Jul 02

Regular readers know where I stand on Variable Annuities, and I though thought I’d share this quote from a Suze Orman interview on CNN Money which caught my eye;

“I hate them with a passion – a passion! – especially in a retirement account like an IRA. Variable annuities have all these extra fees and tax issues and penalties, but – oh, that’s okay! – because they give you a tax deferral. But a retirement account is already tax-deferred without all those fees. It’s absolutely ridiculous. I think variable annuities exist for one reason only: to make money for the financial advisers who sell them.”

I’ve had some disagreements with some of her advice, but lately I’m finding more of her quotes that are right on target.

Joe

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49 Responses to “Suze on Variable Annuities”

  1. Jason Says:

    Are variable annuities more expensive because they are charging for ‘tax deferral’? What does tax deferral cost and who’s collecting the fees for tax deferral? Last time I checked tax deferral was free.

    The proper question is what am I getting for the extra fees the variable annuity charges? Perhaps an income that rises at the roughly the same rate as the cost of everything I buy. An income that is provided until death, no matter how long that is. If that is of no value to an investor looking to provide a guaranteed income through retirement than buy an index fund and hope for the best.

    By the way, what extra “tax issue” is Suze speaking of for variable annuities inside of an IRA? That’s a new one to me.

  2. JOE Says:

    Well, two tax issues I can suggest is 1) VAs take potential long term gains and convert them to ordinary income, although to be fair, an IRA is guilty of the same, and 2) the growth within the account does not get a stepped up basis on death, but again is treated as an IRA with some basis. I’m certainly an IRA/401(k) fan, just not a fan of the huge expenses the VAs carry.
    Joe

  3. Jason Says:

    Joe,

    You’re entitled to your own opinions on variable annuities but you and Suze are not entitled to your own facts. The facts are the annuity adds no “tax issues” to an IRA and you both lose credibility when you make that claim. Your response confirms that fact.

    Again, the question is whether or not an income that provides for a husband and wife over potentially three decades of retirement that rises with the cost of everything you buy each and every year is worth the additional fees. With the lack of guaranteed sources of lifetime income available in America today (pensions, etc) it might be worth taking the time to study that issue.

  4. JOE Says:

    I don’t see where I made up any facts. Both VAs and IRAs are both subject to the two negative tax issues I state above. It’s the extra expense of the VAs that still have my objection. FWIW, I have no issue with a good immediate annuity.
    Joe

  5. Jason Says:

    Where is your discussion around what you are actually getting for the extra fees in a variable annuity? According to you and Suze the fees pay for tax deferral. Nothing could be further from the truth. Tax deferral is FREE. No charge for that gift from the federal government. So what are you actually paying for?

    My guess is you have no idea what annuities provide beyond tax deferral. Otherwise you would mention the fact you for a fee you get an income that addresses the duration problem (a paycheck until I die) and the direction problem(rising at roughly the cost of inflation). Let the reader decide if the fees are worth it. But to mention fees without any discussion of what you get for the fees beyond tax deferral is irresponsible.

    By the way, you like a good immediate annuity. If the cost of everything we buy increases each year and you propose to “FIX” my income with a level payment of an immediate annuity how do I pay for goods and services at prices 30 years from now assuming I’m 65 and live to 95 or 100? Have YOU received any pay raises over the last 30 years of your career? I would hope so. What if you didn’t? What if you were receiving the same amount of income as you did when you were 21? The loss of purchasing power is EVERYTHING over longer retirements. Your obsession with fees rather than solving for the real problems of running out of money and purchasing power can really hurt those without guaranteed sources of income in retirement.

  6. Will Says:

    Variable Annuities do have much of the same tax treatment as IRAs and 401(k)s. The reason is that a VA is designed to be a retirement income vehicle, and the tax-deferral they are granted is a result of that. That is an act of congress, not a feature that a VA issuer can legally charge for.

    The reason you would consider a VA over mutual funds, as an example, is that you want some of the features unique to VAs, such as guaranteed lifetime income. Sure, you can structure a portfolio of mutual funds and if you take out no more than 4% per year as income, you PROBABLY won’t die broke, but you might. See T. Rowe Price’s website for some good calculators to illustrate this.

