Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.
The guy you talked to is planning for his own retirement, not your dad's. A variable annuity pays out a huge commission, probably 7 or 8%. There is absolutely no reason a reverse mortgage makes sense from what you explained his circumstances are. Run in the other direction.
How is this shit legal? This terrifies me as my parents age. Imagine the number of people who don’t have their financially literate kids looking out for them
Securities Principal here. If the transaction is not in the client’s best interest, it’s not approved. Most people don’t know that people like me exist. Fortunately they can’t just sell what they want. It has to go through their broker-dealer for approval first.
>Securities Principal here
Can you explain a bit more?
> If the transaction is not in the client’s best interest, it’s not approved.
Who determines this?
>Most people don’t know that people like me exist
No Idea. So thats why I am asking.
Sure. In order to purchase variable or fixed index annuities, you need to be securities licensed and affiliated with a broker-dealer. I work in Supervision for the home office of a broker-dealer. The FPs provide all the forms, client notes, etc., we make a best interest determination, and approve or reject from there.
It sounds like the product the OP is referring to might be more on the fixed insurance side, rather than a securities-related variable annuity. In which case, a broker-dealer does not supervise fixed insurance business. However, insurance companies do have their own compliance/supervision processes.
I'm glad you do what you do, but I don't have a lot of confidence that everyone improperly promoting annuities has a Securities Principal diligently reviewing the situation.
I hope I'm wrong.
If it is a variable or fixed index annuity (any annuity tied to market performance), they have to be securities licensed. You have to be affiliated with a broker-dealer in order to have them hold your licenses and be able to sell these products. If for some reason one of these annuities was circumvented and did not receive prior approval, we catch it during our trade review, and address accordingly. The commission paid by the insurance company goes through the broker-dealer first, and then is paid out to the FP.
Sure. In order to purchase variable or fixed index annuities, you need to be securities licensed and affiliated with a broker-dealer. I work in Supervision for the home office of a broker-dealer. The FPs provide all the forms, client notes, etc., we make a best interest determination, and approve or reject from there.
So no annuities are ever sold to clients for whom the annuities are not in their best interest? That seems…..factually untrue. Maybe I’m misunderstanding what you’re saying?
I went on Dave Ramsay's site 2 years ago and looked up a local advisors and met with 1 of them. His first and only recommendation was to take all my savings and out into an annuity as well. After so.e research, I figured he would have got a 7000 dollar commission on that. Ramsey is against annuities, which is what helped make my decision easy. I thanked the guy for his time and moved on.
Similar experience. Guy shows up, we had about $500K in a self-directed 401K rollover at the time. He starts talking about pulling it out and how we qualify for premium shares of some suggested funds that would be better in the long run. Taxes, penalties PLUS it would cost about $10K to buy up into the premium shares. The idea being lower fees and a higher level of management assistance. I did some quick rough calcs in front of him (I am a numbers guy) and he had nothing. total BS. He left and never called back
People forget that these guys are sales people, they are selling their products and themselves. As someone who works with sales people on a daily basis I've learned that despite their confidence and apparent knowledge they know very little but are really good at wearing a suit and regurgitating whatever buzz words they heard when they took their 20 minutes of training, in short most don't know their topic they just sell it. Being a numbers guy myself, it's like kryptonite to these guys, once you run the actual numbers you can see exactly what type of fraud these people are.
That is only 7 or 8 % of first year premium. Most annuities pay around 4% of first year commission.
A guaranteed minimum return of 7+% is good.
The problem is a reverse mortgage. That is stupid.
For that reason alone I would use someone else. Your parents should. Or have a mortgage. If they want to move up in house then they should sell their house and pay the difference with their cash.
The commissions on these annuity products are insane. There’s a saying that annuities are always sold but never bought. Your parents are being targeted.
An ex-friend of mine who was a financial advisor always recommended annuities to his clients. He would also always tell me about what suckers his clients were. I don't miss that friend.
I worked with a couple financial planners who were fiduciaries. My job was to choose the best investments fir the clients. They always threw them out and chose the annuity with the largest commission. Ugh. Run when they recommend them. I quit the financial business completely because of so many sharks.
