- May 5, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Situation Overview
I am faced with a decision regarding helping my 93-year-old grandmother invest $800k. She requires an annual income of $75-100k for her remaining years. Her financial advisor is strongly recommending an index annuity as the best option. The annuity allows for a 10% yearly withdrawal, with gains capped at 10% depending on the market. There is no risk of loss, but a down year would result in a 0% return. Additionally, $160k will be added to the fund initially, bringing the total balance to $960k.
## Personal Strategy
Despite the advisor’s recommendation, I believe that the index annuity may not be the best choice for my grandmother. I have personally found success with a 3-fund strategy involving US equities, international equities, and bonds. I am seeking guidance on the best course of action in this situation.
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****** just grabbed a
The financial advisor is pushing the annuity because there’s a fat commission check in it for them. This isn’t a financial advisor. This is an insurance salesman. Move on.
At 93 with $800K, she doesn’t need guaranteed. Someone would have to screw up pretty badly for her to outlive her money.
Run, an annuity for a 93 year old is theft. Report them to their licensing agency.
An annuity is basically a bet with an insurance company where they think the holder will have a shorter life, and the holder is betting they’ll have a longer life.
Generally, an index annuity has terms like, you’ll never get less than x% and anything over y% return they keep.
If you run the numbers, and I have for a 30-40 year period, the annuity company makes more than the holder.
Run, fast and far.
I did a deep dive into annuities for a family member. I wouldn’t get near it.
1. Annuity growth is capped at 10%. All growth above 10% goes to the insurance company. Potentially leaving money on the table.
2. If she passes, her estate loses the $800k. It’s gone. Beneficiary may get a payout over a few years but it will be far less than the $800k.
At 93, an annuity would be the worst investment. Get a second opinion.
Not long after the 2008 crash, my wife’s friend’s husband sold her on one of these because she was so afraid of losing her money. We held it for 10 years. Yeah it caps at 10% and can’t go down but after 10 years, the overall rate of return was 2% per year. It wasn’t worth it for us.
She has a large enough fund that she should be fine for the rest of her life just putting it in regular mutual fund.
Her “financial advisor” is a crook, who could stand to make $30 – $70k in Instant “commission” off of this $800k. He needs his a ss whipped most likely ..
I won’t say anything about the specific annuity, but three fund portfolios are useful for building wealth over one’s life. In very old age continuing to manage a portfolio is not necessarily something that someone wants to, or can deal with as compared to an arrangement that “just pays”.
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You really want someone who knows fixed income. I’d learn towards a tax advantaged bond ladder that takes advantage of bond rates at the moment, personally.
Sadly, reddit PF is pretty thin on money at twilight years and fixed income products.
Not for the full amount!! Ask what the commission paid to the advisor and what other products he can sell? Does he do comprehensive wealth management or is he just an insurance salesman?
A lot of annuities can’t even be issued to someone of her age let alone that high of an amount. Generally, you lose liquidity and they have a long surrender schedule. The annuity might be OK for her but only for a a portion of her assets. The 10% that you speak of is what’s legally allowed on all annuities. All annuities allow for a maximum 10% withdrawal per year. If the index it’s made to doesn’t make any money then all she is drawing is her own principal back out of it. I would also ask what are the internal fees on the index annuity and do those count against index performance? If the index is up to 2% does the account actually get credited that?
Thoughts from a CFP financial advisor. Good luck!
I’m going to echo the suggestion u/JJJJShabadoo made: do a CD ladder.
Do a rough calculation of how much money your grandmother will need for each of the next 5 – 10 years, including an allowance for inflation. Then make a bond / CD ladder that will provide at least that much for each of the years covered. (The more risk averse she is, the longer the ladder should be for.) It would probably be a good idea to have it provide extra cash in case you calculation/estimate is wrong.
Put the rest into something like a three-fund portfolio. As she redeems the bonds/CDs, buy replacements for however many years into the future you are doing the ladder, selling your three-fund portfolio to provide the money.
I use an annuity for my brother.
He is disabled.
If she’s 93, and you have $800k, you could consider buying individual government bonds in a ladder.
Another thing that hasn’t been mentioned is stepped-up cost basis. These annuities end up with a pent-up tax liability. So instead of you inheriting something tax free because of the stepped-up cost basis, you pay the income tax at YOUR current marginal income tax rate which can be mitigated by splitting up the payout, but the annuity issuer won’t pay you the same rate as the actual owner. In my family’s case, the annuity paid my mother 3%, but after her death, the rate to us was 1.5% in a year in which the market had gone up 22%, and I was getting 5.12% on my savings account. Fortunately, it was December, so I took the hit on the crappy rate to split the liability over two years. Which is a rip off because most likely the taxable portion is because of capital gains and qualified dividends that would have had much more favorable tax treatment considering that your 93 year-old grandmother is surely not working and probably in the zero percent capital gains tax bracket.
“Advisor” is most likely an insurance salesperson and not a fiduciary.
Find a CFP.
People like this sell shit to their own family members because of the huge commissions. They throw all sorts of numbers around to confuse you and simply wear you down until you give. No better than a timeshare salesperson.
They DGAF about you and your grandma.
Ask them what is the compensation (all forms) they would receive and see the villain unmasked.
The annuity will actually be in her daughter’s name with her 91 yo Mom as a beneficiary.
The average life expectancy of an average woman in the USA of age 93 is [3.5 years](https://www.ssa.gov/oact/STATS/table4c6.html). I’d suggest looking at investment strategies with a 10 year horizon; that will cover 97% of likely outcomes. Revisit the portfolio annually.
[This](https://imgur.com/ZOeWlR5) is what a S&P 500 index fund has historically returned.
[This](https://imgur.com/pS6RTIs) is what it sounds like the annuity fund would have returned; a S&P 500 index fund limited to 0% – 10%.