Invest a rollover!

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Jul 26, 2008 8:17 am

for fun-- please share an investment stategy for an avg 500k r/o invested for the avg 65 retiree in the 25% bracket who will not tap it for income in the foreseeable future and has a moderate risk tolerance, and hopes to have much of it to pass on if possible. Please do not attack the way the question is phrased; have not given it much thought.

Jul 26, 2008 8:27 am

Variable Annuity.

Jul 26, 2008 11:26 am

Its called rule 405...........

Jul 26, 2008 11:28 am

I agree with Frank. I would put a large portion in VA and the remainder in laddered CD's for emergency spending.

Jul 26, 2008 11:31 am

 
 
Jul 26, 2008 11:33 am

Married? Children?  Life insurance in place?  LTC policy in place?  Why doesn't he need income now?  If working, how much current income?  How is health?  Any other retirement income sources (pension, part time work)?  How much income does client feel he needs? How many obligations does client have? When (foreseeable future in no specific enough)is client needing income for the rollover?  Is client charitable?  Which is more important, comfortable retirement or legacy gift?  This is some of the information needed to to answer your question. 

Jul 26, 2008 6:35 pm

VA would be about the last place I'd consider putting an IRA Rollover.

Jul 26, 2008 6:40 pm
BBQ:

VA would be about the last place I'd consider putting an IRA Rollover.



Why?

Jul 26, 2008 8:18 pm
BBQ:

VA would be about the last place I'd consider putting an IRA Rollover.

 
Please do tell.
Jul 26, 2008 10:26 pm

I'll tell,

 
How about:
1.  7 year surrender penalty
2.  Limited investment choices
3.  Average M&E expenses of 1.4%
4.  Rider expenses averaging 0-1.5%
5.  no access to CD's, individual bonds, individual stocks, money market, or any other investment other than the limited mutual fund choices allowed in the variable annuity.
6.  considering the main reason annuities are justified is tax-deferred growth, buying a VA inside an IRA would be like putting two diapers on a baby.
7.  Considering asset allocation is 90% of long-term investment success and this client has a significant time frame, the death benefit wouldn't be a good reason to buy a VA inside an IRA, especially since most VA hucksters flip these ever 5-7 years anyway.
8.  Because the client will not be taking an income for the foreseeable future, a GMIB would not be a justification to buy a VA.
9.  Increased regulatory scrutiny has made it extremely difficult to justify VA's inside IRA's, and regulators have touched just the tip of the iceburg on this one.
 
If you want a couple more reasons, let me know.....I'll list them. 
Jul 26, 2008 10:55 pm
While a VA is usually not my first choice, I disagree with some of your reasoning.  On a side note, newnew is clowning you guys.  Any ethical advisor could not fathom to make a recomendation off the limited client information given.
 
 
 
rankstocks:

I'll tell,


 
How about:
1.  7 year surrender penalty There are VAs with no surrender, 4yr surrenders etc.
2.  Limited investment choices Agree
3.  Average M&E expenses of 1.4% True
4.  Rider expenses averaging 0-1.5% True
5.  no access to CD's, individual bonds, individual stocks, money market, or any other investment other than the limited mutual fund choices allowed in the variable annuity. Agree, although this area has improved, i.e. ETFs, UITs etc.
6.  considering the main reason annuities are justified is tax-deferred growth, buying a VA inside an IRA would be like putting two diapers on a baby.  I disagree that tax deferal is a feature.  The expenses cancel out the benefit of tax deferal. 
7.  Considering asset allocation is 90% of long-term investment success and this client has a significant time frame, the death benefit wouldn't be a good reason to buy a VA inside an IRA, especially since most VA hucksters flip these ever 5-7 years anyway.  You only "flip" an annuity if it is in the best interest of the client.  If the death benefit is higher than the account value, you don't move it.  A death benefit could be a reason.
8.  Because the client will not be taking an income for the foreseeable future, a GMIB would not be a justification to buy a VA.  This is just dead wrong.  Many contracts have annual step ups of the GMIB, you get the better of market action or the auto step up.  THIS is the main reason to consider an annuity for this person assuming at some point they will need income.
9.  Increased regulatory scrutiny has made it extremely difficult to justify VA's inside IRA's, and regulators have touched just the tip of the iceburg on this one.  True, although I do not give the regulators much credit for their intelligence.
 
If you want a couple more reasons, let me know.....I'll list them. Please do.
Jul 26, 2008 10:57 pm

oh well, I tried. OF COURSE I didn't list every KYC particular. It's just a friggin' forum--have some fun

Jul 26, 2008 11:08 pm

Not a criticism, I think it's funny people are answering it.