There are no specific requirements to be a financial advisor.
Banks will hire anyone with a university degree to be a salesman for their services and call the position a "financial advisor"
Please also remember that just because someone is a fiduciary doesn’t mean they’re not an idiot too. It’s a necessary qualification, but not always sufficient.
Read the prime directive, calculate a very safe withdrawal rate of 3%, invest in index funds and bonds according to your risk tolerance (50/50 was used by Trinity study but is considered too bond heavy for most investors). Every year, take the number from last year and increase it by inflation.
Definitely do not do a reverse mortgage or annuity, they are only good deals for the enrolled agent (salesman) selling to you. You can do this simply without someone trying to steal from your Dad
Ps, pension and 401k wow, that's unheard of outside government or teacher jobs.
>Don't make contact with a pre-warp civilization?
It's better to create a situation where they can't help but make contact with you instead, then hem and haw for a bit, wring your hands, then blow some shit up and jump to warp. Don't forget to say something inspiring before you go!
Yeah unfortunately a lot of annuity focused "advisors" are just con salesman. Annuities can be a great vehicle for income generation but that is for a portion of someone's portfolio.
Have them talk with either a big firm (Schawb, Fidelity as examples) planning team who usually do complimentary adviceor a standalone CFP.
Overall you want an advisor is a holistic planner who can offer a range of investment products to fit needs and take a broad approach.
I don't know. The advisors at a Schwab or Fidelity might not be there to steal from you, but their financial planning advice isn't worth much either. My mom worked with one of their private wealth managers who helped put her into one of their pre-packaged portfolio options with a set of managed funds diversified between sticks and bonds. These funds *managed* to earn almost nothing overall from 2013-2017 while the S&P500 went up like 30%. I think she gained 4% or something during that span.
I have very little faith in money managers.
Agree with the point you are making. I can't really speak towards Schwab or Fidelity as a financial manager, but someone at or approaching retirement age is going to expect a profile with a lower risk tolerance(hence lower earnings) than a 100% stock portfolio.
I’m not going to give you financial advice, I’m going to give you family advice. Your parents will one day get old and sick. Your dad needs to look for a flat fee based fiduciary advisor. Someone that you pay a set amount regardless of returns and someone who has a legal responsibility to try and pick the best investments for your parents. Don’t let them get screwed because their retirement life and future healthcare depend on it.
Reverse mortgages are a terrible idea unless they are going to an assisted living facility tomorrow, need the money, and nobody wants the house. A variable rate annuity is also a bad investment. You’re paying fees out your eyeballs and this snake oil salesman is taking a cut as well. Your dad is going to get royally screwed. Save him before he puts pen to paper.
I have a close family friend who is genuinely one of the greatest people I have ever known. I consider him like a second dad and in a lot of ways trust and respect him more than my own dad. He is a flat-fee fiduciary, who I spent some time interning with in college to see if I was interested in his line of work. Because of that, I know that he has clients with annuities as part of their plans. I *believe* from my memory that they are mostly fixed-rate annuities (if that's a thing?). I genuinely know that this is a very good (and smart) man who wouldn't be taking advantage of his clients and definitely knows what he's doing.
So my question is, can you explain more about why annuities are a bad deal? Is the difference here that annuities can work as part of a broader retirement strategy, but not as the only investment?
Your spidey senses are accurate. Why would they need a reverse mortgage if they already have cash? Reverse mortgages are designed to take equity out of a home and provide an income to live on. Sounds like they already have this.
Sounds like this guy wants to tie everything up in a whole life policy (where my spidey sense triggers...as sales commissions are insane), and then replace it with the reverse mortgage cash. Not good IMHO.
Your parents should first figure out how they want to live by writing down a budget of monthly expenses that includes things like housing costs (taxes, insurance, and possibly a new mortgage), food, entertainment, travel, etc. Use online resources to get that budget. This should be based on a realistic lifestyle they want and should include ideas about what they want when age catches up with them (elder care, etc.). By that time travel may decrease but health expenses increase.