    VAs offer guaranteed income through insured systematic withdrawal programs, that allow the owner to take 5 or 6% per year, maybe even more depending on their age, for their entire lifetime and their spouses — guaranteed.

    You can also annuitize, and create pension-like income. Remember, annuities were spawned from pensions as a way to provide pensions to those who were not fortunate to have a pension plan at work. That used to be a minority, but now the majority of workers don’t have a pension.

    Get the facts straight on just exactly what you are paying for with a VA. It is not the right investment for everyone, but anyone who wants guaranteed income needs to understand that as of 7/3/2008, annuities are the only investment vehicles that can guarantee income. Period. Everything else can probably provide income for life.

  7. Jason Says:

    Well said and I guess it’s my point in trying to call out those “experts” that really don’t have the facts on just exactly what you are paying for with a VA.

    To “hate” something with a “passion- a passion!” as Suze writes and Joe agreeing with her hatred by making up facts that VA’s have additional “tax issues” when owned inside of an IRA borders is very silly.

    Stop “hating” Suze and Joe and get your facts straight! Then we can have a meaningful discussion on the pros and cons of an investment that just might provide the income so many Americans will need.

  8. JOE Says:

    Jason – I approved this comment, but I’d like you to accept my offer. I emailed you to send me a Pro-VA post, which I will publish within a few days of getting. Offer the facts. If VAs are ‘good’, tell me why, and who they are best for. Stay away from personal comments, and I’ll publish it, unedited, fair enough?
    Joe

  9. Suze Orman Celebrity Gossip | Suze on Variable Annuities Says:

    [...] my eye;. I hate them with a passion – a passion! – especially in a retirement … Source: Suze on Variable Annuities Who Would Be A Worse Mom? Paris or Lindsey? Vote Now And Get A Free iPhone. Suze Orman Used [...]

  10. Rob Says:

    Variable Annuities are good for people that want principal protection, guarunteed growth, (yes there are companies that provides a VA with a guarunteed growth) and for those who want an income for life in the future. The fees, which are taken out of your account value pay for the guarunteed growth. The guaranteed growth is good and will hold true if your goal is FUTURE INCOME FOR LIFE. If you want to take a lump sum withdrawl or a 70-90% withdrawl of your total investment, then annuities are not for you. With IRA’s, u don;t have charges, but who knows what the market will do, and you can do whatever your heart desires with your money provided you’re between the ages of 59 1/2 and 70 1/2, but you run the risk of your $$$ = 0. Annuities put some restraints on your choices, but who cares, becuase you are creating a pension you cannot outlive. Also, u gotta start taking your IRA $$$ at 70 1/2 anyways. Just take your RMD’s and call me when u hit zero. Annuities you won’t have that problem.

  11. leese Says:

    i don’t know if i did the right thing. i just became a widow and lost money in the market , no one advise me so i took it out and the bank advised me to put in something called annuities and john hancock.. i split my money which i have only 10 days or 30 days i think, before i can change. i just don’t know what i am doing. i hear so much.. i am 62 . reading all this scares me. if i have an emergency will i be charged a fee from them and for taxes? where can i get honest answers other than everyone trying to sell me their policies? i don’t know if it is to late. i signed some papers 3/26/09

  12. JOE Says:

    I am sorry for your loss. A grieving widow (or widower) should not make any financial moves for at least 6 months.
    Your right to cancel is 10 days, and since it’s clear you don’t understand what you bought, I would do just that. Even if this turned out to be a good product for you, one should never buy something they don’t understand.

    There are many many sites where you can post questions and get advice, but some details are needed about your situation. I would avoid contact with people trying to make a buck off you. The advice should contain low cost options, such as index funds/ETFs for whatever is in stocks. The bank did you no favor, they took advantage of you, I’d find another bank.

    (Note: I tried to email “leese” with this reply as well, and the email address left for me was not valid.)

