"Indexed Annuities: The Big Lie" by Don McDonald

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arcticpineapplecorp.
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"Indexed Annuities: The Big Lie" by Don McDonald

Post by arcticpineapplecorp. » Fri May 27, 2016 6:31 pm

Thought this might be of interest to some. An article about why indexed annuities are to be avoided in most cases. At the end of the article, there's a long list of questions to ask at your "free" steak dinner.

My favorite part of the article:
"In 2009, Barron’s Frederic G. Marks wrote an article on EIAs entitled,“Designed to Deceive.” Even before reading the piece I knew it was unlikely to be a ringing endorsement of the indexed annuity concept.

In this well-researched article, Mr. Marks discovered that, in one EIA example, the promised 3% guaranteed annual return ended up being 0.37% per year, for the first seven years. Over 14 years, it rose to a whopping 1.67%. Thanks to the miracle of complex qualifiers, embedded deep in the policy, they can magically reduce the claimed 3% by almost 50%.

He calculated a real world, average annual return for the good market years of 2003-2006 (based on the insurance company’s own explanation of how gains are calculated - average monthly return) at 4.2%. He went on to look at what the gain would have been on this EIA over every rolling 10-year period since 1975 (there were 241 of them). Using the monthly average return method, an EIA would have returned 62% less than the S&P 500."
http://www.realinvestingjournal.com/rep ... he-big-lie

Enjoy!
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by Ostentatious » Fri May 27, 2016 6:36 pm

Maybe I am paranoid but I always run away from anything called annuity :-).

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by joe8d » Fri May 27, 2016 7:38 pm

Don McDonald.Used to listen to his show on radio many years ago.
All the Best, | Joe

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by Mel Lindauer » Fri May 27, 2016 8:57 pm

Here's a Forbes column I did about these things titled "The Truth About Equity-Indexed Annuities". Didn't make any friends in the insurance industry with that column.

http://www.forbes.com/2010/08/10/truth- ... dauer.html
Best Regards - Mel | | Semper Fi

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by mickroark » Sat May 28, 2016 7:13 am

Boy, I bought my equity index annuity in 2008 and it has done exactly what I bought it for. But I never got that steak dinner. Maybe I should call my insurance company.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by arcticpineapplecorp. » Sat May 28, 2016 12:18 pm

Mel Lindauer wrote:Here's a Forbes column I did about these things titled "The Truth About Equity-Indexed Annuities". Didn't make any friends in the insurance industry with that column.

http://www.forbes.com/2010/08/10/truth- ... dauer.html
Nice article Mel. Thanks for sharing.
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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by dbc47 » Sat May 28, 2016 12:36 pm

My brother says he was sold an investment that either gives him the return of the S&P 500 or 6%, with no downside risk. The thing is reviewed every year in August and at that time he gets which ever is higher, "guaranteed". I don't know any other details. Does that sound like an Indexed Annuity?? :confused

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by nedsaid » Sat May 28, 2016 12:41 pm

I have fond memories of Don McDonald. He had his own newsletter and a radio show. His philosophy was in many respects Boglehead. He favored no-load investing and keeping expenses low. Later on, he became an educator with Paul Merriman's firm. He is a good guy and even met him once at an investing conference.

The article he wrote sounds about right. I would not buy indexed annuities.
A fool and his money are good for business.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by itstoomuch » Sat May 28, 2016 12:58 pm

We bought 2012,FIA (EIA) with GLWB for its Income Account's Straddle. I give the Actual/Real/CashValue-index account a "D" in comparison to the SP500.

works for us. We may be taking Income in 2018, for RMD and the big income payout. We'll see how our other accounts work out.
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YMMV.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by mickeyd » Sat May 28, 2016 1:15 pm

Does that sound like an Indexed Annuity
Probably so but most of the 6% is a return of his own money. It's a commission generator for his LI agent.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by arcticpineapplecorp. » Sat May 28, 2016 1:31 pm

nedsaid wrote:I have fond memories of Don McDonald. He had his own newsletter and a radio show. His philosophy was in many respects Boglehead. He favored no-load investing and keeping expenses low. Later on, he became an educator with Paul Merriman's firm. He is a good guy and even met him once at an investing conference.

