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Started By
Message
Fixed Index Annuity – do any of you have experience with them? Update on page 2
Posted on 10/9/14 at 1:07 pm
Posted on 10/9/14 at 1:07 pm
I’ve never been an annuity guy. But, a good friend who I have discussed investments with over the years and whose opinion I respect told me about an annuity I wasn’t aware of, Fixed Index Annuity. From what he told me and a little research it works something like this. The annuity invests your principle in bonds. The interest earned on the bonds is not returned to the investor. It is used to purchase a stock index fund such as S&P 500 or options in the index fund. If the index goes up you make money but if the index goes down you don’t lose your principle.
The general idea is you don’t lose money in a down year but make money in the up years.
He said the life of the annuity is 5 to 10 years. At the end you get your principle and any profit out and can invest in another one if you want. There is a penalty for taking your money out early except that you can take up to 10% out during any year with no penalty.
I have an appointment with his advisor next Friday and have thought of a few questions. I was hoping some of you have looked into fixed index annuities or might let me know of other questions to ask. Here is what I have so far.
-What type of bonds do they invest in? It must be individual bonds because bond funds do loose value when interest rates rise. There is always the danger of default of some individual bonds. How can they guarantee that your principle will never lose value if invested in bonds?
-These annuities must have an inception date and a date certain ending date. How do they determine what the date is that they close out their position in the index fund and take a new position? They have to close out the position to “cash out” during up years. I need to know how this works because at the end of the year you have more income from the bonds that needs to be invested.
-What are the fees charged by the agent and by the administrator? Supposedly the insurance company pays the agent a commission.
-Would there be an advantage to laddering, for example, $5000 every 6 months vs. investing $50,000 at one time? I believe $5000 is the minimum investment.
-Wouldn’t it be better to wait for a big correction before getting into one of these? The money I am considering is sitting in a money market fund (outside of an IRA) earning about $50 per year. So even if I got in near the top of the market I wouldn’t miss much income. I might even make out better with the principle invested in bonds.
Thanks in advance for any thoughtful insights you might be able to pass along.
The general idea is you don’t lose money in a down year but make money in the up years.
He said the life of the annuity is 5 to 10 years. At the end you get your principle and any profit out and can invest in another one if you want. There is a penalty for taking your money out early except that you can take up to 10% out during any year with no penalty.
I have an appointment with his advisor next Friday and have thought of a few questions. I was hoping some of you have looked into fixed index annuities or might let me know of other questions to ask. Here is what I have so far.
-What type of bonds do they invest in? It must be individual bonds because bond funds do loose value when interest rates rise. There is always the danger of default of some individual bonds. How can they guarantee that your principle will never lose value if invested in bonds?
-These annuities must have an inception date and a date certain ending date. How do they determine what the date is that they close out their position in the index fund and take a new position? They have to close out the position to “cash out” during up years. I need to know how this works because at the end of the year you have more income from the bonds that needs to be invested.
-What are the fees charged by the agent and by the administrator? Supposedly the insurance company pays the agent a commission.
-Would there be an advantage to laddering, for example, $5000 every 6 months vs. investing $50,000 at one time? I believe $5000 is the minimum investment.
-Wouldn’t it be better to wait for a big correction before getting into one of these? The money I am considering is sitting in a money market fund (outside of an IRA) earning about $50 per year. So even if I got in near the top of the market I wouldn’t miss much income. I might even make out better with the principle invested in bonds.
Thanks in advance for any thoughtful insights you might be able to pass along.
This post was edited on 10/23/14 at 1:03 pm
Posted on 10/9/14 at 1:10 pm to PlanoPrivateer
Not a fan of capped returns.
Posted on 10/9/14 at 1:15 pm to PlanoPrivateer
Do. Not. Want.
Could be suitable for some folks, but lots of people buy and regret. Do lots of homework then make informed decision.
Don't let me talk you out of it though. Make your own choice
Could be suitable for some folks, but lots of people buy and regret. Do lots of homework then make informed decision.