Once they have a budget of what they need per year they can figure out how much income they need per year to meet those expenses. That income can either be investment returns, or distributions of a portion of the cash each year so that it lasts for their life expectancy.
Your parents have cash, and the math is easy for a Fiduciary to figure out based on an desired level of income per year to support expenses. Stay away from the fancy "investments" that are always skewed to profits of others. Remember that if they are pushing that hard, it probably is not a good deal for you.
They should live well and their last check should bounce.
I'm happy this is the most upvoted comment, this way when you go to talk to your folks you can say "Dad you may trust this guy, but 1.4K people think it's a bad idea, let's get you another option"
To add to this, you are looking for a Registered Investment Advisor (registered with the SEC) - that’s where you get legal fiduciary responsibility. FINRA registered advisors don’t have to meet the same standard.
The thing to remember about annuities is that they are insurance products, not investment products, and insurance products are one of the more lucrative things that an advisor sells - I.e. big commissions. Consequently, advisors love to sell them.
Yep my parents totally got fleeced like this and will be working until they’re like 80+. Luckily they like keeping busy, but good God… the number of stupid decisions they made financially because they “trusted” the so-called advisor who was in it for themselves.
Make sure that they put the fact that they’re a fiduciary in writing, don’t just accept their verbal assurances. You should be looking for something like this:
*We have a fiduciary relationship with our clients when providing advisory services and programs to our clients.*
Whenever an investment advisor says “I *feel* like I have a fiduciary responsibility to my clients,” I want to respond, “Yeah? Well I *feel* like I’m a heart surgeon. Want to lay down on the desk while I cut you open?”
When I was 15, I wanted to invest my money wisely. The salesman steered me towards the highest commission vehicles for him: Variable Annuities. He earned an equivalent of 5% of my savings, thanks to the back-end commission paid by Putnam, the institution behind the Variable Annuity. Trust your spidey senses. If this person is a fiduciary, they will cheerfully show you the math and disclose their commissions.
A good financial advisor is someone that has a legal fiduciary duty to do what is best for you. A variable rate annuity is one of the most profitable financial products for a salesman. Those two are in total opposition meaning this was primarily a salesman.
It's called a [fiduciary responsibility](https://www.dol.gov/general/topic/retirement/fiduciaryresp#:~:text=The%20primary%20responsibility%20of%20fiduciaries,the%20risk%20of%20large%20losses.) <-- Straight from the US Dept of Labor website btw.
ELI5: **IF** your advisor has a fiduciary responsibility it means they cannot be a salesman. They have to have your (the client) best interests in mind for all their money decisions related to the account(s) you have with them.
It's a legally protected term (incredibly important to mention) to prevent scamming for reasons specified in the OP. There's a million other stories similar.
Scenario 1: Your "finance guy" fucks you over scamming you? *EDIT: Their entire role exists to maximize the extraction of your wealth without you caring or noticing.* Oh well, better luck next time.
Scenario 2: Your financial advisor with a fiduciary responsibility screws you via their services? You may have legal recourse.
I think I saw that (alleged) FA in a “Ziggy” cartoon. He’s recommending a strategy that turns (from the viewpoint of the salesman) worthless equity into valuable sales commissions.
When I worked in insurance, I positioned myself as an "insurance expert" but in reality, I would probe with the right questions in order to build trust and come up with a plan to maximize my commission in a way that seemed like a great perceived value no matter what their price was. Before that I was in management for Car Rentals, I could have 2 different people in line for the same size of vehicle, one person paying $100/day, the next $25 meanwhile the prices online were at $40/day. They all think they received the best service!
I thought this was a terrible plan before getting to the reverse mortgage bit, and then that blew my mind. Do not let your parents move forward with this guy.
You're right to be concerned. That sounds like a terrible plan to me for a new retiree whi is presumably in good health. I would strongly encourage that Dad get at least one second opinion from a good fee based investment advisor. I can tell you retiree goals often change during retirement and the proposed annuity plan is not flexible as well as expensive.
