Help a Reader: Variable Annuity

Here's a question a reader recently left here:

My mom has $120,000 to invest and our Smith Barney guy wants to put it into a variable annuity with retirement income. Mom is 78 and in a rest home paid for by an insurance policy for her life. She requires about 1200.00 extra per month for medicines not covered on her part d etc. What do you think of his suggestion? Variable annuities were always a no no in the past -- high commisions and high fees. Please help me someone. We have also set aside 35,000 for the next two years expenses and 25,000 in a mainstay high yield corporate bond fund. so her total money is approx 180,000 and what is the general consensus?

Any thoughts for her?

Comments

[chynalemay]

As a retired fin planner AND a fiduciary, I'd think "if" the $1200.00~ month is a "must need" a Fixed annuity may be better served, however, in the event of death, unless the contract offers a survivor type benefit, the monies are "lost" upon Mom's death, and, if she's already in a home, that may happen sooner than later negating the benefit of a long term contact payment guarantee. The VA can offer the income with a death benefit and guaranteed withdrawl rate, annual reset, etc., but, typically they are better (I own one for my IRA - allowing a guaranteed 7% w/d for life, regardless of account value AND I get annual step ups which can increase income). But, they are suited better for IRA's since income from annuity (like a tax deferred account) typically is ordinary income anyway. Definately do not put ALL money into ANY annuity! They are an (excellent) substitute for PART of a portfolio, typically 20, 25, 33 or AT MOST 50% (maybe a mortgage payment in older age, LTHC premiums, etc., also makes them an excellent vehicle for therese as example) of total invesments. Perhaps w/ $150K of theh $180K invested into a CD ladder you could generate some income but, regardless, you'll have to help pay or continue to reduce her assets. $1200 mo/$4,400 annually is going to result in expected principal reduction. Contact a fee based planner for a couple hours of planning you are comfortable with (monte carlo simuations, various conservative products to mix and match) and go from there. Realize the pot of monies should shrink annually due to the high w/d rate. Here's a great example why baby boomers NEED TO PURCHASE LTHC coverage to supplement the cash flow, Elder care is expensive and you'll need a LARGe pot of money to pay for it, for readers: get the insurance, now when you are healthy!!!

[Jake]

Another issue is what if mom needs more expensive care in the future, it could easily eat up her $180k in a few short years. Medicaid will go after all her assets before they pay any of her bills. If her asset (the $120k) was turned into an income stream via an annuity, then there is no asset for Medicaid to take, all they can get is the monthly payment each month as it is paid out. If the annuity's income stream payout is for a period certain (like 20 years) then they will payout to mom for the time period or if she dies will make the payment to her beneficiary (you) for the remaining balance of the time period so all is not lost.

Yes annuities have fees but one, don't ever put all your assets into one investment type and two, which is worse a 2-4% annuity fee or a 100% Medicaid seizure?

[RDS @ Smart Financial Values]

Annuities get a bad rap (and somewhat deservedly) due to the high number of annuities with outrageous fees. However, there is a time and place for annuities and it sounds like your mother might be a good candidate for one. If I were in your shoes I would ask the broker two questions:

1. Why is he recommending a variable - not fixed - annuity? Based on your brief description, I am not sure that a variable makes sense for her.

2. Ask the broker what his commission is on the variable product that he recommends. When I was a financial advisor most variable products paid anywhere from a 4% - 8% commission. There is nothing wrong with making a living on commission based financial products. However, I would be wary of someone who is unwilling to be upfront about how he makes his money.

Good luck and good for you for helping your Mom make these choices!

[Jennifer]

Be careful about Jake's comment about Medicaid!! That may be true in HIS state, but my state requires the State to be named as 1st beneficiary (other than spouse) to the extent that Medicaid was paid. This is part of DRA 2005 and is supposed to be mandatory in ALL states. Thus, for a single person, there would be nothing to survivors even if mom died prior to the expiration of her 20 year annuity, unless the Medicaid payback didn't comsume all the remainder.

Additionally, many States are instituting legal challenges to annuities to try to force you to sell them to the great folks at places like JG Wentworth. Some states are now considering them a liquid asset!!

Don't buy annuities for Medicaid reasons unless you've consulted with a knowledgeable Elder Law attorney (www.naela.org to find one) to find out the ramifications in your state. Money spent on a good elder law attorney (not one that simply dabbles in elder law issues) could be money well spent when it comes to Medicaid issues and annuities.

[Jen]

I am not an expert, but everything I have heard about these is that they are incredibly bad news, -especially- for people your mom's age.

I think it would be worth the money to see a fee based planner for a second opinion. Worst case, you're out the fee and can feel good about her investments. Best case, you save her entire nest egg.

[thomas]

The guy is a scumbag. Sure, he may not think that he is, but he is. Might as well ask him to sell you a car w/ a 26% interest rate. Listen to the majority of advice given here and stay away.

[rrpf]

A variable annuity for someone in your mother's situation is 99% likely to be the WRONG investment vehicle. Fixed immediate payout annuity from a highly rated company is probably the way to go. I strongly second the fee-based planner for 2nd opinion. $120k near end of life is a LOT of money to invest on one person's opinion...especially someone who stands to gain a VERY LARGE commission from the sale of a variable annuity.

[Sarah]

Based on this advice, I'd consider ditching "the Smith Barney guy." It sounds like you already know this advice is bad--what's different that makes him recommend it now?

Like others here, I think a fixed annuity might not be crazy, but a variable?

[James]

The best investment that is as guaranteed (although it isn't) as I've found for an older person would be lendingclub.com. It beats the hell out of a variable annuity which invests in mutual funds (losers) and stocks (most of them are losers). Plus I haven't found many variable annuities that have ever produced better than a 3% annual return. Most of them pay nothing. lending club is very unique and is a great opportunity to make a fantastic return that has a very limited downside. I suggest you go to their site and read exactly what they do. I do not work for lending club no am I affiliated with them in any way. I've added them to my portfolio a little over a year ago and have made a 14% annual return.

[jeffinwesternWA]

A 14% low risk return, hmmm, "James" may be the SB salesman!

[Kenny]

BEST ANSWER> Call Fidelity at 1-800-FIDELITY. I do NOT work for them or am not affliated with them.

Why: Cause they have the lowest cost annuity you can imagine. They will give you a Fixed Annuity and you can reverse engineer how much you need to put in there to get $1200.

HOW COME: How come you want to do an annuity at age 78? This is not right. Average age of a woman coming from that generation may be 80 or 85, and if she is in excellent health then it is 90, but no more. Hence, you can device a mix of growth and income or income only portfolio that will give her that return from a variety of sources. Looking back at the market, you WILL be skeptical, but looking forward, you know that we have corrected as much as we could and worst case is 1000 points down from where we are. So, invest is slowly over 12 months (monthly cost averaging), and do not lock into an annuity. Annuity lock is money gone forever. In this approach, there will be money left for the children, while she would have eaten the income only (for the most part).

RISK> If you are risk averse to the Income option, then do 50% Income and 50% Annuity. This gives you the advantage of both.

REVERSE MORTGAGE> This is yet another option, although everyone poo-poos it quickly. If the house is worth $150K, then you do a R-Mortgage on $24K ($1K per month for 24 months), and let her go on a cruise or two.

Bottom-line, let money not be first. Let Mom be FIRST, her pleasures and comfort be FIRST, and then comes all these other calculations.

Hope this helps.

Kenny