Retirement plan to support my "habit"

[jonhall]

Please google “structured product scams”.

The bit in bold is called a structured product. They are a classic (legal) scam.

Did do a Google search and saw index annuity specifically mentioned a few times. Several of the articles will then direct you to financial advisors and attorneys. Is that a scam in itself?

IMO, there are scams out there, but a person needs to do a little research before jumping into an investment. I'm always surprised when I read about people who buy into a timeshare after a pressured, one time only offer during a timeshare presentation. My financial advisor got to know me pretty fast when he offered us a new product, because I went home, looked it up, made my own charts showing the possible gains/ fees, and caome back to him with questions. Research every detail!

Here's what I accept:
- No matter how great a product sounds for the investor, the bank or insurance company has figured every scenario and all probabilities and are going to make money.
- I'm a wimp when it comes to taking risks with my money. I've always taken safer risks over higher earning risks.

Now, what apparently makes an index annuity a (legal) scam, but why I don't see it as a scam:
* Tied to an index - mine is tied to the S&P. Since the year I was born the annual return has been at a loss 15 times (4 of those in the years 2001, 2002, 2008, and 2015 - not good years for most anyone), stayed the same once, and, which means, it's gained (some little, some big) 39 times. I look at that as a low risk.
* Can't lose my initial investment - If the S&P failed to go up, say, each of the 8 years I agreed to leave my money in the annuity I wouldn't have made any money, unless there was an automatic low percentage (but higher than most banks) promised if that scenario happened. Remember, the bank/insurance company has worked out every possibility and invested a part of my money in something where they can't lose. Low risk.
* Guaranteed market returns - this is not how mine was presented. I knew there were caps on what I would actually get. But 8% of whatever was actually made is better than what a person gets most places. Caps are getting lower in the current index fund I am in. I had only hoped to get back at least 4%.
* You can lose some of your principal - after an annual period, when money is credited to your account, that becomes your principal of which you cannot lose it. If you take money out early, then yes, you can be penalized and lose money. Don't take the money out!

An example of the first index annuity I took out. The index credit rate was based over a 2 year period for a period of 8 years. It was also during the 2008 year when things were so bad with the economy. In terms of a structured product, it was a structured investment.
year 0 - invested money and the insurance company threw in an $800 bonus
year 2 - S&P up 274 points, $7984 into my account
year 4 - S&P down 490 points, no increase or decrease in my account. Still have what I did at year 2.
year 6 - S&P up 112 points, $2445 to my account
year 8 - S&P up 578 points, $13632 to my account. End of term and free to do with the money what I wanted.

The S&P was at 1637 when that annuity ended in 2013. Today it is around 2770. Guess this is why it's hard to sell an index annuity to me as any kind of scam.

Designed to be difficult to follow and literally take a PhD to unravel.

True, because in most products, there are so many options and hidden fees. That's why I look them up before jumping in.

 

[jlcnuke]

In general, an index annuity guarantees no losses but does not provide full gains. That, coupled with their fees, is how they make money. They absorb the losses on a down year but they keep a bunch of the gains during good years as well. So you get a "guaranteed no loss" but you miss out on much of the gains (they've already run simulations to make sure they're likely going to be the "winners" in the long run with your money before deciding how much of the gains they'll pass along to you). The market goes up 25%, you don't see a 25% return, you see a fraction of that generally (either through participation rates or other similar methods PLUS many will also cap the max gain you can see in a given year - typically in the 7-9% range). Many consider it to be "scam-like" because they get investors excited at "no losses" while the company absorbs so much of the gains that investors would have been better off investing in an S&P 500 index fund yourself and having the losses in most long-term scenarios (which is what the company is likely doing and making money doing so).

 

[KenGordon]

Money has a price and risk has a price. Zero risk money’s price is whatever the US Treasury, the Bundesbank, Bank of England, Dutch central bank pay on their government bonds. Anything you can get above that pays for additional risk.

An investment is a scan if it doesn’t pay a fair rate for the money invested by means of obscuring the actual risk.

Typically the risk is of earning zero return, plus the risk that the provider goes bust (the Bank of England etc don’t sell these) and the opportunity cost (other stuff you could use the money for).

Unknowns are the price of the risk and the probablility of loss. You need proper quantatitive analysis for that. The people selling the product probably do have that, the punter does not.

100k investment like this is a bit like putting 90k in treasuries for 5 years and 10k on Black in a casino, except rather less transparent.

 

[KeithG]

In general, an index annuity guarantees no losses but does not provide full gains. That, coupled with their fees, is how they make money.

The big issue with many investments (think mutual funds) that people blindly fall into is the fees. Guaranteed fees. Regardless of their level of performance.

Mutual funds generally take a fixed percentage of your principle balance. Your fund makes 3% and they take 2% MER of your balance - so you make 1%. When your fund makes 1%, they take 2% of your balance (so you made -1%, oops). They really do not care what return they give you as they will always steal a fixed percentage of your money regardless of your return. They ALWAYS make money. This is a WIN for them - screw you situation. We blindly fell into that trap for many years...

