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Started By
Message
Pros and cons of fixed index annuities.
Posted on 3/18/22 at 10:56 am
Posted on 3/18/22 at 10:56 am
I recently retired and am in the process of moving my 401k funds. FIAs were mentioned as one alternative. Tell me what you know about them.
6
Posted on 3/18/22 at 12:15 pm to Cool Hand Luke
Pro- Downside protection
Con- limited growth and liquidity (for some)
This post was edited on 3/18/22 at 12:32 pm
Posted on 3/18/22 at 1:09 pm to Cool Hand Luke
quote:
FIAs were mentioned as one alternative.
The only way I’d consider a FIA is as an alternative to fixed annuities, CDs, or maybe bonds.
It’s in no way, shape, or form an alternative to equities over any extended period of time.
Unfortunately, you typically only see FIAs sold by people that cannot sell traditional equity (aside from mutual funds). As a result, many folks that sell them pitch FIAs as something they’re not. To a hammer, everything is a nail kind of thing.
If you’re getting FIA recommendations, I would interview another advisor altogether just to get a separate idea. Look for someone that’s listed as an IA (investment adviser) on Finra’s BrokerCheck or the SEC Investment Adviser Website.
FIAs as a tool often get a bad rap, but it’s usually because of the shitty posers that are selling them.
Posted on 3/18/22 at 2:05 pm to Cool Hand Luke
quote:
FIAs were mentioned as one alternative. Tell me what you know about them.
What is your retirement window?
When are you looking to need funds?
Has annuitizing the annuity been pitched as a benefit of the FIA?
Posted on 3/19/22 at 6:56 pm to meansonny
I won't need the funds at least until 5 years from now. Maybe not even then if I can cash flow part of college tuition.
Posted on 3/20/22 at 8:37 am to Cool Hand Luke
quote:
Pro- Downside protection
Con- limited growth and liquidity (for some)
TDTOM has it simply put.
They have surrender charges. Make sure they expire before you want to potentially access funds. Also ask about the process to withdraw funds. I've seen withdrawal expenses that are ridiculous as well.
These are typically for a longer period to not be touched (8-15 years). But if you can find an option that is free to get funds after 60 months, then it may be suitable.
Posted on 3/20/22 at 2:01 pm to meansonny
There are plenty of 3, 5 and year options. There is also one that I know of that you can pay .40% and it is fully liquid on day for a full surrender.
Posted on 3/20/22 at 10:13 pm to TDTOM
quote:
There are plenty of 3, 5 and year options.
I know. But you have to give up something in order to get something. The insurance companies arent in the "lose money" business. Once you strip the insurance companies of their protections, the benefits of the annuities are often no longer flashy.
Posted on 3/22/22 at 7:34 pm to Cool Hand Luke
As a FA.... a very rare set of circumstances would make fixed rate annuites a suitable investment choice.
To protect principal you are sacrificing:
(1) Upside potential
(2) Purchasing power - even with a COLA rider... inflation is going to eat into it.
(3) Liquidity - high surrender charges
If a client was risk averse, had a sizeable retirement, and wanted to place a portion of the fixed income allocation into a fixed index annuity then it MAY be suitable. Rising rates are going to make the bond market a mess for the next few years.
That's a lot of IFs. The advisors that love to sell these things typically have a Series 6 and not a Series 7. High commississons make these a favorite.
The biggest risk perceived risk is the market when in reality it is a 30+ year retirement (you or spouse) that sees you outliving retirement savings.
In my humble opinion, focusing on high quality dividend paying companies provides inflation-protected income and asset appreciation without locking up liquidity.
To protect principal you are sacrificing:
(1) Upside potential
(2) Purchasing power - even with a COLA rider... inflation is going to eat into it.
(3) Liquidity - high surrender charges
If a client was risk averse, had a sizeable retirement, and wanted to place a portion of the fixed income allocation into a fixed index annuity then it MAY be suitable. Rising rates are going to make the bond market a mess for the next few years.
That's a lot of IFs. The advisors that love to sell these things typically have a Series 6 and not a Series 7. High commississons make these a favorite.
The biggest risk perceived risk is the market when in reality it is a 30+ year retirement (you or spouse) that sees you outliving retirement savings.
In my humble opinion, focusing on high quality dividend paying companies provides inflation-protected income and asset appreciation without locking up liquidity.
This post was edited on 3/22/22 at 7:37 pm
Posted on 3/22/22 at 8:09 pm to Cool Hand Luke
Con: Gains are taxed as normal income
Edit: missed the 401k mention.
Carry on
Edit: missed the 401k mention.
Carry on
This post was edited on 3/22/22 at 8:38 pm
Posted on 3/23/22 at 5:23 am to Cool Hand Luke
quote:
I recently retired and am in the process of moving my 401k funds. FIAs were mentioned as one alternative. Tell me what you know about them.
Stay far away from them. Sales folks in that industry prey on simple minded, well intentioned folks. And just like Diggs mentioned a few posts above, the advisors that love to sell these things typically have a Series 6 and not a Series 7 and do so for the unusually high commissions.
A fixed index annuity ranks up there with a reverse mortgage as one of the most egregious products of all time. Right next to an auto extended warranty.