Jul 27, 2008 12:29 pm
rankstocks:

I'll tell,

 
How about:
1.  7 year surrender penalty
2.  Limited investment choices
3.  Average M&E expenses of 1.4%
4.  Rider expenses averaging 0-1.5%
5.  no access to CD's, individual bonds, individual stocks, money market, or any other investment other than the limited mutual fund choices allowed in the variable annuity.
6.  considering the main reason annuities are justified is tax-deferred growth, buying a VA inside an IRA would be like putting two diapers on a baby.
7.  Considering asset allocation is 90% of long-term investment success and this client has a significant time frame, the death benefit wouldn't be a good reason to buy a VA inside an IRA, especially since most VA hucksters flip these ever 5-7 years anyway.
8.  Because the client will not be taking an income for the foreseeable future, a GMIB would not be a justification to buy a VA.
9.  Increased regulatory scrutiny has made it extremely difficult to justify VA's inside IRA's, and regulators have touched just the tip of the iceburg on this one.
 
If you want a couple more reasons, let me know.....I'll list them. 
 
Rank, these are the same reasons that most out of touch senior advisors in wirehouses give against annuities.  Some of your points are just dead wrong.
 
Annuities are actually having more inflow into tax-deferred accounts than non-qualified these days, and it's for the same reasons that they used to be shunned in qualified accounts:  tax treatment is the same.
 
The purpose for buying most of today's annuities is for the living benefit.  I do hope you understand how these riders work, both tangible and intangible.  I'm sure you haven't read any of Moshe Milevsky's reports or Ibbotson's studies.
 
I have not had any trouble from regulators or compliance about putting a VA in an qualified account.  On the topic of regulators and VA's, we had FINRA in our office checking up on things.  The FINRA person asked, "Why would you do a 1035 exchange of this client's annuity?  Why would you create a taxable event?  This client might have a huge tax liability".
 
Obviously the regulators don't know what they are talking about.
 
Another point, people aren't buying annuities for the death benefit anymore either.  Again, it's for the living benefits that I'm sure you know very well.
 
And while we're on the subject, if you want to talk about costs, let's go for it.  How much do you charge?  Do you charge a fee and wrap mutual funds?  A shares?  C shares?  If you add on the fund expenses and trading costs of the fund, you're easily at 2%.  Depending on the sub-accounts you use in the annuity, you can easily keep ALL expenses at 3% max.  So it's only 1% more for an insurance guarantee of income.
 
Like Primo, I'd enjoy your other reasons.
 
I'd also like to know how some advisors still think annuities are the same as they were in the 1990's.  And how they are doing right by their clients by not staying updated on these changes. 
Jul 27, 2008 1:07 pm
Well, Like Primo and annuity wouldn't be my first choice especially at the age of 65.  However, I could see it for a portion of a qualifed roll over
rankstocks:

I'll tell,


 
How about:
1.  7 year surrender penalty.   Some are as short as 4 years and fee advisors can sell no load no CSDC annuities
2.  Limited investment choices  Not necissarily.  Multiple fund families availability is attractive if the client isn't in a fee based account
3.  Average M&E expenses of 1.4%  True, but the pay off is some guarantees for the client's beneficaries.  Many find this appealing and worth the extra cost.
4.  Rider expenses averaging 0-1.5% True again. The extra fees are purchasing guarantees such as a guaranteed income stream after a period of time no matter what the market does.  In qualified money, this is a plus since NO ONE is planning to take large lump sums out of their IRA in any case.
5.  no access to CD's, individual bonds, individual stocks, money market, or any other investment other than the limited mutual fund choices allowed in the variable annuity.   No shit Sherlock. 
6.  considering the main reason annuities are justified is tax-deferred growth, buying a VA inside an IRA would be like putting two diapers on a baby.  Not if you are interested in the guarantees.   Having had a child....sometimes the two diapers is a very very wise thing when you are traveling long distance.
7.  Considering asset allocation is 90% of long-term investment success and this client has a significant time frame, the death benefit wouldn't be a good reason to buy a VA inside an IRA, especially since most VA hucksters flip these ever 5-7 years anyway.  Now you are talking about unscrupulous advisors who would sell away the death benefit.  I assume you aren't considering that any of US would do such a thing.  What makes you think that you  cannot use asset allocation strategy within a VA?
8.  Because the client will not be taking an income for the foreseeable future, a GMIB would not be a justification to buy a VA.  Maybe...maybe not.  There are other guarantees that would justify.  In addition with the safety net of some of the guarantees the client just might be persuaded to invest a little more agressively than they would outside of the annuity to generate more growth to overcome the  downside of the expenses.
9.  Increased regulatory scrutiny has made it extremely difficult to justify VA's inside IRA's, and regulators have touched just the tip of the iceburg on this one.  Actually the regulators have conceeded that the guarantees may be of benefit to the client in a qualifed roll over annuity.  Not so much for flipping annuities, however.
 