The article he wrote sounds about right. I would not buy indexed annuities.

All true. He and his partner Tom Cock left Merriman a few years back and started their own investing advisory firm (they're fiduciaries) called Vestory. They still have a radio show weekly which is also available as a podcast called "Talking Real Money." They recommend Vanguard to most who call in to their show, but they use DFA for most of their clients. Though they started a robo advisory feature which I believe uses Vanguard ETFs. They promote the small cap and value tilting strategy.

I'm not affiliated with them in anyway (have my investments with Vanguard directly) but a few years ago they did provide a gratis blueprint (spreadsheet) basically showing how much I'd have at retirement (standard "future value" computations which I didn't know how to do at that time). And they were very nice to talk to.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by lostdog » Sat May 28, 2016 2:14 pm

My brother in law is an annuity salesman. I keep my mouth shut but I am looking forward to the day he tries to sell me one...
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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by BruDude » Sat May 28, 2016 5:22 pm

Comparing indexed annuities to actual investment returns is an apples-and-oranges comparison, they are not designed for the same purposes (that is not to say that bad agents didn't present them that way since most don't even know how they work internally). If it is viewed in the context of being a fixed annuity with a varying interesting return per year, they were very competitive a few years ago, now not so much. Some of the annuities had caps of 10-12%/year which can certainly outperform a standard fixed annuity that was paying ~3%.

The riders and bonuses were often very confusing to most people and some of them were more complex than others. A simple point-to-point annuity was easy to understand and when they were originally introduced, the cost for the guaranteed lifetime withdrawal riders were relatively low, then increased substantially over time as caps were being lowered, resulting in a squeeze on both ends that made them less attractive. We sold a few of the "better" ones over the years when the product fit the goals, and each of those clients has been very happy with how it's turned out. Everyone's situation is different and a lot of people entering their retirement years do not want any risk of loss in their portfolio, even if that would not be the "optimal" situation for them. Not everyone is capable of or has any desire to understand investment strategy and the "set it and forget it" idea is appealing.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by skepticalobserver » Sat May 28, 2016 6:04 pm

Paltry returns, fees and the prospect of sizable and lengthy early withdraw penalties reduce FIA contract values to where they're often underwater in relation to the initial investment. That leaves the default position for the contract owner: annuitize what's essentially an SPIA, and expensive one at that (low payout rates). The touted 6% "growth" on the annuity income base is a gimmick; the yearly percentage increase just line up with the increasing age of the annuitant.
Last edited by skepticalobserver on Sat May 28, 2016 6:33 pm, edited 1 time in total.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by mickroark » Sat May 28, 2016 6:30 pm

What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by stratton » Sat May 28, 2016 6:31 pm

I saw an article that mentioned an equity indexed annuity was equivalent to ~15% stocks and 85% T-bills. The closest we can get:

Vanguard Life Strategy Income fund (VASIX): 20% stocks, 80% bonds.

Fund Portfolio

Code: Select all

Vanguard Total Bond Market II Index Fund Investor Shares        56.1%
Vanguard Total International Bond Index Fund Investor Shares    23.6%
Vanguard Total Stock Market Index Fund Investor Shares          12.1%
Vanguard Total International Stock Index Fund Investor Shares    8.2%
Fund Performance

Code: Select all

2006     7.93
2007     6.70
2008   -10.53
2009    12.08
2010     9.22
2011     3.77
2012     6.54
2013     3.40
2014     6.76
2015     0.22
2016 ytd 2.23 thru 4/30/2016
Note: Vanguard removed the fund's market timing a couple years ago.

