals from the taxable (non-qualified) annuities need to be managed more carefully. I would ask for the basis information on each one to understand how much of each annuity will be taxable.
Welcome to the Forum! Glad that you posted your question.

David Jay’s response is spot on.

The “financial advisor” has taken terrible advantage of your parents. He has made massive commissions in selling these inappropriate policies to them. The internal fees that you quoted are absolutely unconscionable.

OP, I hope that you’re able to nudge your parents in a better direction.
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NotWhoYouThink
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by NotWhoYouThink »

First, they should stop contributing to annuities. If both plan to work 4 more years, they can save a lot of money over that time.

As to what they should do about annuities - well, it depends. If they had half their money in the stock market now, how would they have reacted to the events of last week? Panic selling?

Also, how good are they at budgeting, and how much of their income do they spend? If they told their advisor that their priority was having safe stable income in retirement, and that they are very risk averse, that could explain a lot about their current portfolio. Will they get Social Security or pensions?

I am not saying the annuities are good investments, and certainly the ones inside the IRAs are particularly bad. But not everyone can muster the behaviors needed to manage a 3 fund portfolio through booms and busts, bonuses and car repairs, windfalls and illnesses. Some people need the income not the assets. Does this sound like your parents?

Also, people don't react well to being told they have made bad decisions, especially big financial decisions. So before you suggest big changes, come back and talk more about your parents' behaviors and needs. And consider that maybe they could have better annuities, but some annuities might be appropriate for them. I am just over their age and none of this would be appropriate for me, but I am not your parent.
Topic Author
ArgentWren
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by ArgentWren »

I don't want to say they've made bad financial decisions; I'm really proud of them for saving as much as they have on an income of about 60k over the last decade (they only started saving heavily in the last decade due to a lot of prior life issues before that). They budget well (as far as I can tell), spend only 50% of their income, and don't have many expenses (apart from health insurance premiums, though they are both currently healthy). They have no debt and no mortgage.

They are very risk adverse. Lifestyle wise, they lived through a few bear markets and it doesn't make them sleep well. They haven't ever managed their own assets for investment, but I would guess they would be very stressed during a bear market and if they were in full control of their assets, would have struggled not to sell last week. That said, they don't watch the market very much.

They will get social security, but are trying not to withdraw from it until later to prevent reduced payouts.

They're not well educated on investment, however, which is why I've been taking the last few months to read the books suggested on this website and educate myself so I can help them. I'm by no means completely up to speed, so I really appreciate all the advice here.


They are willing to make changes, but really just want a stable income during retirement they feel will be safe. They don't necessarily need to come completely out of annuities, I think, because it may offer them peace of mind, but maybe better ones for some of the portfolio and roll over the IRAs into a fund like has been suggested. I'm just trying to get a sense of the best path for them based on collective advice.
Last edited by ArgentWren on Sat Feb 29, 2020 5:17 pm, edited 1 time in total.
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gwe67
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by gwe67 »

mhalley wrote: Sat Feb 29, 2020 1:17 pm Plan B is for a one night stand, not an investment policy statement.


my first +1 ever!
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Jack FFR1846
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by Jack FFR1846 »

The salesman has already been paid his commission of 4% to 7%. Doing quick math, your parents put $758k into these products, so have paid between $30,000 and $53,000 in commissions.

https://www.thebalance.com/what-levels- ... ies-146003
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Freeadvice
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by Freeadvice »

My parents had the same problem. If there is a low basis on the unqualified annuities, maybe 1035 them into a fidelity annuity and withdraw during the years after retirement but before taking social security in order to minimize the income taxes.
dandinsac
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by dandinsac »

ArgentWren wrote: Sat Feb 29, 2020 4:59 pm They budget well (as far as I can tell), spend only 50% of their income, and don't have many expenses (apart from health insurance premiums, though they are both currently healthy). They have no debt and no mortgage.
If they don’t need the money, you many not have to do anything. The key question is, how much do they spend each month? With $800K in investments, If thy only need $30K / year, they have already saved over 25 years of income and they are still working and saving.