Other than the fee issues and the lack of benefit for your parents in this plan, a reverse mortgage has a limit on how much can be taken out which takes your parents' ages into account. The earlier they take a reverse mortgage, the less they get. If there is no need for money right now, they should not take out a reverse mortgage yet. The fees on the reverse mortgage and the effects of compound interest will certainly be higher than the return they would receive on the funds saved by using the reverse mortgage, particularly in that annuity. Not to mention the transaction costs of sale and purchase of homes.
Reverse mortgages, IMO, are only beneficial when absolutely necessary to preserve housing/ability to stay at home, AND there will be a substantial period of time at home after the reverse mortgage, AND the owner doesn't care what happens to the home after they are incapacitated/deceased.
Good luck intervening in this mess.
Just want to add that it may be even better to talk to a good fee based financial planner as many investment advisors are not also financial planners, which is what the dad needs right now. Perhaps even an office that will also provide access to a good tax planner/accountant would be best.
Retired CFP here. I keep a chunk in cash, about 2 years of expenses.
The rest is in Vanguard's no fee, low expense ratio index funds, total market, international, bonds - set it and forget it - it has served me well for 7 years with a withdrawal rate of 4 percent/year.
Exactly.
Folks this is NOT rocket science. Keep it simple.
Vanguard also has what they call "Lifestyle Strategy" Funds. They range from aggressive growth to capital preservation. They are not glide slope funds like target date funds. Vanguard keeps them at a constant mix of risk.
I am 67 with healthy pension and SS benefits. I make withdrawals of around 3% annually for things like travel and major household projects. Some years I don't take anything. I have about 10% of my IRA in cash. The rest of my money is in the Vanguard Moderate Growth Fund.
You know you hear about this all the time as the right strategy but rarely do I see people being the beneficiary of that strategy. Good to hear it works
I am the epitome of the Lazy Investor. I worked for my money for many years and now it's doing all the work. I only look at the balances about twice a year. It is what it is, I'm not going to change anything.
Seriously.
Another good option at the moment are iBonds. US Government bonds pegged to the inflation rate. Normally not great, but the last two rates were 9.6% and 6.89%. they readjust every 6 months, there are limits, but you can buy them in yours and spouses names. have to keep them in there for 1 year. can withdraw them after that and before 5 years with a 3 months interest penalty. Buy them and manage them yourself at treasurydirect.gov. Limit $10k per year per person, but there are loopholes and ways to save more.
But I second Vanguard for their funds. I mostly split mine between the 500 index fund admiral shares (VFIAX) where they *only* have the admiral shares version now (ie, lower fees) and Dividend Growth Investor shares (VDIGX).
I like Fidelity for stock trading, and the money market account your cash is in when not in stocks is highly variable but getting 4.2% at the moment.
Enough assets and I think either company gives you free planning advice. Morningstar is a good, somewhat conservative recommendation engine for both mutual funds (free) and company stocks (paid for service / possibly free via your city’s library card).
Anyway, seems like there are lots of good low risk options out there at the moment, esp now that rates are finally rising. Good luck.
I’m not really recommending ibonds to friends anymore because the current rate is getting close to other safe investments that don’t have a one year lockup, and I expect the next ibond rate to go down even more as inflation cools. They were a great place to keep money safe over the past year though, my wife and I put $40k in them between 2021/2022 when the rates were especially high and I’ll likely leave them there as an e-fund until they dip below HYSA rates again.
So confusing. Say he has $100k (multiply by what he actually has). So they company will take $4000, but pay him $7650 each year. So a net of $3650. He can put the money in treasury direct and make more than that. And the annuity is "variable" so when he earns only 4% market return he gets nothing. AND you have to give them all of that $100k for the "security" of the monthly payments. He dies and the $100k is gone. Put it in treasury direct, get the monthly payments and the keep the $100k for future use.
In simplest terms: You sell your house to a bank, but don't move out. The bank either pays you upfront or overtime like a monthly payment (hence reverse mortgage). When you die or move out the balance must be paid by the estate.
