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There are different kinds of annuities. Immediate annuities are probably ok? Depending on the insurance company. The kind described by the OP is different, far as I know (variable rate?). Every time I have gone into a bank to open an account they have tried desperately to sell me these. When I see how hard they are working to convince me, I assume it must be a bad deal so I have never bought any.
I never bothered to look at the details, so I did not realize the fees were so high. But it figures. If something is really a great deal, they wouldn't be pushing it so hard. I think the bankers get a nice big commission from these.
I have never been to a bank that tried selling me any annuity or other investment. I have been in many banks that had investment companies hawking products as if its from the bank. I was told by a branch manager of one of the largest banks that the bank absolutely do not sell any type or form of annuity or other investement product. They do have investement advisors who work for an insurance or investement company that may be owned by the parent company of the bank and use that name in the investment or insurance company's name mostly to confuse the uneducated and specifically to target seniors to belive they are dealing with the "bank' when they are not. She said that a senior will refuse to invest with an investment company but slap the bank's name on an investement company and those seniors will throw their money on any product thats recommended by what they think is the bank. Sad thing.
Got a phone call today from our bank inviting me to come in so they could share the upcoming changes to me as a result of a merger. Didn't want me to get any surprises down the road. How nice and they are nice but I have a bet with my wife that the annuity or other financial service sales pitch will be coming. Especially when she said it will take 20-30 minutes.
Many banks are entering the annuity because interest rate and thus CD rates have been and will most likely continue to be very low. The annuity sale allows the bank to offer a product that appears to be more advantageous than their CD.
The use of a variable annuity to replace a CD it NOT a good idea. And let's be clear here...there are many types of annuities in the market. Variable, fixed, indexed, MYGA, SPIA, etc. The types I have seen described most often here are variable. You money is placed is sub accounts and performs as well or as poorly at the investments in those sub accounts. There are fees associated with them as well that i believe MathJack outlined very well. Now many of these product do have living benefit riders that "guarantee" lifetime income or death benefits. But no variable annuity is designed to mirror a CD.
Other the other hand there are a few fixed or even indexed annuities that could be used a CD substitutes. Many have minimum guarantee rates at 1% of 100% of the initial premium and surrender periods as low as 2 years. These products do not carry an ongoing fee that would reduce the amount of interest crediting. Most also have 10% penalty free withdrawal after the first year. They do however have "caps" on the upside potential and charges should you want to remove more than 10% in any year.
For example:
BankRate.com says the avg. APY on a 5 yr. CD is 1.14% as of today.
A 5 yr. indexed annuity might offer a 1% minimum guarantee on 100% of initial premium. The annual S&P 500 point to point crediting method might offer a 4% cap. So we know that we are guaranteed to receive between 1% and 4% if we hold the money in the annuity for 5 yrs. At the end of the term we can walk away with the account value.
In this scenario, a fixed indexed annuity just might be a nice alternative to a CD for a client.
i used to roll my own index linked cd's when rates were higher on cds.
you could link them to any index you wanted and then decide whether you wanted guaranteed principal or a guaranteed minimum interest rate besides the performance kicker if your index did well.
while the banks like to pass this off as a conservative equity investment the reality is even doing it yourself with minimal costs if the markets really took off you may see an extra 1 to 2 % and that was when rates were around 4% or so,,, its really a cd on steriods rather than any kind of proxy for a market investment.
i did it when cd rates were around 4% . rates may be way to low today to pull it off effectively.
if anyone is interested in how to do it on their own ill be happy to post the details.
What I don't understand is why anyone who is old (like me, 61 yrs old) would save any more money. I certainly wouldn't put any of my money into an annuity that wouldn't let me withdraw it for years. Seems to me it is time to start spending all that money we saved. I had a friend who was still saving money and depriving himself into his 80's. He died, never traveling, buying cool stuff, etc.
From all I've read about insurance companies, and from my personal experience, I avoid insurance companies at all cost, except where necessary, car, homeowners and health insurance. For the most part, nothing but a bunch of thieves.
What I don't understand is why anyone who is old (like me, 61 yrs old) would save any more money. I certainly wouldn't put any of my money into an annuity that wouldn't let me withdraw it for years. Seems to me it is time to start spending all that money we saved. I had a friend who was still saving money and depriving himself into his 80's. He died, never traveling, buying cool stuff, etc.
depends how much money you have and how much you need to withdraw. insurance products at retirement age are about spending money,not saving money.
if you are withdrawing little from a big pile of money than an insurance product isnt for you.
there are 2 big variables for retirees counting on living off of their nest eggs.
first is if we knew the day we would die planning is a piece of cake. but we dont and so we dont know how long we need to have our money last and with a spouse you have 2 horses running in a race.
second is from a pure numbers standpoint just spending down at an inflation adjusted 4% with little gains will leave you broke in 19 years.
thats far to short.
add to that equation the fact that the biggest killer for those living off their portfolios is not only the gains they need but the order those gains and losses come in effect your survivability big time when spending down.
since markets consist of big peaks and valleys and having to sell things to raise cash during a valley because your running low on cash can be devastating to a portfilio.
so the idea of buying a pension to smooth out those valleys and reduce the cash needs during extended periods of low interest rates and not great market performance works very well.
the addition of an insurance product that invests more in dead bodies than market performance shifts some of the burdeon of providing a steady income stream over to a 3rd party .
perhaps if your sitting on a big pile of dough and not taking inflation adjusted to the max withdrawals you dont need any help making your money last but for most with the new norm the last 12 years we need all the help we can get increasing the survival rate on our nest eggs.
the last 12 years retirees have actually been living that 10% failure rate those financial calculators tell you can happen.
Last edited by mathjak107; 03-17-2012 at 03:26 AM..
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