  13. Dave Shafer Says:

    Joe,

    I, like you, don’t like VAs in general. And if you are not aware many insurance companies are having a hard time honoring the “guarantees” in this tough market. I am sure they will honor the guarantees but it is hurting them and causing some capitalization issues. But, the real issue for me is that you can get an immediate annuity that pays out a much higher percentage on the face amount which can be used or partially used and partially saved as needed. And if you are not healthy you can even get them “rated” with a larger pay-out. With an immediate annuity you are making a “pure” bet with the insurance company over how long you will live. This is the fundamental business of the insurance company and it is the real reason annuities exist. All the rest is simply a future market bet! Making market bets while in retirement in my opinion is a dumb thing to do for many reasons starting with bear markets that occur more than twice a decade on average and 40%+ drawdowns that occur about every 10 years or so [8 times in the last 100 years].
    As to inflation degrading your payout, that is very true, but you can transcend that in several common sense ways; leave a small amount in the market, own real estate which inflates a couple of percentage points over the inflation rate, etc.
    Having had my father live to 99 years of age here is another fact. As you age over 80 your expenses actually can go down because you become less active. My father played golf and drove a car until age 93, traveled to Europe at age 92, etc. so I know about the possibilities of an active life well into retirement. And his expenses at 90 were significantly less than at 80. My parents simply didn’t do as much stuff like go out to eat, travel, drive as much, etc. once my father got into his high 80s because he couldn’t physically do it. And remember he was a serious outlier living to 99 and being very active well into his 90s.

    The other issue is that home which so many seniors trying to hold on to way too long, but that is another post!

  14. leese Says:

    I am the widow who emailed last week. I am updating my email address. It has been a year since my husband passed. I also put funds in something called Resources.. some IRA they told me would be good. so it is split with VA which I am just learning of and the other sounded good. I already signed papers but something said 30 days and the other said 10 which now has passed… but my money is split in these 2 . I am supposed to meet with them april 14… I am feeling awful now because everything sounded good but I can’t even explain what I have. as I mentioned before, I didn’t know where to get information becasuse everyone I statred to talk to just want to sell me something and they were all different. I am 62 and no longer work but now I can’t take out money they said for 5 years or get penalized.. a different penalty depending on the year.If I am able to stop this where do I put my money so I won’t get taxed for taking it out? I must find somewhere first I suppose..
    Leese

  15. JOE Says:

    Leese, you wrote “but I cant even explain what I have.” This scares the hell out of me. The bank guy who sold it to you should have his license pulled. What exactly did he tell you about it? What product is it ?
    Worse, since I don’t know the actual product, I am unable to comment good or bad on it. Without any more details to understand your risk tolerance, I’d not have enough information to do a response justice. CDs are safe and even though they provide a low yield right now, you can’t lose a penny.
    There are places on the net to ask questions, books to read, so you can understand what’s going on. An IRA or a VA is just a wrapper, the investment inside can be nearly anything.
    At your age, unless you have a lot of assets, tax deferral is the last thing on my mind. Safety is first.
    Yes, VAs typically have a decreasing penalty for 5-10 years, one of the many reasons I’d avoid them.
    Joe

  16. sardi Says:

    Joe,

    Great post – too bad there are one too many insurance agents posting on this. What’s the point of a VA when tax deferral is free and you’re income payouts (interest first) is taxed at ORDINARY income rates, possibly pushing you up a tax bracket or two as opposed to CAPITAL rates. I like how they personally attack you and Suze (who I don’t always agree with, though I do on this issue) yet can’t explain their positions in actual tax terms (ie no benefit of step-up basis). Don’t fold to these salesmen, thanks.

  17. Cameron Says:

    Like all other insurance company products, variable annuities provide some protection but also have some opportunity costs. If you’re more conservative, they’re fine. If you’re more aggresive, do something else. Nuff said.

  18. JOE Says:

    If it’s fine for the conservative investor to underperform in both rising and falling markets, long term when compared to investing in treasuries, them I guess that ’nuff. I though my writings backed up my claims.

