Talk to me about annuities

[Ottakee]

I just met with a financial advisor today and he is suggesting an annuity as a good option for me.  I have about 15 years before retirement and am making out my ROTH IRA.  I hope to have a small pension but that is not for sure.  I have a lump sum I can invest now.

What are the pros and cons of annuities?

For those that don't remember I am suddenly a single mom of 3 special needs young adults.   My home is paid off, I am debt free and would have enough in an emergency fund for 12 months of living expenses.

[RootAnn]

Did he suggest putting it in your Roth IRA? (I don't recommend this.)

Annuitites, in general, are money makers for the people who sell them and not for the people who buy them. Now, sometimes they are a good idea, but only in specific situations and in certain accounts. 

[Ottakee]

28 minutes ago, RootAnn said:

Did he suggest putting it in your Roth IRA? (I don't recommend this.)

Annuitites, in general, are money makers for the people who sell them and not for the people who buy them. Now, sometimes they are a good idea, but only in specific situations and in certain accounts. 

No, I am fully funding my ROTH IRA.  There is just a yearly max and I will continue to do that every year.  I am not employed anywhere that I can put any contributions into a 401k or 403b plan.  So basically I have this lump sum amount I want to invest for retirement and need to figure out the best plan.

[Ottakee]

16 minutes ago, Arctic Mama said:

Generally we stay away from annuities.  What upsides was he selling you on?

Well, I maxed out my ROTH IRA and will next year and beyond.  I have no other retirement accounts I can put it in (no 401k or 403b).  So....what is suggested as a moderate risk.....moving to lower risk place to put this money for the next 15 years or so.

[Bootsie]

Generally, an annuity is simply trading a lump-sum of money for a series of cash flows in the future.  Often this cash flow is a lower rate of return that you could make on other investments.  Because it ties up your lump-sum of money today, it can be a good option for someone who is tempted to spend the money today rather than keep it invested. 

Do you know what type of return the annuity is offering?  

[northcoast]

1 hour ago, Ottakee said:

No, I am fully funding my ROTH IRA.  There is just a yearly max and I will continue to do that every year.  I am not employed anywhere that I can put any contributions into a 401k or 403b plan.  So basically I have this lump sum amount I want to invest for retirement and need to figure out the best plan.

For the reasons already stated, I am not sure an annuity is the best way to go.  Would you be open to doing investing yourself or do you want a financial advisor to do it for you?  For moderate to lower risk there are mutual funds that do well with low fees such as Vanguard & Schwab.  Schwab does have financial advisors if you don't want to DIY & 24 hr customer service.  I can't remember about Vanguard...

You are off to a great start by asking questions & having a ROTH IRA funded!  You know you want moderate to lower risk over time which is also good.

If you aren't comfortable investing in a mutual funds and/or a more DIY approach, I am sure others here can recommend other investment opportunities or companies with reputable financial advisors.  

[madteaparty]

I can’t invest in anything tax sheltered but if I were on my own having to sort investments, it would all be in low cost index funds. Not only would I not invest in an annuity, I would no longer see that adviser, personally. 

[RootAnn]

Ditto what madteaparty said because after an advisor points me to an annuity, I question every other piece of advice, wondering how much he's going to make off of it. (Even if it was in good faith.)

Low cost, lower risk mutual funds, index funds . . . Not guaranteed by a long shot, especially with the current market, but better than most annuities. (Fidelity and I think Vanguard have low fee, easy to get out of annuities.)

[Bootsie]

Another thing to consider is how your Roth IRA funds are invested.  A Roth IRA is a special type of account, with special tax considerations, but it it not  a specific type of investment.  The money in your Roth IRA account may be in low-risk investments or it may be in more risky investments.  You need to think of your overall tolerance for risk, and then how to invest for that level of risk for your overall portfolio of investments.  