The average return in the S & P 500 (the largest 500 U.S. companies) is somewhere around 9.50% per year. That’s an average. PER YEAR. In a passive index fund with low, low annual expenses. Like 0.12%
You don’t need to pay an exorbitant amount of fees in a fixed index annuity.
This post was edited on 3/23/22 at 5:26 am
Posted on 3/23/22 at 6:51 am to Kreg Jennings
quote:
You don’t need to pay an exorbitant amount of fees in a fixed index annuity.
Please explain.
Posted on 3/23/22 at 9:56 am to Kreg Jennings
quote:
The average return in the S & P 500 (the largest 500 U.S. companies) is somewhere around 9.50% per year
Ehh
Posted on 3/23/22 at 3:53 pm to TDTOM
Like everything else, annuities are not for everyone. Just like I would never own a CD but that doesn't mean that it isn't a good idea for my Grandmother that never wants to lose money and wants her money in the bank. I have never seen a variable annuity that fits a purpose, but I have seen lots of FIA accounts that work.
I have NEVER seen fees on a FIA. NEVER! There maybe a spread on the earnings but not fees. You may be able to buy a rider like increased death benefit Ect. Variable annuities often have fees.
On the commissions, I have seen them around 5-6% for a 10 year account. I remember American Equity had a 7.5% commission on a annuity but they were not allowed to offer it in Texas. What does Edward Jones charge for an American Fund A Share? 5.75% and guess what, they can sell and buy at any time. With an annuity, you get one commission and it is for the life of the account.
I am in Texas and was a broker with a series 7 license with life and health. I dealt with a lot of clients that were okay with making 3-5% but never losing any money. I would take the penalty free money (10%) off the annuity to give them a monthly check. This was with 50% or less of their total nestegg. It worked. I am still in the investment business but not in personal production.
I have NEVER seen fees on a FIA. NEVER! There maybe a spread on the earnings but not fees. You may be able to buy a rider like increased death benefit Ect. Variable annuities often have fees.
On the commissions, I have seen them around 5-6% for a 10 year account. I remember American Equity had a 7.5% commission on a annuity but they were not allowed to offer it in Texas. What does Edward Jones charge for an American Fund A Share? 5.75% and guess what, they can sell and buy at any time. With an annuity, you get one commission and it is for the life of the account.
I am in Texas and was a broker with a series 7 license with life and health. I dealt with a lot of clients that were okay with making 3-5% but never losing any money. I would take the penalty free money (10%) off the annuity to give them a monthly check. This was with 50% or less of their total nestegg. It worked. I am still in the investment business but not in personal production.
Posted on 3/23/22 at 4:47 pm to Jaspermac
quote:
I dealt with a lot of clients that were okay with making 3-5% but never losing any money.
This is me.. or will be me in the not too distant future.. i realize this thread was started about fixed index annuities, but im just curious since im somewhat ignorant of the differences- What is the board’s opinion of “regular” (for lack of a better word) annnuities, not the fixed index kind ?
Posted on 3/23/22 at 4:55 pm to BK Lounge
What do you mean by regular? There are 3 types:
Fixed
Fixed Indexed
Variable
Fixed
Fixed Indexed
Variable
Posted on 3/23/22 at 5:04 pm to TDTOM
Im honestly not sure.. it seems that the consensus here is that the fixed index kind is no good.. so i guess im asking about fixed(?) I have a family member who has a Pacific Life annuity, and seems to like it.. throws off around $8k or $9k per year on about $300k .. sounds like it’s fixed (as opposed to variable) but not sure .
Posted on 3/23/22 at 5:26 pm to BK Lounge
I like the Fixed indexed more than the other two. Fixed just pays you a fixed rate for a fixed period of time.
Posted on 3/23/22 at 7:25 pm to Diggs
quote:
As a FA.... a very rare set of circumstances would make fixed rate annuites a suitable investment choice.
To protect principal you are sacrificing:
(1) Upside potential
(2) Purchasing power - even with a COLA rider... inflation is going to eat into it.
(3) Liquidity - high surrender charges
If a client was risk averse, had a sizeable retirement, and wanted to place a portion of the fixed income allocation into a fixed index annuity then it MAY be suitable. Rising rates are going to make the bond market a mess for the next few years.
That's a lot of IFs. The advisors that love to sell these things typically have a Series 6 and not a Series 7. High commississons make these a favorite.
The biggest risk perceived risk is the market when in reality it is a 30+ year retirement (you or spouse) that sees you outliving retirement savings.
In my humble opinion, focusing on high quality dividend paying companies provides inflation-protected income and asset appreciation without locking up liquidity.
I love everything you wrote.
Only one statement needs to be added.
In a low interest environment, 30 year mortgages are great financial instruments. You pay the bank a minimal installment locking in the day's current low rate.
In a low interest environment, annuitizing a lifetime stream of income is one of the worst things you can do. You are contracting an insurance company to pay you a minimal installment locking in the day's current low rate.
DO NOT annuitize in a low rate environment. There is not a worse financial decision you can make.
Posted on 3/23/22 at 7:34 pm to meansonny
quote:
DO NOT annuitize in a low rate environment.
Never annuitize. If you want the income buy the rider.
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