Don't let me talk you out of it though. Make your own choice
This post was edited on 10/9/14 at 1:20 pm
Posted on 10/9/14 at 1:33 pm to PlanoPrivateer
Don't buy anything with a bonus. Run away if it has a bonus. There are some interesting possibilities, but it's not one size fits all.
The best FIA's for the client won't return more than 6% over the long haul. The worst will be under 2%.
The best FIA's for the client won't return more than 6% over the long haul. The worst will be under 2%.
Posted on 10/9/14 at 1:36 pm to PlanoPrivateer
quote:
I have an appointment with his advisor next Friday and have thought of a few questions.
Is he truly a advisor, or a salesman pushing fixed index annuities? People selling these things are cropping up everywhere, and weekend talk radio stations are crammed with "infomercials" about them. They may be a good fit for you, but as others have said, do a lot of research.
Posted on 10/9/14 at 2:04 pm to PlanoPrivateer
What company issued your buddy's annuity?
Whats the partipation rate? What's the cap?
Whats the partipation rate? What's the cap?
Posted on 10/9/14 at 2:52 pm to PlanoPrivateer
I don't understand why they call it an annuity. It's really a structured investment. You are generally buying a product, not a stock or bond investment fund. Think of it is a derivative.
The product invests in bonds and pay a rate (or, the product invests in whatever, but your product is paid interest based on a fictional investment). The interest then buys a side investment - in this case a stock index fund (or, again, it may just mimic one). Generally, there is a cap in how much growth you can get in that side investment in a year. The side investment may or may not "lock-in gains" after a period of time - say annually.
The premise, indeed, is that you won't lose any principal, and you may get some of the gains of the market.
They are pitched on WWL a lot. They have a commercial about how they don't lose "one penny" of the investor's principal.
The product invests in bonds and pay a rate (or, the product invests in whatever, but your product is paid interest based on a fictional investment). The interest then buys a side investment - in this case a stock index fund (or, again, it may just mimic one). Generally, there is a cap in how much growth you can get in that side investment in a year. The side investment may or may not "lock-in gains" after a period of time - say annually.
The premise, indeed, is that you won't lose any principal, and you may get some of the gains of the market.
They are pitched on WWL a lot. They have a commercial about how they don't lose "one penny" of the investor's principal.
Posted on 10/9/14 at 2:54 pm to wasteland
quote:
What company issued your buddy's annuity?
quote:
Whats the partipation rate? What's the cap?
He hasn't bought it yet. He just asked me if I knew anything about them. I told him, no. He told me what he had learned. We don't know yet what company(s) he will recommend. Was told he only recommends those with a participation rate would 100%. Don't know what the cap percentage is but will ask at the meeting.
Thanks for your response.
This post was edited on 10/9/14 at 5:38 pm
Posted on 10/9/14 at 2:55 pm to LSUFanHouston
They call it an annuity because it can be annuitized (although rarely done) to provide a lifetime income.
Posted on 10/9/14 at 3:02 pm to iknowmorethanyou
FIA is a very complicated product and in my opinion is not a very good investment. Most investors don't know what they are buying, but only hear and care for the "guaranteed not to lose" feature. However, most don't know what they're giving up for that guarantee.
FYI, most of these "Advisors" which most don't have to have a securities license to sell these products get paid anywhere from 5-8%. That's where the conflict of interest arises.
FYI, most of these "Advisors" which most don't have to have a securities license to sell these products get paid anywhere from 5-8%. That's where the conflict of interest arises.
Posted on 10/9/14 at 3:05 pm to iknowmorethanyou
quote:
They call it an annuity because it can be annuitized (although rarely done) to provide a lifetime income.
And all the ones I have seen only offer true annuitization as opposed to partial annuitization.
Plano, how old are you?