[Ottakee]

21 minutes ago, jdahlquist said:

Another thing to consider is how your Roth IRA funds are invested.  A Roth IRA is a special type of account, with special tax considerations, but it it not  a specific type of investment.  The money in your Roth IRA account may be in low-risk investments or it may be in more risky investments.  You need to think of your overall tolerance for risk, and then how to invest for that level of risk for your overall portfolio of investments.  

It is in a trgets retirement fund based on my age that started out more aggressive and over time will become more conservative the closer I get to retirement age.

[SereneHome]

I am NOT a financial adviser nor do I play one on TV.  I have taken Finance classes for my accounting degree and have Masters's in Tax.  I have super low risk tolerance for investments, but still realize that keeping it in bonds or CD's would loose me money.

Do not do annuities.  Do not see the person who suggested it.  Vanguard 500 index fund usually follows S&P returns and does fairly well over long term.  I would stop putting $$ in any kind of Target fund also.

Oh and I would just keep it in cash vs putting it in annuities.  That's how much I despise annuities.

 

[Bootsie]

No one has a crystal ball to use to predict the market, but given that interest rates have been so low by historical standards over the past decade, they are likely to be higher than they currently are in the future than they are right now.  If you have the money available for investing, you would be able to put it in CDs or other interest bearing investments later, which will likely be a higher return than the annuity will give you. 

[Ottakee]

Does anyone have any ideas on how to find a good, honest investment adviser?  I am willing to pay a few for some solid advice that fits my needs......which are a bit unique.  I would love someone that isn't just out to sell me whatever product/fund that nets them them most money. 

[StephanieZ]

If your advisor is advising an annuity, I'd get a new fee-only advisor. Period. 

So, no, annuities are generally a really bad idea in the vast majority of situations. Especially with special needs dependents. Because annuities essentially turn your cash lump sum into a pension -- that will only last as long as you live (or have much, much lower value at your death than if you'd invested it in some better vehicle). You're going to want your cash to last for your own life, and presumably help your special needs dependents when you pass away. 

I'd go to a FEE ONLY (no commissions!!) advisor and also an estate attorney that is savvy in these things before you do anything with your cash. 

NO NO NO on annuities for the vast majority of situations. Your situation might be one of those exceptions, but I wouldn't believe it until an estate attorney AND a fee-only financial planner have told you the same thing. As in, no body who is making a profit off your purchase . . . 

[StephanieZ]

ps. If I were you and wasn't willing/able to pay for good advice (which you really should do), I'd put your cash into a similar target retirement date fund. Be sure it's low-fee. (I like Vanguard's Index funds, and I use their target date funds for retirement and "life strategy funds" for other investing for the kids/etc. So, I'd probably stick that whole pile of cash into an after-tax investment account at Vanguard in an appropriate Target Date Retirement fund and be done with it. (There are slightly more complicated ways to do the same thing and maybe save a few dollars on taxes, but simplicity is worth a lot to me.)

[Ottakee]

9 minutes ago, StephanieZ said:

ps. If I were you and wasn't willing/able to pay for good advice (which you really should do), I'd put your cash into a similar target retirement date fund. Be sure it's low-fee. (I like Vanguard's Index funds, and I use their target date funds for retirement and "life strategy funds" for other investing for the kids/etc. So, I'd probably stick that whole pile of cash into an after-tax investment account at Vanguard in an appropriate Target Date Retirement fund and be done with it. (There are slightly more complicated ways to do the same thing and maybe save a few dollars on taxes, but simplicity is worth a lot to me.)

That is the option I am leaning towards.  Simple, straight forward but decent payout.

I am willing to pay for a fee only adviser.  I just need to find one I could trust.

[2squared]

Before paying for advice, I would look for a financial forum (similar to this forum but based on finances rather than homeschooling) and ask your specific questions. You are likely to get high quality advice for free.  Bogleheads has a great forum. Maybe Mr. Money Moustache?  Babycenter has some finance boards as well.