If you want a couple more reasons, let me know.....I'll list them.   
I have quite a few clients that have rolled out of profit sharing plans and 401ks who are not taking income at this time. Some because they are not 591/2 others because they just don't need the income.  I put a good portion 30 to 40% into a VA with the GRIB and 7% step up on the income pool.  The rest are in either fee based accounts using funds, stocks, bonds, etfs and some covered call trading or in a commission account and parked in rather conservative portfolios.  The VAs we are aggressively investing and so far (with the exception of this last quarter) have easily beaten a 7% annual return.
 
Jul 27, 2008 3:53 pm

Met Life offers a product which (i could be wrong but i dont think so) is only offered thru the wirehouse i am associated with.

It is no surrender charge, period, wide choice of fund families, about 3 1.4% all in, and asset allocation models that are reblanced automatically. As i've stated before, i am not a big fan of VA's for everyone, being mindful of the high expenses. But there are situations in which they are totally appropriate, and as snags said, with the living benefits, that goes for qualified money as well as non qual. With no surrender, easy in easy out, it almost comes down to a simple question of what is the clients risk tolerance and is he willing to pay the extra 1-1.25% for insurance.
Jul 27, 2008 7:17 pm
pratoman:

Met Life offers a product which (i could be wrong but i dont think so) is only offered thru the wirehouse i am associated with.

It is no surrender charge, period, wide choice of fund families, about 3 1.4% all in, and asset allocation models that are reblanced automatically. As i've stated before, i am not a big fan of VA's for everyone, being mindful of the high expenses. But there are situations in which they are totally appropriate, and as snags said, with the living benefits, that goes for qualified money as well as non qual. With no surrender, easy in easy out, it almost comes down to a simple question of what is the clients risk tolerance and is he willing to pay the extra 1-1.25% for insurance.



How much does it pay YOU?

Jul 28, 2008 12:15 am

Snaggletooth stated, "The purpose for buying most of today's annuities is for the living benefit.  I do hope you understand how these riders work, both tangible and intangible.  I'm sure you haven't read any of Moshe Milevsky's reports or Ibbotson's studies."

 
An exerpt from Milevsky's key study "The Titanic Option; Valuation of the Guaranteed Minimum Death Benefit in Variable Annuities and Mutual Funds", by Milevsky, Moshe and Steven Posner, as published in the Journal of Risk and Insurance, 2001, Vol. 68. No. 1, 91-126, Professor Milevsky thoroughly demonstrates the cost solely associated with the mortality guarantee (GMDB) is typically less than 15 basis points.  Therefore, while the GMDB is worth only 15 basis points or less, the Mortality and Expense charged by the insurance company (M&E) is usually greater than one hundred basis points and is invariant to factors which affect mortality risk."
 
Also, which living benefit's are you talking about?  GMIB, GMWB, or GMAB.  All are different, all but the GMAB are smoke and mirrors.  You have to Annuitize to capture the GMIB, and the GMIB annuitization tables used for this calculation are significantly worse than a lump sum immediate annuitization using cash.  GMWB's usually are offered at 4-5% annually unless you are over 65 or 70, at which point the chances of your account value going to 0 is almost non-existant.
 
After all, if we're using fear tactics to sell these annuities, keep in mind that these guarantees (which are smoke and mirrors) are only as good as the company backing them........
Jul 28, 2008 12:29 am

Of course GMIB rates are lower than an immediate annuitization.  Of course, immediate ann does not have a death benefit or the possiblility of rising income.  That might be why.  Oh yeah, income benefits do not require annuitization in most contracts unless you run the value to zero, which you stated the chance are small (or did you say non-existant).  And you haven't looked at annuities lately, 65 yr old is pulling 6% and a 70 yr old is getting 7%.

Jul 28, 2008 12:37 am

Here's the conversation I envision from a snake oil, I mean annuity salesman.

"What if your account value at that other firm goes to 0?
We're probably in the next great depression!
I don't want to see you run out of money before you die.
You've seen the stock market the last year, I think it could go to zero, don't you want to guarantee an income and your principal?
Do you wan't your money insured, or uninsured?
Let's cash out of that investment strategy you've got and buy this great variable annuity with all these guarantees.  Don't worry, there's no commission because the insurance company pays me  for finding them business.  Let's not discuss costs, because their irrelevant anyway, after all your money is guaranteed, and so is this income at a guaranteed rate of 7% annually compounded.  You can take plenty of income out of this annuity at anytime, just try and keep it below 10% for a few years.  You might not hear from me again for a while (5-7 years), but when I do talk to you again, all these guarantees will be bad because there will me much better ones available then.  I know the choices seem somewhat limited, and I know you wanted some bonds and CD's, but trust me, that doesn't matter with the guarantees."
 
.....If the client only knew that the chances of them needing to use the GMIB's or GMWB's was actually smaller than the chances of the insurance company going out of business and not being able to honor those same guarantees.