Paul
...and then Buffy staked Edward. The end.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by Grt2bOutdoors » Sat May 28, 2016 6:44 pm

Someone very intelligent on this forum once said never to confuse insurance with investments. Insurance is to protect you from the fat tail risk you are unable to cover with your own assets, investments are to take a reasonable level of chance depending on one's risk tolerance to multiply those assets by some factor.

The only annuity I'm interested in is a single premium life annuity and only when the time is ripe for me to obtain one, otherwise the company I keep is Vanguard. (my spin on the NY Life ads) :D
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by Grt2bOutdoors » Sat May 28, 2016 6:52 pm

mickroark wrote:What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.
Put the numbers up to back your statements, otherwise your claims hold as much water as a variable annuity salesman who claims one will receive 6% on their money without risk. That DOL fiduciary rule is going to implode the variable annuity industry - it really is a weapon of mass destruction. :)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by mickroark » Sat May 28, 2016 7:11 pm

Sounds kind of like kinder garden. I will show you mine if you show me yours.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by arcticpineapplecorp. » Sat May 28, 2016 9:24 pm

mickroark wrote:Sounds kind of like kinder garden. I will show you mine if you show me yours.
Well, I kinda thought the same thing as Grt2bOutdoors when you said:
mickroark wrote:"With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years".

How can one outperform stocks when these annuities only pay out a portion of the gains of stocks, but not all? There's no possible way you can "outperform" stocks if you're not getting the entire return of the performance of stocks.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by grabiner » Sat May 28, 2016 11:14 pm

mickroark wrote:What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.
Check the numbers; the exact numbers will depend on the specific annuity, but they aren't likely to match a long-term investment strategy. Typically, an equity indexed annuity follows the value of the S&P 500 index. If so, it should underperform an investor who holds an index fund, because the index fund includes dividends but the published index value does not. (There are usually caps and floors, which make the overall return more complicated.) If the annuity has 100% participation, no cap, and a 0% cumulative return floor (that is, you get 100% of the index return, but never below zero), stocks have a 2% dividend yield, and bonds return 5%, a 60% stock investor will beat the annuity if stocks return anywhere between -3.33% (zero portfolio return) and 10% (8% in the 60-40 portfolio matches the after-dividend return), with less risk. Most Bogleheads with a 30-year time horizon have more than 60% stock, and stocks have never come anywhere near returning -3.33% over a long time period (a 64% loss in 30 years).
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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by itstoomuch » Sun May 29, 2016 12:16 am

arcticpineapplecorp. wrote:
mickroark wrote:Sounds kind of like kinder garden. I will show you mine if you show me yours.
Well, I kinda thought the same thing as Grt2bOutdoors when you said:
mickroark wrote:"With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years".

How can one outperform stocks when these annuities only pay out a portion of the gains of stocks, but not all? There's no possible way you can "outperform" stocks if you're not getting the entire return of the performance of stocks.
{Bold added}

As an owner of this "Stuff", some BH need to get off the comparison of ANY annuity vs a stock/bond/cash portfolio.
The good way to describe our purchase is, " I bought a Pension Plan, with known costs and gives us a minimum Income at X date in the future. It tries to replicate a conservative, Tier 1, PERS. We bought Insurance in the form of a pension. I sold off much of my retirement Income risk to some entity, who thinks that it can make money on this transaction. I hope they do make money, too. :idea: My profit/loss profile for this type of annuity would look something like a long Straddle Option. :idea:

The BIG question that I asked myself, " If, another BlackSwan event, prolonged Inflation/Deflation, how would we do? :annoyed and What can I do to minimize their effects on our retirement? :annoyed

Notes: Purchase at ages 59/61-62/65. Current age 66/69. Current Income and future Income portfolio: Bucket #1-SS (took at first oppurtunity), small pension (non COLA); Bucket #2- deferred GLWB annuities (not taking Income); Bucket #3- rental condo (purchased with inheritance and taking Income. This was unforeseen and we would be fine without this bucket). This Income portfolio, Buckets 1-3, hopefully will be fairly immune to Market gyrations and should be flexible enough to withstand moderate inflation and strong deflation. :D

Our Bucket #4- INVESTMENT portfolio is something that has considerable Risk exposure, representing about 20% of retirement assets. Today, the discretionary is almost entirely in Cash holding. On, 02Jan2016, we were fully invested. We're +3 to +5% YTD on this discretionary.

