New economy, new investors, old scam. Help!
December 22, 2009 7:33 AM   Subscribe

Broker is pointing my 35 year old sister in law and spouse to a *variable annuity* as their first retirement saving choice.

My relatives are late to starting to save, and have $20,000 set aside (taxes already paid). They don't have an IRA or 401(k). I've tried to explain the differences, but I'm looking for specific, recent web content that addresses starting to save for retirement for folks that have poet-level understanding. Help, mefites! It's not enough set aside to warrant a fee-based financial planner, but certainly merits good advice from good people.

And yes, they have their emergency fund and have zeroed the credit card debt. Thanks again!
posted by Arch1 to Work & Money (16 answers total) 5 users marked this as a favorite
 
This is not a general overview of what kinds of products to start with, or a plan for retirement savings. But, this Life Insurance Buyer's Guide published by the National Association of Insurance Commissioners has some consumer-oriented, independent (i.e. not created as a selling piece by any individual company) information on topics like deciding how much insurance you need, the differences between the types of policies, and so forth.

In providing the resources above, I'm not intending to state that insurance should be their first move (or that it shouldn't). But since they are already being pointed in that direction, and in the direction of a variable annuity which is equity-dependent and does not guarantee interest rates (higher risk than other policy types although there are potential advantages), I hope it may be useful.
posted by bunnycup at 7:57 AM on December 22, 2009


PS, it may be tax reasons that the broker is suggesting an annuity. You probably know this, but traditional IRAs and 401(k)s are funded with pre-tax money, with the advantage being you pay no taxes on the money when it is deposited and pay no taxes during the investment stage, and you make withdrawals after age 62.5 (I think) when your income and tax bracket have decreased. When you make permitted, non-early withdrawals, you are taxed on the full amount (interest and principal), but at a lower rate then you would have paid earlier in life. It wouldn't make sense to fund these vehicles with after-tax money.

On the other hand, again IIRC (which I may not), annuities are funded with after-tax dollars. With a deferred annuity (typically used for retirement), you purchase with after-tax dollars, it accrues for X number of years (during which time you pay no tax on the accrual assuming no early withdrawals) and then begins paying out. When you start taking payments, you are taxed only on the interest accrued (because you already paid tax on the principal), which is calculated based on an exclusion ratio.

Summary: You buy IRAs and 401(k)s with pre-tax money, and annuities are one mechanism to save for retirement using after-tax money. Consideration of the tax issues is important to maximize your net received funds.
posted by bunnycup at 8:11 AM on December 22, 2009


I would encourage you to encourage your sister-in-law and her spouse to consult a fee-for-service financial planner before making any decisions.

Taking advice from a broker about financial products is opening yourself up to being the victim of a conflict of interest. Of course the vast majority of brokers are trying to do their best to help their clients find the product that is best for them, but I personally wouldn't want to take a chance on my bullshit detector.

Investing in a meeting with a fee-for-service financial planner to review the array of products out there is the smart move.
posted by Sidhedevil at 8:16 AM on December 22, 2009 [2 favorites]


Response by poster: I'm up on annuities, but couldn't they just put the money in a Roth or simply get a Vanguard or Schwab index fund and skip over 2% in annual "administration" charges? There's also a horrid lack of liquidity in an annuity for a couple in the mid-30s, for cat's sake.
posted by Arch1 at 8:47 AM on December 22, 2009


Annuities are high commission products. That is why a lot of them are sold--it's a healthy payday for the broker. Yes, there are tax advantages, but unless you are in a very specific tax situation, there are probably better investment options.

A visit to a flat-fee, non-commissioned financial advisor would be prudent, if only to get a second opinion.
posted by FergieBelle at 9:06 AM on December 22, 2009 [1 favorite]


The Bogleheads wiki and messageboard cover a lot of ground and are aimed at the novice investor. The board has a help section with very patient and informative posters who'll answer even the most basic questions. They generally recommend starting with one of a few intro books.

I love Bogleheads. It's the best place I've found on the internet for investment advice.
posted by Durin's Bane at 9:14 AM on December 22, 2009 [1 favorite]


couldn't they just put the money in a Roth or simply get a Vanguard or Schwab index fund and skip over 2% in annual "administration" charges?

I think that question would, as others have said, have to be answered by a financial planner who knows their tax burden, specific financial goals, risk tolerance, etc. "Could" is not always the same as "should," and I don't know that anyone here will be comfortable (or legally allowed) to advise what they should do. I know that's not the answer you wanted, but I think the people advising that paying a fee for advice is a sound investment in their future are probably spot on.
posted by bunnycup at 9:14 AM on December 22, 2009


You're right. $20K isn't enough to attract a fee-only or fee-based planner.

The broker isn't necessarily trying to fleece them. There could be a few reasons to suggest an annuity: low risk tolerance, only product line the broker works with, low minimums to start, etc.

Most likely though, an annuity isn't best for them.

Their best bet is to get some hourly advice, a good book, or a good blog.

Hourly advice: Garret Planning Network - pretty much the only bias-free advice they'll get by the hour. Most folks in the GPN have quite a bit of altruism in them. The fee structure nearly requires it. Advice is still expensive though. GPN will probably be the most cost effective for them but the price tag may still be out of their range.