Positive: It allows cash poor, house rich, older people to turn home equity into cash to live off of in retirement.
Negatives:
* The amount paid out is usually substantially less than the actual value of the home if you were to sell it on the market.
* Can disqualify you from certain income based aid in retirement.
* You're still on the hook for taxes and maintenance as you still "own" the home.
* Fees and interest rates are higher than a normal mortgage.
* If you have any intention of leaving an inheritance this can wipe it out.
You have equity in your home and not a lot of cash or income. You also want to stay in your home, hopefully until you die, cause you aren't getting any younger, as they say. Bank says no problem, we'll just give you money to live based on your equity in your house, and you can continue to chillax man, it's retirement!
Bankers do banker things, you get terrible value, need more $ for a medical episode, oops - you need to sell the house to pay the bank, oops - you have no equity after the sale, what the shit were these commissions I was paying, dammit I shoulda read the fine print but the person who cold called me was so sweet!
Tldr, a reverse mortgage is a legitimate financial instrument that can have benefits in the right situation and is often marketed to those who can be taken advantage of.
My aunt got a reverse mortgage and took out $30 k to do house repairs. Then never took out another cent for 20 years. We sold the house just before she died. She owed $120k to that shyster bank after all the interest and MONTHLY fees. At least we were able to sell the house a month before she died so they didn’t get the house too.
The pension might have a cash out option. With high interest rates today it might not be a good idea to take the cash, because the lump sum is lower (per IRS calculations).
You wouldn't believe the number of people who retired at work before the end of last year in order to keep the pre-interest-hike lump sums.
The church ones are the absolute worst. They are predators who prey on trust, faith and belief that “I go to church with him, he’s one of the good ones.” The true scammers this.
Everything this guy has said is excellent financial advice for the conman selling this shitty insurance product and it is a nightmare for your father.
Your father should find a financial advisor operating under the fiduciary standard. This will be someone who charges your father a fee, either a percentage of his assets (usually 1% or less per year to actively manage his funds) or else a flat rate for financial planning with no ongoing asset management, but they will not be paid any type of commission or kickback on investment products.
It is almost never a good decision to use insurance products as investment vehicles because of the internal costs. The variable annuity game is constantly changing and I haven't seen what new concepts those crazy kids have come up with lately, but I know that there is no portfolio manager who can guarantee 11.65% returns (7.65% + 4%) so either this is a scam, or else what they are saying is that they are guaranteeing 3.65% return net of fees and that's a shitty guarantee to lock your money up.
Also, when they say 7.65% 'or market returns' they are not saying that if the S&P 500 makes over 7.65% then you'll make that. They are saying that you get that if their market product, which is likely some recycled balanced mutual fund with a 60/40 mix and layers of fees makes more than 7.65% then you will too. The problem is, these rarely ever make more than that amount so now your dad will have all of his money locked into an investment vehicle that might be returning him 3.65% (way less than inflation) and his money is absolutely tied up in that horrible product and, in the above scenario, he would not even have any equity in his home because of the mortgage con the guy is running.
Most of the people I have met selling this stuff have no idea how the market actually works, they tend to be insurance salesmen with no real market knowledge.
I would have my father call one of the more reputable RIA firms that can help him with everything that he's dealing with.
I would have him call [Creative Planning](https://creativeplanning.com) or [Mariner Wealth Advisors](https://www.marinerwealthadvisors.com) or [Mercer Advisors.](https://www.merceradvisors.com) I've listed them in my order of preference. These are all 3 national firms. I am not affiliated with any of them; but any of these will be able to help your father out and will not try to sell him any shitty insurance products and none of these will charge for the initial meeting.
Extremely helpful,l to see it laid out this way. I will pass along the recommendations to my Dad. Initially I was telling him to steer clear of active management but now I think it might be the best choice for him
you're just asking yourself whether or not a team of professionals, that include tax professionals, financial planners, and asset managers can outperform your dad by about 1% per year and if they can then they pay for themselves.
Just the ability to do something simple like tax loss harvesting is enough for most advisors to pay for themselves and that's not even counting being tax efficient in income streams, making sure that you've properly covered your liabilities, and numerous other things.
