38 yr Old Wants Fixed Indexed Annuity

[junkman]

I was lazy and asked a friend at one of the major brokerage houses what he charges for portfolio management and what he would do. The broker dealer has software that crunches the efficient frontier numbers and sets up an automatic rebalance every xx number of months. The fee was 75 basis points on the 1st $500k & 50 points there after. I forget what funds they use but none had better returns and all had higher expense charges than those I use.

That amounted to several thousand/yr at the minimum investment. He has no more education than I and we're still friends and I manage my own. A little dusting off and updating of my understanding has kept things moving along satisfactorily - and I get to keep the $100,000 (actually most likely more) or so in lost performance that his fees would have cost. Not bad for a little studying. The OP would do well to do his own studying.

Yes, advisors had do more than manage a portfolio but at the end of the day, how much hand holding is necessary? Everyone on this board is licensed (except LD) and is supposed to be competent and professional.

 

[SecureHealth1]

You guys are giving me a lot to think about!

I know enough to be dangerous. But I like the idea of making as much as I can without worrying every-time I turn on the news what the market is doing.

I have so much going on in my business that I just want the best avenue that I don't have to worry about.

I understand the market can have much higher upsides then an fixed indexed annuity, but id rather say in 15 years that I made a little less but felt piece of mind. Now, is that a bad way to think at my age? That's what most advisors tell me. I also plan to invest other monies in real estate at some point, I just need to get myself in gear about getting this 200K working for me, its been sitting there doing nothing for 2 years. If business is good, i try to max out my Solo 401K contribution each year, and with myself and my wife, that's something like $36,000 give or take. I do remember now that taking a bonus is going to limit my future growth, so Ill have to look at that. Its just so confusing and I know enough to not trust EJ on there product offerings because of the unknown fee's etc.

 

[DHK]

If you think of your business like a stock holding itself (except you have a lot more control on it), and how much it represents of your financial life, then diversifying from that one-owner, illiquid stock... can make a lot of sense.

 

[DHK]

I also plan to invest other monies in real estate at some point,

Just to ask - why would you put money in illiquid assets (qualified plans and/or annuities) when you want to be in a business that really needs as much liquidity as possible?

I know we're only talking about your $200,000 in your current Solo 401(k) in this thread, but having easily accessible cash on hand is king - particularly in real estate and other businesses.

You may want to consider paying more taxes now, bypassing the tax deduction of the 401(k), and put money in a max-funded IUL or similar life insurance policy for its liquidity and loan provisions ALONG with some decent growth with principal guarantees.

Something to consider.

 

[jboussea]

You guys are giving me a lot to think about!

I know enough to be dangerous. But I like the idea of making as much as I can without worrying every-time I turn on the news what the market is doing.

I have so much going on in my business that I just want the best avenue that I don't have to worry about.

I understand the market can have much higher upsides then an fixed indexed annuity, but id rather say in 15 years that I made a little less but felt piece of mind. Now, is that a bad way to think at my age? That's what most advisors tell me. I also plan to invest other monies in real estate at some point, I just need to get myself in gear about getting this 200K working for me, its been sitting there doing nothing for 2 years. If business is good, i try to max out my Solo 401K contribution each year, and with myself and my wife, that's something like $36,000 give or take. I do remember now that taking a bonus is going to limit my future growth, so Ill have to look at that. Its just so confusing and I know enough to not trust EJ on there product offerings because of the unknown fee's etc.

investment advisors have these investment goggles on but yet they love to point fingers at insurance agents for having insurance goggles on.

Your job is always to learn more about what is at your disposal and make your own decision.

Since you run a business, I would always weigh all these options vs having liquid cash money. At the end of the day, the highest potential of return is your business.

After all, when you buy stocks, you're contributing to someone else's business, hoping it will appreciate by the time you cash out. Nothing wrong with that but if your focus is high return, I would look at your own business first. You might determine that it's not a growing business and leave it alone. But if it is, you have a lot more control over the returns.

The problem with the indexed annuity moreso than the return and is that it's not liquid , but owning stocks in a 401k has the same problem.

 

[scagnt83]

I think it is very ironic that a group health agent who makes a living giving advice to business owners and individuals on a complex Financial product. Would be so dead set against people using professional advice for what amounts to their survival during retirement.

Forget the annuity issue. He clearly has no clue what the benefits are. And he clearly has no intention of learning. You can't fix "I don't want to".

Asset allocation is easy. You can pay a few bips a year and have a computer do it for you. Hell, most advisors these days are simply in putting your info and having a computer spit out the results. The real value of an advisor is they create action from the client. Especially conservative-minded clients.

You guys know what is worse than a lower return then you could have had? Zero return. Because that's what happens to a lot of conservative investors. They will refuse to put a lot of money in equities. Back in the 70s, that was fine because they could get a huge interest rate on their money. But in today's world, and for the past 20 years, they have not even kept up with inflation. I can't tell you how many people I've come across with hundreds of thousands sitting in a bank account or CD for the past 10 years because there were not any decent interest rates to be had. At least they knew of.

I am not saying that all advisors earn what they charge. But many advisors do much more than just portfolio allocation for clients.

And to say that most people or even all people should manage their own portfolios shows how little experience in this area a person has. Other than their own personal experience... which means absolutely nothing... Because one single personal experience is not reflective of the entire whole.

 

[junkman]

1. Return is derived from asset class. Stocks (and I'm only talking about funds because you won't devote the time to make individual stocks a consideration) simply have returned more than bonds or any fixed account. You can control asset mix and to an extent expense. That's about all.

The way to not worry about market swings is simply to understand that it goes up and down but generally up more than down. This is true even including major recessions and depressions. I think of it as being on sale and don't have any money in the market that I'll have to withdraw in the next 4 or 5 years.