My parents bought annuities as well with some of their IRA accounts. Fast forward 20 years and my mother is in her mid-80s with ~$170,000 in an annuity IRA with Jackson. (My father passed a few years ago.) RMDs are $9,000 per year, which is money she doesn’t really need. She does fine on normal savings interest, farm land rental, a small pension and social security. I can’t really complain how it ended up. My parents succeeded because they had a high savings rate.

My advice, based on your description of their risk tolerance, would be focus to help them develop a plan to get to retirement. Don’t worry about the annuities. Get a good estimate for their expenses versus savings. They should focus on setting aside cash now, ideally tax deferred, so that they have no concerns holding off on social security until age 70. If they have any large expenses upcoming (new car, house renovations, etc.) get those done while they are still working
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BL
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by BL »

I believe the company is required to give you an In-Force Illustration that includes guaranteed results if you ask them. This information may help you decide what to do.

There has been an expert person who analyses these products mentioned on BH. Perhaps someone could find it if you wish.

There are both qualified and non-qualified annuities here. They would have different tax treatments and perhaps penalties if cashed under a certain age (59-60?) and maybe non-qualified. If the qualified ones are carefully kept within an IRA, they might avoid immediate tax consequences. They could be invested in an IRA.

Sorry, I just know enough to be dangerous.
Topic Author
ArgentWren
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by ArgentWren »

I appreciate the assistance from everyone on the forum!

As an update, after speaking with my parents, we are considering a plan around:

- Keeping the largest non-qualified annuity but 1035 into a better annuity (they want to avoid the major tax hit + surrender on it as well as maintain some money in annuities for guaranteed income)
- Dollar cost average the rest + some cash into a 30/70 stock/bond fund at Vanguard (after looking at the data and living through previous markets, this is appropriate for their risk tolerance and they feel better doing a dollar cost average technique)
- Continue to save and work for a little while longer
- Delay social security payments on one parent past 70 and the other to at least 67

The plan is still in the works, and it may not be the absolute best plan, but they are feeling more confident. The assistance & information from the people on this forum has really helped and I want to thank everyone for that!
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Stinky
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by Stinky »

ArgentWren wrote: Mon Mar 02, 2020 3:54 pm I appreciate the assistance from everyone on the forum!

As an update, after speaking with my parents, we are considering a plan around:

- Keeping the largest non-qualified annuity but 1035 into a better annuity (they want to avoid the major tax hit + surrender on it as well as maintain some money in annuities for guaranteed income)
- Dollar cost average the rest + some cash into a 30/70 stock/bond fund at Vanguard (after looking at the data and living through previous markets, this is appropriate for their risk tolerance and they feel better doing a dollar cost average technique)
- Continue to save and work for a little while longer
- Delay social security payments on one parent past 70 and the other to at least 67

The plan is still in the works, and it may not be the absolute best plan, but they are feeling more confident. The assistance & information from the people on this forum has really helped and I want to thank everyone for that!
Congratulations to you for having the maturity and presence to be able to work with your parents toward a better path.

It’s clearly better than where they’ve been. And if they’re comfortable with the plan, you’ve done your job.

Again, congratulations to you.
It's a GREAT day to be alive - Travis Tritt
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David Jay
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Re: Parent's Retirement - Annuities, Seeking Advice

Post by David Jay »

ArgentWren wrote: Mon Mar 02, 2020 3:54 pm - Dollar cost average the rest + some cash into a 30/70 stock/bond fund at Vanguard (after looking at the data and living through previous markets, this is appropriate for their risk tolerance and they feel better doing a dollar cost average technique)
They can do all this with just one fund, the Target Retirement Income fund (VTINX) which permanently provides the desired 30/70 allocation (allocation does not adjust over time).

Link: https://investor.vanguard.com/mutual-fu ... olio/vtinx
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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