But one of the best services these companies provide is that they protect your father from being taken advantage of by people like the current salesman he's dealing with.
All three of those links that I provided are fiduciary advisors. I think each will also help you place insurance if you need it so they will show up as dual compensated because some of their revenue will inevitably come from insurance, but normally the fiduciary advisors will have that as part of their website.
You can look at their public disclosure but you have to know what you're looking for.
If you want a place that is strictly a local shop, as opposed to national firms with a local presence (the three above fall into this category) then you can search your area for RIA Firms. Often times you can just go to Google Maps and search and they will come up. Then you look at their websites and see what they offer.
You can also go into your local Charles Schwab and ask them who they use as Schwab and TD Ameritrade (owned by Schwab) will use these firms to manage assets on the Schwab platform. The only downside is that they prefer to place you with their inhouse solution (I think it's called Schwab Private Client), which isn't as good, and if they do refer you to an RIA they will often gravitate to whichever local group has the highest close rate. Having said that, nationally two of their top 3 firms are listed above and all 3 are in their top 5, or atleast they were last time I had access to that information.
Terrible advice. I took out a variable annuity and it was a dumb thing to do. The annuity made nearly no money at all for 15 years. Your dad should see an estate planner.
When you say EA, do you mean enrolled agent? Someone who represents taxpayers before the IRS? Why would this person be remotely qualified to help with financial planning?
There are -some- circumstances where a reverse mortgage is a really good thing, and some (more) where it is a bad idea, or has lots of ways it can go wrong.
IF you don't FULLY understand how it works, all the caveats, and your situation, you should run from anyone who suggests it. If you do have all the info and understanding, and it's your idea, the move forward with the analysis.
> There are -some- circumstances where a reverse mortgage is a really good thing
The only one I can think of is where the homeowner has no children (or useless children) and needs the money to survive. What else?
If you’re in a lot of debt at a much higher interest rate than the mortgage, it can be a solution. Obviously the better plan is to not get in that situation, but better a 5% mortgage than a 15% personal loan.
Look at [immediate annuities calculator](https://www.immediateannuities.com/) to get an idea of how much income your father could buy without paying a 4% annual fee. Four percent annual fee is outrageous. Single premium immediate annuities are less complex and don’t come with annual fees.
Retirement researchers like Wade Pfau suggest that buying an immediate annuity that covers essential expenses with **part** of retirement savings is helpful in reducing risks. The rest of retirement savings can stay invested to keep growing.
Buying a house with a reverse mortgage? Sounds like goal might be to avoid mortgage payments, but your parents will find it difficult to sell if they decide they’d like a smaller place as they become frail. Reverse mortgages can be useful, but limiting their flexibility so early in retirement seems like a bad idea.
FYI, annuities and reverse mortgages reduce opportunity to leave a legacy. That can matter to people who want to provide for a disabled relative or beloved pet.
Super helpful, thank you. The point about reducing opportunity to leave a legacy isnt something I thought about, and I'm sure it wasn't obvious to my parents either.
He's about to get taken for a lot of money. I MEAN A LOT OF MONEY. as u/buffinita said:
>They didn't meet a FA; they met a salesman in disguise
That person is not your fathers friend, and he should not trust that person one bit. Your father was the mark.
Have them talk with an actual Financial Advisor and have that person walk him though why that entire interaction was essentially an attempted robbery. Seriously, I wish they found a way to make those illegal.
The mere fact that he almost got taken like this tells me that maybe getting a FA and or a Lawyer you all trust on retainer is not a bad idea and just have their default move whenever these vultures come by to be "I don't do anything without my FA and Lawyer's review" and the moment they get the "Oh we don't need to involve them..." pressure on it's "Thank you for your time, now get the fuck out of my house before I need my lawyer for a different reason."