  19. john dee Says:

    66 years young,need income with 300,000. to invest.how would you divide this for income with slight risk

  20. JOE Says:

    A well diversified portfolio of corporate bonds would provide income and limited risk. Higher risk to principal, but greater gains over the years can be achieved with companies that offer a decent dividend, old names like McDonald’s, Coke, Verizon, J&J, etc.

  21. Janene the CFP Says:

    While corp bonds provide income, I would not call it “limited” risk. You have the risk of default (ex. Lehman Bros, were AAA rated until the day the declared bankruptcy); inflation risk, how will you give yourself a cost of living increase if you are in all fixed rate investments; and interest rate risk, when rates rise, you are stuck with a low rate bond. You could sell it for a loss and redeploy that cash into a higher rate bond. Also, buying and selling bonds as an individual investor is not nearly as easy, cheap and transparent as trading stocks. Bonds are still an “old boys club”, you have to go out and have your broker get bids and you have no idea what kind of spread the brokers are putting into your trade.

    VA’s and SPIA’s give investors a way to obtain guaranteed income and place a lot of risk on an insurance company. Are the fees worth it? The investor has to make that call. Not all investors want to manage their own bond ladders, so paying an insurance co. to hedge your portfolio may not be a bad choice. Most VA’s with “living benefits” are hedged portfolios. You cannot buy an outright hedge fund unless you are in accredited investor and then you pay your hedge fund manager upwards of 2% plus as much as 20% of profits. When you compare that to the 3% at VA might cost, it doesn’t seem so expensive.

  22. JOE Says:

    I respect other’s views, but I have yet to see a VA product that was superior to most of the alternatives, the guarantee coming at too high a price. I appreciate your comment.

  23. Steve Says:

    Joe,

    Have you looked at the Penn Mutual Freedom Variable Annuity? We have 250k to invest in IRA/401k money and another 100k in unqualified cash after my dad’s passing (mom still around). This product was presented to us. If not this then just make sure the 250k is invested in conservative mutual funds and bonds? And then same with 100k? Thanks in advance for any advice.

  24. JOE Says:

    Are you able to forward the prospectus?
    As you’ve read, I’m pretty anti-VA. I’d need to read the exact details to understand how to comment on it.

  25. Denis Zundel Says:

    My question pertains to Indexed VA’s, can the annual 10 to 15% allowable partial withdrawal proceeds be 1035′d into another annuity to continue with the tax deferrals? Thanks

  26. JOE Says:

    Yes, the withdrawal you cite is not like an RMD, you should be able to transfer a bit at a time if you wish.

  27. Debbie Says:

    Joe – I was just presented with a Met Life Variable Annuity. It has several riders including GMIB Max and EDB max (GMIB Guaranteed Minimum Income Benefit and EDB Enhanced Death Benefit). Do you have thoughts on this?

  28. JOE Says:

    I’d need to see the exact cost and promises to comment intelligently. I’ve yet to meet a VA I really like, nearly all should be avoided.

  29. Deborah Says:

    Steve on Dec 10, 2010 asked you about Penn Freedom Variable Annuity. You asked him to forward the prospectus. Did he provide it? I moved 1/2 my 401(k) to the Penn Freedom Variable Annuity in Sept. 2008 with a Guaranteed Minimum Accumulation Benefit on my opening balance of $126,153 with a Guaranteed Ann. Lifetime Withdrawal Amount (5%) and a Guaranteed Annual Withdrawal Amount (7%). In Aug, 2011, my Penn Mutual fin. advisor advised me to switch 100% of my account (currently split between the Independence Capital Mgmt Wuality Bond, T.Rowe Price Associates Flexibly Managed Fund, and Vonobel Asses Mgmt Int’l Equity) to the Limited Maturity Bond Fund. I questioned the lack of diversity in doing this. What advice can you give me about his recommendation and the Penn Freedom Variable Annuity?

  30. JOE Says:

    As I’ve mentioned, the prospectus for most VAs is not available so easily (what are they hiding?). No, I never heard from Steve.