Bucket #0-We also have a non-Income acreage. Carrying costs are relatively small. Considering selling this property but not in a hurry. We own home. We consider home and acreage as expenses, not risk or assets. LTCi. Small debt from DS education at 3%, interest will be entering income deduction phase out. We are in SS Hump zone and will be determinate on how I manage retirement Income and Deductions.

YMMV.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by lostdog » Sun May 29, 2016 10:36 am

mickroark wrote:What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.
Is this a joke?
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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by lostdog » Sun May 29, 2016 11:02 am

Grt2bOutdoors wrote:
mickroark wrote:What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.
Put the numbers up to back your statements, otherwise your claims hold as much water as a variable annuity salesman who claims one will receive 6% on their money without risk. That DOL fiduciary rule is going to implode the variable annuity industry - it really is a weapon of mass destruction. :)
Grt2bOutdoors,

You might be right.

http://www.investmentnews.com/article/2 ... y-industry
Vanguard Total World Equity Index - The rational portfolio

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by Mel Lindauer » Sun May 29, 2016 11:34 am

lostdog wrote:
Grt2bOutdoors wrote:
mickroark wrote:What crazy thing about this discussion is that it seems these annuities are only bought in or near retirement. Yes they are bad investments then. These products are best suited for someone in their 30-40's. With time to grow and no loss of principal, they will easily outperform stocks and bonds for most investors. The only way a stock and bond investor can beat these is if they can buy and hold for 30 years. I guarantee not even the best bogleheads can or did that.
Put the numbers up to back your statements, otherwise your claims hold as much water as a variable annuity salesman who claims one will receive 6% on their money without risk. That DOL fiduciary rule is going to implode the variable annuity industry - it really is a weapon of mass destruction. :)
Grt2bOutdoors,

You might be right.

http://www.investmentnews.com/article/2 ... y-industry
Boy, the unsuspecting investor might finally be getting some help against the unscrupulous and deceitful tactics used to sell these awful things. From the InvestmentNews link:
Further, brokers could find themselves in the situation of not being able to recommend a variable annuity for a client at all, if no annuities available over their broker-dealer's platform are deemed to be in a client's best interest, according to Amy Lynch, president and founder of Frontline Compliance.

“Under a fiduciary standard, [brokers] can't make the sale, period, if nothing fits for a particular client,” Ms. Lynch said.
That's great news for investors and bad news for those selling these complicated and unsuitable products.
Best Regards - Mel | | Semper Fi

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by edge » Sun May 29, 2016 7:30 pm

I have run the numbers. The majority of these products have had horrific returns. Less than bonds. The products that performed well have been redesigned so that the new versions will not have good returns.

I've done consulting for the largest carriers of these products...primarily on how to proactively avoid losing class action law suits because these products are just that awful.
mickroark wrote:Sounds kind of like kinder garden. I will show you mine if you show me yours.

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Re: "Indexed Annuities: The Big Lie" by Don McDonald

Post by montanagirl » Sun May 29, 2016 7:41 pm

dbc47 wrote:My brother says he was sold an investment that either gives him the return of the S&P 500 or 6%, with no downside risk. The thing is reviewed every year in August and at that time he gets which ever is higher, "guaranteed". I don't know any other details. Does that sound like an Indexed Annuity?? :confused
An acquaintance of mine also bought one of these..she had the choice of 5% with a fixed payout, or 6% if she let it fluctuate with the market etc etc etc all very complicated, but with a guaranteed floor. I had no idea about these products, and could say only that I would never buy one due to hidden fees, and would stick with self managed Vanguard funds. Maybe consolidate into one balanced fund at RMD time. But she kept saying she's frightened of the Market!!! and didn't want to risk her money. :|

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