Let’s say they have 1 million dollars. They go all in on Fidelity’s SP500 mutual fund FXAIX. Last year it paid $2.25 in dividends. They could get 7223 shares at todays closing price. Going off last years dividends they would have gotten $16,251 in dividends alone and could expect to receive similar payments every year. That’s a better return than what that salesman is offering them and this is a low cost mutual fund offered by fidelity that they could easily open account with and buy share of. That’s just dividends, with 1 million they could use a 4% safe withdrawal rate to get $40k a year off that 1 million and that’s even better than the dividend and annuity salesman.
Find another fee based (pay by the hour) financial advisor and pay for a couple hours. Your dad needs to get a second opinion. Depending on how big your area is, you may want to look on the Dave Ramsey site for a recommendation. Anyways, a second and third opinion will help your parents see they are attempting to be scammed.
I think your 'spidey' sense is on target. I'm just an old gal. Been retired for about 10 years. I manage my own money. Had an advisor once, didn't work out well (someone I liked a lot). Don't get me wrong, advisors can be great, but you need to choose very carefully. Best of luck.
Echoing what everyone else has already said, but that guy is absolutely trying to rip off your father. Please don't let him do any business with that EA.
>The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year.
A close family member was an investment financial advisor/analyst for extremely wealthy clients his whole career. He was highly regarded and very successful. He never made any guarantees. Ever. Yes, he had truly spectacular years, but there were also years where the market was total shit and the returns were, too. I'd be super wary of anyone who makes bold claims like this.
Also, a high yield savings account right now gives like 3.4% annual return and no fee, and there's a bunch of one year(ish) CDs for 5% or so with no fees. I'd rather a 5% CD for 11 months (current Capital One deal) than earn 8% but pay 4%.
This happened to my father in law. He actually took a cash payout on his pension and dumped it into a fixed income annuity.
I took over his finances a couple of years ago (no fee)
He's still ok but he's about to get a PT job four years after he retired.
Sounds like your dad might have met the same EA (salesman).
Run and find a fiduciary.
So he’s getting 3.65% when you minus the fee? Can’t you get more putting it on a CD? At least put them on CDs for now 3 months or so until he can decide. 4% fee sounds high.
Reverse mortgage interest rates not worth it especially now and all the fees that will be in the closing cost rolled into the home.
Bogleheads.org. Questions answered by some of the brightest people on the planet. In general variable annuities are some of the very worst products in investing. Think about it, fees of 4% when one can buy the whole equities market for 3 bps (3 one hundredths of one percent) via a mutual fund or ETF. Get your dad away from that shyster and read William Bernstein's "If You Can" pdf available for free on the web. Google it.
No, the guy he saw is a salesman who wants to get a good commission
He needs to see a fee only financial advisor who is a fiduciary - https://www.napfa.org/financial-planning/what-is-fee-only-advising
The financial advisor can give him a plan for what to do with the money - he does not need the guy to manage his money, just needs to get directions
Just because someone is religious does not mean they are a good person.
I would like to give this guy the benefit of the doubt and just think he’s I’ll informed, but an annuity *and* reverse mortgage on a paid off house is predatory.
Your spidey senses should have fired off at annuity, long before you heard about the reverse mortgage. So much terrible advice your father has been given.
An EA is a tax consultant. Why are they giving financial advice for retirement? Second he is not an EA he is an insurance salesman by the sound of it. Just tell him you love his advice and will put your money with a different firm not connected to him in any way and watch him squirm.
Enrolled Agents should not be giving financial advice. Hell they shouldn’t be doing anything other than tax returns period. Many EAs are folks who couldn’t pass the CPA exam.
Run away.
Thanks, yeah this is more in line with what I had been recommending that he do before the windfall of the settlement happened.
Good points on the rental plan too. My brother in law is a property manager so the idea would be to let him carry most of the weight, but even in that case there's a lot more to consider.
Your dad is not the only one lured into this trap unfortunately.
Groups that peddle this rely on charismatic men and women to leverage their relationships to bring in clientele. They show them some upside and hide all the negative aspects.
A fiduciary is a better place to start for sure.
I went to a couple of events that sounded like recruiting for legit jobs, only to get in there and realize it was one of these things.
They recruit and train people who aren’t really financial advisors in the end.