[Bootsie]

17 hours ago, Ottakee said:

Does anyone have any ideas on how to find a good, honest investment adviser?  I am willing to pay a few for some solid advice that fits my needs......which are a bit unique.  I would love someone that isn't just out to sell me whatever product/fund that nets them them most money. 

https://www.daveramsey.com/smartvestor?int_cmpgn=no_campaign&int_dept=elp_bu&int_lctn=Blog-Text_Link&int_fmt=text&int_dscpn=

I have not used them to find an investment advisor, but Dave Ramsey does have a referral service that you could try.

If you have an attorney, someone who does your taxes, or a friend who works in the banking industry, I would ask them for suggestions of an advisor.  Even if they are able to suggest financial advisors, make sure that you are comfortable with the person.  Just because someone comes highly recommended does not mean that they are someone you are comfortable working with or that they are best in your unique situation.  

The first thing to think of is ho how (and when) you will see yourself using this money.  Is it money that you will need to provide you a regular cash flow to pay monthly expenses during retirement.  Is it money to provide an extra cushion now in case there is an emergency?  Is it money to be used to assist your dependents once you die?  

Another major question to ask is how much you care to be involved.  Do you enjoy looking at financial options?  Do you like reviewing options over time?  Would you enjoy learning more? Or, is it something that you would prefer to deal with as little as possible?  (My mom would rather get a root canal than have to look at a financial statement or a fund prospectus, so my advice to her would be much different than for my sister, who works in health care, but who has some interest in following the financial markets.)

[mumto2]

I agree with pp’s  Vangard’s index funds are good.  When you decide where you want to put your money you want to put it into the fund over several months to dollar cost average, not in one big chunk.  That will give you the best average price over time and let you start investing immediately.  People tend to wait for the optimum moment and may totally miss it while they decide.  This way you are actively investing........For instance you deposit that month’s amount  in your investment account on the first day of each month over a year, so divide your money by 12 and move it to Vangard over 12 months. 

[Ottakee]

19 hours ago, jdahlquist said:

https://www.daveramsey.com/smartvestor?int_cmpgn=no_campaign&int_dept=elp_bu&int_lctn=Blog-Text_Link&int_fmt=text&int_dscpn=

I have not used them to find an investment advisor, but Dave Ramsey does have a referral service that you could try.

 

The guy i have that others have said is not so good is a Dave Ramsey suggested one.  

[Ottakee]

8 hours ago, mumto2 said:

I agree with pp’s  Vangard’s index funds are good.  When you decide where you want to put your money you want to put it into the fund over several months to dollar cost average, not in one big chunk.  That will give you the best average price over time and let you start investing immediately.  People tend to wait for the optimum moment and may totally miss it while they decide.  This way you are actively investing........For instance you deposit that month’s amount  in your investment account on the first day of each month over a year, so divide your money by 12 and move it to Vangard over 12 months. 

I tried last night to set up a Vanguard account but they can't confirm my identity (possibly because I moved in the past 6 weeks) so now I have to send in my application, etc.

[Bootsie]

6 hours ago, Ottakee said:

The guy i have that others have said is not so good is a Dave Ramsey suggested one.  

Sorry to hear that.  I have found that in some areas of country, especially depending on the size of your local community, it can be harder to find a good fee-based financial planner

[Bootsie]

On 11/14/2018 at 5:52 PM, StephanieZ said:

ps. If I were you and wasn't willing/able to pay for good advice (which you really should do), I'd put your cash into a similar target retirement date fund. Be sure it's low-fee. (I like Vanguard's Index funds, and I use their target date funds for retirement and "life strategy funds" for other investing for the kids/etc. So, I'd probably stick that whole pile of cash into an after-tax investment account at Vanguard in an appropriate Target Date Retirement fund and be done with it. (There are slightly more complicated ways to do the same thing and maybe save a few dollars on taxes, but simplicity is worth a lot to me.)