  31. Larry Says:

    Variable Annuities are a scam. I was told I would get 7% on my GRIB, but they never explained that this 7% increase was not to be paid out to me, it will be paid according to the insurance companiews desires. It would take 10 years to get back exactly my original lump sum invested 10 years prior, at a 7% rate.
    If I put this money in at 50 years old and it takes till I am 70 to get my own money back and I also will betaxed on my own money for this 10 year period, I need to live to be about 74 years old before I began to make one penny of the promised 7% interset rate. If I die after this period and don’t live to be 95 years old I will never see the promised 7% rate. If I consider inflation into this factor over thirty years I actually am losing money, This is such shell game of where is my money, it is not under any of ythe shells it is in the insurance agents pockets. On top of this they are charging me 4% and I only discovered this little ditty after 7 years, since it never disclosed this cost on my quarterly statements. Where is the SEC (Security and Exchange Commission) when it comes to these rip off products and fedreral consumer protection disclosures?

  32. Terry Says:

    I’m under intense pressure from my insurance agent to take my 401k assests and put them into a variable annuity. I told him I want to wait a few months before deciding. The annutity he is offering guarantees a 5% return each year. They also will lock in mutual fund gains several times a day, so supposedly, my asset value can only go up. It sounds too good to be true. Has anyone heard of this guarantee.
    Here is why I’m leaning against this annuity:
    I know that the agent gets a sizable commission out of this annuity.
    Annuities are part investment, part insurance policy. I have no one dependant on me, since my brothers and sister have more savings that I do.
    About 13 years ago, my mother was talked into placing $145,300 into a variable annuity. The value of the annuity fell to $103,000 during the stock market crash 12 years ago. Over time, the fund got back up to $170,000 at the time of her death last year. The distributuion process was very easy, but my brother, sister, and myself now owe tax on $8,000 each. The insurance company sent forms to the IRS that ALL of the $170,000 is taxable, so I’ll have to prove it isn’t. The assets were moved to another insurance company during the 12 year span. Also, my mother has lived solely on social security and a military pension, so she has not paid any taxes in the last 20 years. If she had kept this money in CDs, I doubt if she would have had to pay any income tax on it, but my siblings and I will owe 25% on the $24,000 gain. That is what is bothering me now. having a lot of assets in tax deferred investments does not make much sense to me, if your tax rate is low.

  33. JOE Says:

    Terry, agreed. You’ve thought it out. The whole issue is “pressure”. When you are being pressured to do anything you don’t want to, the best action is to go the other way. If you have no dependents, there’s no need for insurance at all, certainly not life insurance.
    Unfortunately, the agent doesn’t care about you, his one goal is to take your money, not get you the right product.

  34. Steve Says:

    Joe, as a long time advisor that uses both fixed and VA accts, I can tell you firsthand they are worth the expense. Look at rates today at 1% or less on time deposits

    VA’s can offer payouts for life at 5% with market participation potentially giving the annuity owner a raise. Income can never go down.
    It offers protection from deflation (0 % interest rates) and inflation.

    Most people have no concept of how money works. Trust me on this.

    VA’s are worth their weight in gold when used appropriately. Orman is clueless.
    I would use a VA in an IRA without hesitation and in fact prefer them in IRA accts because of the ordinary income tax.

    It is a myth that you are paying extra for the tax deferral: a popular myth but a myth.

  35. JOE Says:

    Steve – Sorry, I believe the sale of a VA inside an IRA should be considered criminal.
    Aside from that, much of my issue with VAs in general is the lack of disclosure. Many talk about the benefits, yet, due to their insurance nature, no one can legally produce a prospectus (due to the regulations for insurance sales.)
    With no disclosure, anyone can make any claim they wish.

    You are telling me these products are great, yet offer no details. They were great when 1 yr TBills were 6%, right? Or are they only great now that short term rates are zero? What does “when used appropriately” mean? If the paying for tax deferral is a myth, what is the truth?

    Why do I feel that VA salesmen talk in riddles or parables, if you wish, but never in full, detailed, facts. Numbers. What are the costs, and trade offs? It’s been quite a few years since I had my hands on a prospectus (or whatever the disclose statement is for a VA, I forget) but in the end, it was easy to summarize. And dismiss as a very expensive product with little to offer.