I've lived through some and remember Black Monday. The next day we were glued to the TV and........nothing happened. The market recovered and people who stayed in had more money than before and more money than if they'd bought bonds or annuities or savings accounts. The market also took a dump recently 08-09 and has recovered just fine for those that stayed in.

Anyone that ties up their time running a business has to put their money somewhere and the market has been a good place (for me at least) that doesn't require a lot of time managing it. Up, down, whatever, it simply doesn't matter - and you'll have more money than if you're scared, opt for fixed income and stay uneducated. Anyone that has a long (say 20 or 25 yr) time horizon simply should learn the basics. Even a 1% lower return turns into significant dollars over 25 years.

2. Any investment has some risk. The market risk has been generally short negative swings. On the other hand, it has mostly been completely liquid. Enter a sell order and it generally settles and you have your money within a week. Yes, the US economy could go to hell in a hand basket but those who have bet against the US economy for the long term have lost.

Real estate has liquidity risk and requires more hands on to run it. I've always stayed out of it because I didn't want to spend the time. I have friends and neighbors that do well taking care of their own rental property. To each his own. I'd rather ride my bike and sail my boat.

Don't get caught up in any REITs or any of the other stuff that gets packaged and sold as investments. Those are frequently ill-liquid with high expense charges and most of the return goes to the people running the projects. Keep it simple.

You don't have enough money (yet) to get fancy. Look at the reading list I pointed to and learn and follow some basic finance principles. Be diversified, stay fully invested and don't bail when things look bad. You can open any intro finance book and read "the small investor gets in at the peak and out in the trough - exactly opposite of what he should do." When the market goes up, put money in. When it goes down, put money in. Then you'll have some. You'll understand more by the time you have accumulated twice what you have now - because you'll become interested and read.

Edit: @Scagnt, the OP is simply talking about what to do with already accumulated QUALIFIED money. He's young with a long time horizon. It ain't rocket science. Giving even 1% to an advisor to tell him to put your $200k over here will cost $250,000 in 25 years. I hope the advice is worth it. To the educated or those willing to learn it isn't.

The OP isn't the broke business professor 30 years ago that I had to push into putting $50/month into a 403B. OP already saved some money. He can't take it out without penalty so has to put it somewhere. The question is where to put it. Seven % for 25 years is approximately $1,100,000 if he doesn't contribute more to it. Do you know of an annuity that is paying anything near that? Have you considered how many 25 year periods the market has returned less? I'm not talking about investing in bit coins which have a little more risk

 

[scagnt83]

Edit: @Scagnt, the OP is simply talking about what to do with already accumulated QUALIFIED money. He's young with a long time horizon. It ain't rocket science. Giving even 1% to an advisor to tell him to put your $200k over here will cost $250,000 in 25 years. I hope the advice is worth it. To the educated or those willing to learn it isn't.

I addressed his situation in a professional manner. There was a lot more to his question other than asset allocation. There are tons of funds, services, etc. that can provide asset allocation. I actually answered his questions. I also recommended that he look into funds that are appropriate for his risk tolerance... which to his surprise, would likely include equities, even at a "low" or "moderate" risk tolerance.

I never said someone should pay 1% for asset allocation. They shouldnt. Vanguard can give you simple risk-based asset allocation for less than 0.2% per year. You can get active risk-based management for less than 0.60% per year in many 401k platforms.

And I never said I was against stocks. I specifically said an advisor should not be charging 1% for managing mutual funds. If they are charging that much, IMO, they need to be hand selecting a basket of stocks for the client.

The question is where to put it. Seven % for 25 years is approximately $1,100,000 if he doesn't contribute more to it. Do you know of an annuity that is paying anything near that? Have you considered how many 25 year periods the market has returned less? I'm not talking about investing in bit coins which have a little more risk.

Yes, I am aware of an annuity that provides a 7% yearly increase until the client retires. And the payout rate during retirement is higher than the traditional 4%-5% per year recommended for a balanced equity portfolio. You must take that accumulated amount as income for life. But you still have a liquid value available.

And there are annuities with rollup rates higher than that. And there are some that will double that yearly income if the client needs LTC care.

That is why many people put a portion of their savings into these products. They can guarantee what they hope the market will do. If you can match or beat the income produced in retirement, why take on market risk unnecessarily?

I am very aware of the return history of the market. That is why I am not against investing in the market. But you have to respect the client's risk tolerance. If you dont, they will keep it hidden under the mattress.

I agree that this guy should have a decent amount of money in equities. But if he is not comfortable with that, then he should get the next best thing. And if he likes the idea of guaranteeing a portion of his retirement income, then an annuity is a perfectly suitable solution for him to do that.

 

[LostDollar]

Everyone on this board is licensed (except LD) and is supposed to be competent and professional.

I have been avoiding this thread because I figured it would be beyond what I could understand. I scanned a few posts today and saw what is quoted above.

I have a client and two pieces of wisdom.
Utilities are a good investment. They pay dividends and "everybody" uses them. Best I can remember as a paraphrase of a college instructor's comment 40 years ago.

Find some simple way to improve your financial position and do it. LD's interpretive paraphrase of some advice from junkman elsewhere.

My client's compounding horizon is somewhere between 1 day and 30 years.

He's going to get into really big money, maybe $8K to $10K.

I've created a "highly sophisticated equity investment strategy" for him. (Maybe I should start a fund.)

 

[GreenSky]

I have been avoiding this thread because I figured it would be beyond what I could understand because I’m not an insurance agent and have no business being part of this or any other thread.

Couldn’t have said it better myself.

Signed,

Most of us on the forum