We now use a "wealth manager" type service where they take a fixed percentage of our PROFITS, not our principle. Their take percentage is large - VERY large. But if they screw up and only make us 1% then they get a very large slice of our 1% profit. They can not can eat into our principle (well they can screw up big time and lose some of it in which case they get $0).

Our wealth manger only makes money when we do.

 

[DavidFL]

I have been watching this thread with interest. In many ways I'm going to do the reverse of the stereotypical American retirement. I've lived in Florida for 35+ years (and done a lot of diving in Florida in those years). Sometime later this year I'm going to retire from full time work and move to the Pacific Northwest. Part of the reason is family; part of the reason is wanting a few years in the high country while I'm still able. Still planning to dive though; just bought my first drysuit (after 50 years of diving) and I'm collecting the equipment and experience to try out British Columbia, Puget Sound, Hoods Canal; maybe some high country lakes. And I won't be far from airport connections for those warm water LOB trips.

 

[woodcarver]

Money has a price and risk has a price. Zero risk money’s price is whatever the US Treasury, the Bundesbank, Bank of England, Dutch central bank pay on their government bonds. Anything you can get above that pays for additional risk.

An investment is a scan if it doesn’t pay a fair rate for the money invested by means of obscuring the actual risk.

Typically the risk is of earning zero return, plus the risk that the provider goes bust (the Bank of England etc don’t sell these) and the opportunity cost (other stuff you could use the money for).

Unknowns are the price of the risk and the probablility of loss. You need proper quantatitive analysis for that. The people selling the product probably do have that, the punter does not.

100k investment like this is a bit like putting 90k in treasuries for 5 years and 10k on Black in a casino, except rather less transparent.

I think Red is better...

Index annuities are "safer" than other types strictly because the seller knows the long term will net them significantly more than the max payment to the buyer. It is designed for the seller, not the buyer.

 

[KeithG]

I think Red is better...

Index annuities are "safer" than other types strictly because the seller knows the long term will net them significantly more than the max payment to the buyer. It is designed for the seller, not the buyer.

Let's not make any blanket statements here. "Safer" for who? You generally are still relying on payment after the MER takes thier cut.

Anytime you invest into an investment vehicle with guaranteed MERs (Management Expense Ratio) then you are on the "lose" side. Regardless of the investment scheme.

There are other investment options that do not have MERs. I suggest that everyone should learn about them.

 

[jonhall]

Index annuities are "safer" than other types

"Safer" for who?

There are other investment options that do not have MERs

Speaking only of the index annuity, maybe "safer" means safer than a product where one's principal investment could actually drop. The index annuity account value cannot go down. Most index annuities do not have a MER, or the fees are extremely low, because there is nothing to manage. Mine has no fees or charges (according to the disclosure statement.) But we know the financial institution is going to make money.

@jlcnuke explained the process very well. In my index annuity, I have my principal distributed across several index strategies that all return a capped percentage. If the index spread of the strategy wound up being 12%, but was capped at 6%, then I will get 6% times my principal investment. That will happen across all of the strategies. If one of the index strategies went down, I would get 0% for that term. Did the financial institution make money off of me? Yes, but I accept that. Did I lose anything? No, whatever they take from my gains, I never had it in the first place.

To be clear, I'm not recommending index annuities, but only offered it as one of the products in my financial portfolio that has done well for me in the years just before retiring as well as currently. It is a safe investment that may not get the highest interest rates in something more risky, but aren't you supposed to go less risky in retirement years? Like other posters, I would always recommend that whatever you invest in, find out everything you can about it.

I wonder how many people invest into their mattress?

 

[billt4sf]

True, because in most products, there are so many options and hidden fees. That's why I look them up before jumping in.

"Looking them up" is insufficient.

Anyone reading this thread should get themselves educated about financial instruments, etc. It's not rocket science. Read some books.

- Bill

 

[KeithG]

Speaking only of the index annuity, maybe "safer" means safer than a product where one's principal investment could actually drop. The index annuity account value cannot go down. Most index annuities do not have a MER, or the fees are extremely low, because there is nothing to manage. Mine has no fees or charges (according to the disclosure statement.) But we know the financial institution is going to make money.

@jlcnuke explained the process very well. In my index annuity, I have my principal distributed across several index strategies that all return a capped percentage. If the index spread of the strategy wound up being 12%, but was capped at 6%, then I will get 6% times my principal investment. That will happen across all of the strategies. If one of the index strategies went down, I would get 0% for that term. Did the financial institution make money off of me? Yes, but I accept that. Did I lose anything? No, whatever they take from my gains, I never had it in the first place.

To be clear, I'm not recommending index annuities, but only offered it as one of the products in my financial portfolio that has done well for me in the years just before retiring as well as currently. It is a safe investment that may not get the highest interest rates in something more risky, but aren't you supposed to go less risky in retirement years? Like other posters, I would always recommend that whatever you invest in, find out everything you can about it.

I wonder how many people invest into their mattress?

But we need to be very clear on what we are taking about. Annuities are handy once you are already rich.

An annuity is NOT an investment (growth) vehicle. It is a de-investment (spend) vehicle.

It is a financial vehicle designed to generate a consistent (hopefully) life long return once you have successfully already realized an investment. An annuity is not designed to make you more money. It is designed to conserve the money you have already made.

Annuity