  36. Dany Says:

    What about the Metlife VA that will allow for RMD’s to come out of the account without decreasing the death benefit to the bene, as long as there is money in the account. You can put in 100k, take out the RMD’s that Uncle Sam makes you take out. Even if your account is 50k in 10 years because you have withdrawn money, your bene gets 100k. Give me a fixed rate on any product that can guarantee my principal goes to my bene at death but also pays out the Required amount of the government. That is a perfect account for an IRA.

  37. JOE Says:

    Dany – I’m not familiar with the product. Since VAs are an insurance product, the disclosure rules are very different from any non-insurance financial product. It seems that such disclosures are not available on line, and those selling this product in another state are ethically bound to “not’ send me a copy. What is this industry trying to hide?

    This may be a wonderful product, but I can’t comment unless I see the full details, you have a copy? I’ll gladly write a positive article if it’s as good as you imply.

  38. Marie Says:

    I am so grateful for your posted information. Our rep with Ameriprise is trying to sell us an annuity. My husband is 62 and plans on working until he is 70. I am 68 and retired. The issue that is distrubing me is, we had annuities with another firm and he suggested we sell them and put them in something else. Hmmm, made commision on this? He was not with Ameriprise at the time. He recently switched to Ameriprise because they could offer more vehicles for him. Now he is pushing Annuities and I am suspicious. I just do not know enough about them. I am tending to believe that they are just a way for many agents to make money. He is also our financial planner, I queried him on this as possibly being a conflict and thought there should be a third party advising us. He did not have an answer for me. I also asked why some of the investment was not insured by SPIC and he was not aware of it. HMMM.
    I think we should be looking for a CFP that has nothing to gain but an hourly rate. What do you think?

  39. JOE Says:

    I think that one should never put their money into something they don’t understand. I recently pulled the details for a Variable Annuity and found that I was unable to understand the product.
    I do know that immediate annuities are right for some people. They offer a higher return that current CDs, over 6% depending on age, but you give up the principal. This is a hedge against outliving your savings. The annuity your guy wants to sell you likely comes with high fees, as high as 3% per year. Great deal for the salesman.
    Yes, I’d seek a fee only CFP.

  40. Barbara Says:

    I had a guy that just sold me $10,000 worth of Prudential Annunity where you get the market gains from & a rate of not less than 5% if the market drops & it locks you in at the highest poing. What I am wondering is do I really want this? I have 30 days to change my mind. I have a mutual fund with Edward Jones & I was actually saving this money to pay off another mortgage on my rental property. Seems Like I get a better return by doing that & no fees, so do I really need this annunity or should I just cancel & get my money back? He thought it would be good for me to get. I am 72 now.

  41. JOE Says:

    Barbara, your gut reaction is probably correct, paying off the rental will provide a better return. As I’ve said, annuities are sold, not bought. No one ever says “I found a great annuity and asked someone to sell it to me.” It’s always “I was sold.”

  42. Kathleen Says:

    I am 55 years old. I have $20,000 (and hopefully more) I want to invest and …I was thinking of a VA or an IV…but after reading all your above comments, I am now not so excited!
    So what would you suggest? I am trying to “hide/save” money for the future for my husband and me when we will be in our 70s…any great suggestions?
    Thanks

  43. JOE Says:

    With 15 years to go, the simplest suggestion is a mix of stocks (specifically a low cost ETF, S&P 500 or other large cap) and CDs, even though the rates are low. A 70/30 stock/CD mix until you retire. In your 70′s, depending on your needs, I actually might like an immediate annuity. This is a different product from a VA or IV, unrelated to market returns, but guaranteed, fixed, income.

  44. Joe Says:

    I have 600K to invest. My wife is 52 and I am 63. I am currently looking at putting it into a VA or a “hybrid” index annuity. Two different agents. One (VA) works through BB and T Bank, the other with JD Mellberg financial. Your thoughts ,please. PS, this is my life’s savings outside of a fairly large cushion (150K) and I am collecting SS and I am retired.

