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Dana Anspach

Watch Out – It’s Dangerous Out There

By March 7, 2011

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A reader sent me a great question last week. He was inquiring about a site called Senior Annuity Alert.

My reader asked, "Can you provide me any information as to who these folks really are before I give them my e-mail address and get involved with people calling me every day trying to convince me their plans are the best buy."

When you go to the site, it says in GIANT type, "8% for life *guaranteed income". There's a video to watch, and of course they want your email address.

Well, heck, I'll gladly take on the challenge of them trying to convince me their plans are best. (I have a funny feeling I could have them trying to get off the phone with me before I tried to get off the phone with them), so I  put in my email address. The site then gave me access to another page where I could watch a video, and get a free 76 page booklet if I scheduled a "personal consultation with a top annuity expert". I thought I'd spare their poor reps the horror of a personal consultation with me. Really, I think I'd be their worst nightmare.

The reality is, I'm pretty sure I have already seen and devoured information on the type of product they are going to talk about.  You see, there is a little asterisk in front of the words "guaranteed income".  At the bottom of their web page is the disclaimer that goes with the asterisk. It says "8% guaranteed income based on income account value".

That "income account value" is not the same as your actual account value. Understanding how that income account value (sometimes referred to as the "income bucket") works is critical to understanding the guarantees in these products - and how and when they would actually apply. I'm not saying the products are bad. It may be exactly the right product if it is part of an overall retirement income plan or well thought out investment plan.

What is worri-some, is usually these products are sold as stand-alone solutions rather than part of a solid plan.

A recent academic had this to say about annuities,

"The complexity of the annuity industry should be sufficient to raise significant concerns. I needed the help of a trained mathematician and economist and the construction of a Monte Carlo model to accurately and comprehensively understand the product.  Who can an advisor, much less an unsophisticated investor, turn to for similar support?"

So, please, watch out. It's dangerous out there if you don't have someone interpreting the fine print.

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Comments
June 20, 2012 at 9:49 am
(1) Creighton Sloan says:

Thank you, thank you, and thank you. I had been searching the web in order to determine if senior annuity alert is legitimate. Until I found you every other site was written using similar terminology to http://www.seniorannuityalert.com. Senior annuity alert’s marketing department could have written them!

A couple of years ago I purchased a “6% fixed annuity” from Met Life. I thought I understood, but then the value went down every year. I telephoned and asked if they could send me a plain English description of how it worked. I was told that all they could legally give me was a document written by their legal department. I filed with the Met Life complaint department. There response was that they had done nothing wrong. I had the option to cancel the annuity, but there would be a substantial penalty in addition to the already depressed value.

My interpretation is that they use the term fixed fairly loosely. My problem is that I assumed the definition of fixed was “Not subject to change in amount or time.” The definition used by Met Life is “Unfairly or illegally arranged.”

The only thing fixed is my payment of $10,000. What began with a 6% interest rate has a minimum guaranteed interest rate of 3%. The interest rate is determined by a complex market value adjustment, which only an actuary would love. It has a death benefit. The only way I will be able to get anything out of it while I am alive is if I am confined to a nursing home and/or hospital. The death benefit is currently below my initial payment. If I assume an interest rate of 3% compounded annually, the annuity will not be worth my initial payment until 2018.

June 20, 2012 at 12:00 pm
(2) Dana Anspach says:

Creighton, thank you so much for leaving your story. I see this happen all the time. These products are often sold by agents who do not even understand them themselves. They are paid to sell it and taught and trained that what they are selling is the best thing since sliced bread. Annuities can be a good part of a retirement plan, so please know I am not saying annuities are bad. They are not! But they are often sold in an inappropriate way and people are left stuck in a product that does not do what they think it does.

March 14, 2014 at 1:32 pm
(3) bucky bianco says:

Thanks for the input. The only annuity I want to understand is I place X dollars with you and you “GUARANTEE” 8% EACH YEAR. The X dollar never goes down “FOREVER” The X dollars are to be turned over to my heirs at death. The interest is sent to me each month less the amount from your monthly payment, guaranteed less the 1%.
My question…who guarantees this? And no fine explanation to apply?

Thank you

Bucky

April 15, 2014 at 7:53 am
(4) Ed Grosko says:

I would favor your statement; “an annuity should be part of a solid plan” vs. painting annuities with a negative brush or at least a suspicious one.
I personally know Mr. Mellberg and have carefully studied his information and his company and find them to be true and passionate about a true “plan” for every client. I am a Chartered Financial Consultant and a Registered Investment Advisor with over 25 years of experience and upwards of 10,000 client meetings over the years. I’ve seen it all and the disasters people have created for themselves and disasters created by ill informed or unscrupulous advisors. Please, whatever you are selling be accurate and true. Offer real solutions not fear and suspicion. The question is…can any other “investment” promise lifetime income without ever running out of money regardless of market financial meltdowns? The answer is an honest “NO”. In the ideal market if a client could order perfect conditions, higher income is possible! Unfortunately that has never existed and millions of retirees have lost their nest egg on the promise or hope of what has never happened.

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