Book: I like The Bogleheads' Guide to Retirement Planning to start with. The New Coffeehouse Investor is good too.

Blog: Mefi's JD Roth's Get Rich Slowly provides quality advice.

As a fourth option, send me a PM. I'm in the industry, have *no* conflicts of interest as I wouldn't charge, and feel like giving something to the mefite community. If they can deal with me working with them during off-hours, I can probably point them in the right direction.

Whatever they do, they should always keep in mind how they are paying for their advice.
posted by sleepyflywheel at 9:39 AM on December 22, 2009 [3 favorites]


$20K isn't enough to attract a fee-only or fee-based planner.

A fee-only planner makes money on hourly fees from clients, not on commissions from sales. I have never encountered a fee-only planner who asked how much money I wanted his or help planning about before we made an appointment.

(Boston, MA, US; I suppose customs in other parts of the country might vary, but I don't see why, as fee-only planners charge by the hour.)

Tell the sister-in-law and spouse to call a fee-only planner. I really doubt they'll be turned away because they want planning advice on a relatively small amount.
posted by Sidhedevil at 10:19 AM on December 22, 2009


"his or her help" in the third sentence.
posted by Sidhedevil at 10:35 AM on December 22, 2009


Are they self-employed? That might be a reason why they might be steered in this direction, as a traditional 401(k) might not be available to them.

I'm self-employed, and nobody has ever suggested an annuity as a good choice to me. There are lots of good options other than annuities for self-employed folks.
posted by Sidhedevil at 12:39 PM on December 22, 2009


Response by poster: They are not self-employed. I keep thinking Roth, Roth, Roth. They qualify, so why lock it all away and lose the tax-exempt benefits?
posted by Arch1 at 2:40 PM on December 22, 2009


The broker is a crook. There is absolutely no reason for anyone to buy a variable annuity if they have not already maxed out their IRAs and 401(k)s. A broker, no matter how friendly he seems, does not have a fiduciary responsibility to their clients' best interests. Their only responsibility is to maximize the the profits of their brokerage. The broker is trying to sell a variable annuity because that gives him the biggest commission. The purpose is to convert the client's wealth into his own wealth.

Variable annuities only make sense for very high income people who have exhausted all other possibilities for tax-advantaged investing and even then it is a close call due to the high commissions and annual fees. The fact that the broker is pushing this inappropriate investment is a sign that he is dishonest and you should run away as fast as you can.

As others above have pointed out, there are a couple of very good and simple investment books that can help. The first is the Coffeehouse Investor. This is a simple book that you can literally read is just a few evenings.

The other is the Bogleheads Guide to Investing.

For web information there is no better place than the bogleheads.org forum. You can join the forum for free and then post your question about investing and several knowledgeable people will provide answers. The people there have nothing to sell and only your best interests at heart. They will give you great investment advice and steer you away from the Wall Street sharks. If you post a question about variable annuities you will receive a deluge of replies explaining why these are bad investments in most cases and give you several reasonable alternatives.
posted by JackFlash at 2:43 PM on December 22, 2009


Anyone who is newly starting to get a grip on their financial life would benefit from a comprehensive analysis of their current and future finances.

For most fee-only and fee-based advisors that type of service is billed by a percentage of Assets Under Management or by a retainer. Hourly billing does exist but it's normally limited to a specific planning issue.

My guess is that "What do I do with this retirement savings?" is too general of a question to be answered by a $250 sit down with an advisor.

Then again, the most likely answer is to put the funds in a Roth. Maybe the advisor wouldn't charge anything.
posted by sleepyflywheel at 5:51 PM on December 22, 2009


If they're self-employed, they could do a SEP-IRA, or a solo 401k. (Google "solo 401k" for lots of info.) I'm pretty sure Fidelity offers a solo 401k option.

Personal Finance for Dummies actually has a lot of good info about getting started with saving and investing.

For specific info about annuities and what's usually wrong with them, I like the Motley Fool - Annuities: What's to Like?. They point out that many annuities:

* are too expensive
* offer mediocre insurance coverage
* restrict the owner's investment choices to so-so, ho-hum, quasi-mutual fund subaccounts
* do, as advertised, provide for tax-deferred investment growth, yet that growth is taxed at ordinary income tax rates on withdrawal
* lack liquidity

The little submenu on that article page also has links to info on 401ks, IRAs, asset allocation, and retirement planning in general, all written for the beginner. A good place to start, in my opinion.

Totally seconding Bogleheads, by the way, but your relatives may find it makes a little more sense once they've done a little reading at Motley Fool or in some of the friendlier starter books, like the Dummies books.
posted by kristi at 11:24 AM on December 24, 2009


Response by poster: Thanks, everyone! Found them a planner who will give them a no-cost review-- and all they have to do is buy him coffee, and I gave them the web links to start reading. Meanwhile, they RETURNED THE ANNUITY and opened a Roth. Whew!
posted by Arch1 at 11:27 AM on December 30, 2009


« Older Tell me about professional development for...   |   If it does exist, I imagine the school crest is... Newer »
This thread is closed to new comments.