If you have a lump-sum that you are going to invest all at once (or over a short period of time), you I would suggest an low-cost index fund rather than a target retirement date fund.  The assumptions behind that target retirement date fund are that you will be putting some money into your retirement account every month (or year) until you retire.  Mathematically, it is handling the risk that if you are saving for 20 years down the road, this year you have 1/20 of your savings exposed to the market; the last year you will have 19/20 of your savings exposed (and thus want less risk).  If you are putting a lump-sum at once you have 100% exposure to the market now rather than an increasing portion. 

[Ottakee]

1 hour ago, Fifiruth said:

https://www.schwab.com/public/schwab/investing/accounts_products/investment/annuities

Here is a page on the Schwab website that will explain annuites. I would not reject the advice you got just because the adviser would make a commission. We have all bought life insurance even though the agent made a commission, because we needed it. In this case, an annuity provides a steady steam of income, and that may be something that will help you since you are a single parent with special needs adults. 

 

 

Thanks.  I am wading through all of the options, pros and cons, etc.

[Halftime Hope]

I am nowhere near being an expert on finances, but we are getting up to speed as dh and i learn more about retirement.   Annuities have changed a great deal in the past 10-15 years, and I think there is a place for variable indexed annuities as part of a portfolio.  We went to three different retirement specialists, and their recommendations were very similar for our needs.  The advantages of the newer annuities is that you can't lose your principle, they pay a remainder at the end of your life, and many of them have built-in payouts of twice the amount if you are not able to do either two or three (I can't remember what the number was) activities of daily living.  

in my young adulthood, it was drummed into me to never, ever buy annuities.  They've changed, and now I'd give them a good, hard look.  

[Ottakee]

4 hours ago, Halftime Hope said:

I am nowhere near being an expert on finances, but we are getting up to speed as dh and i learn more about retirement.   Annuities have changed a great deal in the past 10-15 years, and I think there is a place for variable indexed annuities as part of a portfolio.  We went to three different retirement specialists, and their recommendations were very similar for our needs.  The advantages of the newer annuities is that you can't lose your principle, they pay a remainder at the end of your life, and many of them have built-in payouts of twice the amount if you are not able to do either two or three (I can't remember what the number was) activities of daily living.  

in my young adulthood, it was drummed into me to never, ever buy annuities.  They've changed, and now I'd give them a good, hard look.  

Yes, that fits more what he told me about vs. the horror stories I heard about annuities.  

[StephanieZ]

On 11/16/2018 at 10:59 PM, jdahlquist said:

If you have a lump-sum that you are going to invest all at once (or over a short period of time), you I would suggest an low-cost index fund rather than a target retirement date fund.  The assumptions behind that target retirement date fund are that you will be putting some money into your retirement account every month (or year) until you retire.  Mathematically, it is handling the risk that if you are saving for 20 years down the road, this year you have 1/20 of your savings exposed to the market; the last year you will have 19/20 of your savings exposed (and thus want less risk).  If you are putting a lump-sum at once you have 100% exposure to the market now rather than an increasing portion. 

 

No, that's not correct.

The point of Target Retirement Date funds is that they automatically adjust your allocations (generally between bonds and stocks) to a more conservative age/stage-appropriate allocation as you get nearer retirement. This has nothing to do with lump sum vs investments-over-time. In fact, Target Date funds are a very reasonable way to invest in lump sums, and they are equally appropriate for either lump sum or over-time investing. Like any type of fund, Target Date funds are only as good as the specific fund. Some are scammy and high fee/high cost/low return. Others are excellent. 

If you choose the RIGHT target date retirement funds, you get the best of both world's  -- low cost index funds along with invest-it-and-forget-it. There are great target date funds (and other "balanced" funds) that are simply a balance of low cost index funds. 

Personally, I'm a big fan of Vanguard's low cost index funds and their investor-owned model. (I strongly encourage any novice investor to stick with Vanguard's famous and excellent low cost index funds.) 