Posted on 10/9/14 at 4:03 pm to PlanoPrivateer
I have a portion of mine and my wife's retirement fund in some of these, because I do like the idea of "no losses", but I also think that over the long haul, they probably won't make as much as "traditional" investments. I think mine have made about 3-4% over the last couple of years, plus the 10% bonus. I'm in my 30's so I took the bonus knowing that I would have to be in a real bad spot to use that money I had invested.
Posted on 10/9/14 at 5:24 pm to LSUGUMBO
quote:
I think mine have made about 3-4% over the last couple of years, plus the 10% bonus.
I'm sure you're aware of this, but for the OP's sake, and for the sake of comparison, an S&P 500 Index fund returned 19%, 32%, 16%, and 2% over the last 4 years. And even balanced funds that hold majority bonds are not too far behind that.
Moral of the story: You pay dearly for the assurance of no lost $$. Don't be afraid of a little risk.
Posted on 10/9/14 at 5:45 pm to Janky
quote:
Plano, how old are you?
65 - retired last year. This would be for money that is outside my IRA and currently in a money market fund. I was just looking for something to make better than the MM rate. I wouldn't take all of the money out of the money market fund but it would be a significant amount.
Posted on 10/9/14 at 6:24 pm to PlanoPrivateer
Not for non IRA assets in my opinion. You are taking capital gain taxable funds and turning them into ordinary income taxable funds. I assume you are in a tax bracket above 15%? At 65 it might be a good idea, but I still don't like indexed annuities. The only one that really comes out ahead generally is the broker. Are you still working? If so, how much longer?
Posted on 10/10/14 at 4:38 am to PlanoPrivateer
quote:
Was told he only recommends those with a participation rate would 100%. Don't know what the cap percentage is but will ask at the meeting.
Thanks for your response.
FYI - some of the products claiming 100% participating have an escalation scale over certain period, either starting on the policy date, renewal date or both. The one I looked over recently had just been renewed for another 10 years and the 1st year of the scale was only 10%
Guy earned 17 bps on his money last year.
As others have said, be careful about about eliminating risk. It can be very expensive in lost/capped earnings.
That being said, there are some good products out there. I hope you report back after your meeting.
Posted on 10/10/14 at 12:34 pm to Janky
quote:No longer working a real job. I continue to officiate high school and youth sports which pays me more than I need to fund my Roth IRA. I've been doing this on and off since 1975 and will continue until I no longer can. Then I'll try to operate the clock or scoreboard somewhere.
Are you still working? If so, how much longer?
quote:Will do. My guess is the % of the cap or some other fee will be a deal breaker but we will see.
I hope you report back after your meeting.
Posted on 10/10/14 at 4:59 pm to Sigma
quote:
Moral of the story: You pay dearly for the assurance of no lost $$. Don't be afraid of a little risk.
Meh, not necessarily. Most index annuities would have outperformed the S&P from 1999-2008, just like most would have underperformed the S&P 500 in the 90s, but that is an unfair comparison either way. A client who is entertaining an index annuity is comparing them to CDs, not a balanced mutual fund or SPY.
Index annuities are one of many financial products that are available to individual investors. They have their purpose and they're a suitable investment for lots of people. The Money Talk board is full of people who are open to a significant amount of risk, and as a result, an FIA is not appropriate.
If you're 50+, I think it is worth looking into, especially if the money is going to be sitting in CDs or money market accounts otherwise.
This post was edited on 10/10/14 at 5:02 pm
Posted on 10/10/14 at 6:21 pm to slackster
Good point. The only thing I know about FIAs is what I have read in this thread, but it looks like a funky balanced fund that caps both upside and downside. Seems to me that if you just invested in a conservative balanced fund (which in reality has very little risk), you don't limit the upside, and you don't pay the relatively hefty fees.
But in the end, like you hint at, if that little risk keeps you up at night, maybe a FIA is for you. Oh the days of MM funds returning 5%....
But in the end, like you hint at, if that little risk keeps you up at night, maybe a FIA is for you. Oh the days of MM funds returning 5%....
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