  45. JOE Says:

    Without any details of the products you are considering I can’t comment with any intelligence.
    I’d ask you, do you have the disclosures for these products? Do you understand exactly how they function? If a friend came over for dinner would you be able to explain these so h understood?

    In general, my issue with these products is (a) they carry high fees, (b) are difficult to get out of if you change your mind, but most important (c) are not understood. Very simply – If the market goes down 2% every year for the next decade, what exactly are you left with? There are often different full withdrawal numbers vs annual distribution numbers. OR – if the market rises 12% per year over next decade, what are the numbers? What are the guarantees on the downside and cap on the upside? I hope to hear back from you. If they gave you a soft copy (i.e. a PDF) I’m happy to review it.

  46. Michelle Morgan Says:

    Hello, I have just returned from a meeting with JPMorgan Rep at my bank I rolled over my 401K as I was laid off 5 years ago and they are trying to invest me in thier Nationwide VA, &5 growth rate for 10 years, with the obligatory fees as mentioned several times here, I know nothing about them so I am voraciously reading everything I come across. What do you need from me that I can show you to tell if this is the way to go, I have a stack of papers with everything outlined and am feverishly trying to understand it all before my time runs out? I also agree they seem quite expensive and is it anything that I cannot get somewhere else?
    Thank you so much for your comments and your time.

  47. Joe Says:

    Everything you’ve written tells me you should run in the other direction. A 401(k) should be rolled into an IRA and left there to be invested in a way that you understand.

    The first red flag is that they are putting this pressure on you. Why do you think ‘time is running out’? A bank should have a deposit option, just as a broker has a cash account. An IRA is just a tax status, a specific kind of account, it can contain a number of investments or just cash waiting to be invested. You should not have a ticking clock pushing you to make any decision. If you do, find out why and tell the bank you want a 3 month CD for the whole IRA balance.

    Second red flag is that you don’t understand the product you are being pitched. Neither did Madoff’s customers, they just trusted him. Sorry to compare JPM to Madoff, but they don’t have your best interest in mind if they are selling you a product you don’t understand.

    Third red flag – the inability to withdraw with no penalty. These products are notorious for having long investment commitments. That’s not for you right now. Happy to look at your big picture to understand the best approach for you based on other savings and your age.

    Last – the high pressure sell. When was the last time someone offered you a .05% cost S&P index fund with such pressure? Never. Such funds sell themselves. Multiplt the cost nearly 100 fold and now there’s money for the salesman to make on this product. Money is a strong motivator.

    If you really don’t want to walk aware, tell the rep your brother in law is a CFP (disclosure – I am not) and he wants to review the disclosure to better understand the product. So you’d like a copy that can be emailed to him, as a PDF preferably.

    There are two views of this product, the anti-VA stance more authors and planners will have, and the pro-VA stance the sellers have. I’ve never read an article that was pro-VA that wasn’t written by a salesman of VAs. Pretty crazy. Let me know how it goes.

  48. Errol Says:

    HI, Im 57 years old I have 400k invested with ML in stocks, bonds and MF , 200k in a 401k. I plan to retire in 8 years. and looking for income addition to SS pension. My broker recommends a VA for 250k which should pay me $2000 per month for the rest of my life. My bene get the entire on my passing. the 250k = 500k in 12 years. if I don’t touch it. Tell me can how can I do better.
    250k

  49. Joe Says:

    Errol –
    Thank you for reading my blog. If I understand this plan, $250K will be worth $500K in 12 years and then provide $2000/mo after that.
    For money to double in 12 years, you need a 6% return. Given today’s level of rates, this looks good, high, in fact. The $24K/yr after that is just under 5%. For an immediate annuity, it’s low, but this VA promises a return to your beneficiaries.

    You said “should pay me $2000,” so I’ll ask, is this guaranteed or a projection? What are the underlying investments in the VA? Ask the agent – if you bought this exact product in Dec 1999, what would you have seen 12 years later?

    As they say, “The devil is in the details,” and the full details of VA products are not readily available except though the salesman pushing them. Without reading the full disclosure, I can only offer this high level comment.

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