I use Vanguard's Target Date funds (VTTHX -- 2035 being my target year). https://investor.vanguard.com/mutual-funds/profile/VTTHX?WT.srch=1&cmpgn=PS:RE

Similarly, for my non-retirement long term investing, where I used to use simply their classic SP500 Index Fund (which was all that was really available when I started using Vanguard 20 years ago), I now primarily use VASGX -- Vanguard's Life Strategy Growth fund. This is a 80/20 blend between stocks/bonds and is aimed for long term growth, and is appropriate for investors with tolerance for the variability of a stock-heavy fund. I use it for long term investments for kids/etc, that I don't expect to need anytime soon, so the purpose is simply to stash it for maximum long term growth.  https://investor.vanguard.com/mutual-funds/profile/VASGX 

You could make up a similarly blended balance of Vanguard's various stock & bond index funds to achieve the same thing as you get with a Target Date or Life Strategy fund, saving a small but not insignificant amount of money over time. But, that would require regular (quarterly or so) adjustments and lots of futzing and puttering around with your funds. That's the very last thing I want to do -- I try to utterly ignore our long term investments, both for stress-reduction and accidental-screw-up-avoidance . . . So, to me, it's much better to pay the very little extra (perhaps a hundred bucks a year per 100,000 invested?) to stick it all in appropriate balanced Target Date or Life Strategy funds and forget about it.  

 

 

[Bootsie]

4 hours ago, StephanieZ said:

 

No, that's not correct.

The point of Target Retirement Date funds is that they automatically adjust your allocations (generally between bonds and stocks) to a more conservative age/stage-appropriate allocation as you get nearer retirement. This has nothing to do with lump sum vs investments-over-time. In fact, Target Date funds are a very reasonable way to invest in lump sums, and they are equally appropriate for either lump sum or over-time investing. Like any type of fund, Target Date funds are only as good as the specific fund. Some are scammy and high fee/high cost/low return. Others are excellent. 

 

I know that this is generally what is taught about moving to age appropriate investments nearer retirement.  It has been based on models where people are putting money into retirement over a period of time and the conclusion was that as you got close to retirement you didn't have time to regain losses that occur in a bad year.  But, mathematically what was happening was that close to retirement ALL of your money was exposed to a down year, where in the early years only a small portion was.  

Say you invest $10,000 for 15 years.  Your ending balance will be exactly the same if the market returns 8% every year except the 15th year, when you have a 50% loss as it would have been if you have a 50% loss the first year and an 8% return every year after that.  

Mathematically your return will be (1 + YR1 ret)*(1 + Yr2 ret)*(1+ Yr3ret)...  It doesn't matter which year the market return is negative, mathematically it is the same.  

[kathkath]

Yes No.  Just don’t.

re:advisors we have had a couple.  One was a Ramsey recommended and he was benign.  Young, fee based, did our taxes ended up quitting so we were assigned another.  We later realized that DR recommended ones only get on his list by paying a fee.  DR doesn’t vet them.

Then we switched to another who was a good friend we trusted.  First with Morgan Stanley then moved to Wells Fargo.  Their statements and interface both were difficult to see what was going on, by design.  Took awhile for us to figure out but he cost us THOUSANDS and has been our biggest financial regret.  5 years down the drain with him. Since then I have spent lot of time readin books and we have come up with our OWN plan.  We switched everything to Fidelity and are managing it ourselves.  Their app is so amazingly simple to see exactly where you are.  We are slowly selling off our bad investments, are waiting til Jan and moving everything into index funds.  Do your homework.  It is less complicated than the advisors would like you to believe.  Look, you homeschool, right? You have had to learn along the way? You can do this.

 Everyone is in this business for a reason, to make $$$.  Sorry if this offends anyone but they are leeches.   They make their money off us—either commissions or other payments that are difficult to see.  Reddit also has some advice forums in addition to bogleheads etc. squirrelers is another.

Edited November 18, 2018 by kathkath