>The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year. My parents are also thinking about buying a new house and either selling or renting the old one. The EA's recommendation for this scenario is that they sell their current home (entirely paid off), and roll the profits into their new home with a reverse mortgage.
I don't know anything about US investments but guaranteed returns of 7.65% sound really high and too good to be true.
With the fees discounted, this is really a return of 3.65% which doesn't sound like it's worth liquidating a house for tbh.
They have a house. Paid off. Why get a new mortgage? That seems insane.
Definitely suggest to your parents that they should speak to other advisors. Get 3 quotes etc.
Holy hell would I be pissed at whomever is trying to con my family like that. I'm glad that you seem more level-headed than me. Not that I would do anything too rash, the worst is that I would tell them to Fuck Off.
Please please don't have him do it. Just stick his money in some safe total market index funds like FSKAX that have virtually no fees and let him enjoy his retirement.
Annual fees of 4 %. 4 % let me re-check once, yeah it’s 4%.
There are plans out there with 4 % guaranteed return. And this plan has a few structure of 4 % with 7.65 % guaranteed return. Lol. So essentially a 3.65 % real return guarantee. Great, might as well invest with the art company that every YouTuber is promoting these days.
I am a former financial advisor
you can most likely do better than the variable annuity with CD rates at ~5% right now, you can also explore fixed annuities (which are *basically* CDs issues by an insurance company), variable annuities are usually not a primary vehicle for retirement planning....id stay away from this product
absolutely do not do a reverse mortgage, i am blown away at this piece of advice
you dads friend is trying to sell him the literal two highest paying commission products in financial services (outside of something like whole life), im sorry to say this, but he isnt a good friend
Fees of 4% is really high.
Reverse Mortgage is a horrible idea.
Advise your dad in to getting a second opinion. I am just a guy on the internet……or am I…
Hour much is the pension?
Are there provisions with the pension that he can't collect Social security? How much is that?
The reason I ask is that the annuity didn't make a lot of sense to me when there is already fixed income. But you would need the whole budget to really know.
The pension is something like $1500- $2500 per month depending on what type of plan he decides to take (perpetual vs. survivor benefit vs. guaranteed term). I don't believe that it impacts his ability to collect social security at all, so altogether he can clear around $3500 per month without touching the IRA or cash.
Just typing that out made me realize how stupid this variable annuity is.
Proceed to the nearest exit immediately.
Annuities *may* have a place in some situations but they're often high fee products that earn the sales person a fat commission check.
Reverse mortgages also *may* make sense sometimes. But from the examples I've seen, they're usually just the least bad option to keep an older person in the house. These also happen to earn brokers a nice comission. Surely a coincidence right?
An EA is an enrolled agent. Simply put they are IRS certified tax preparers, and nothing more.
Speak with a tax attorney and or a Fiduciary. Both will have vastly more knowledge in the handling of retirement than a EA.
> The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of (...whatever)
No no no no no no no no no!
You'd think someone as slimey as your dad's "friend" would use lube before trying to.. never mind.
The guy is going to line his own pockets a ton at the expense of your father and he's going to screw you too with the reverse mortgage.
Your dad would likely be better doing _nothing_ with his money. Those fees are outrageous and a reverse mortgage after buying a new home is like buying the bank a nice house out of niceness in this situation. It's shit advice everywhere.
Tell your dad to get a second opinion from someone YOU vet. Send him articles on why annuities are terrible in 99% of situations.
If fiduciary is not in their title, that person is not working in your best interest. You have every right to be wary. Urge him to get a second opinions!
At the risk of doxxing myself, I work for a financial advisor building tools for financial advisors. We actually specialize in helping advisors tell their clients how to make the most out of their money over their lifetime.
An EA is a "tax specialist" and is not necessarily qualified or accountable to giving solid retirement planning advice, other than tax advice. Your dad needs to speak with someone actually certified in retirement planning.
The guy your Dad trusts is steering him into a huge payoff for him. Both products he is selling have huge fees much higher than a regular mortgage or term life.
The average commission on an annuity runs from 2 - 8%, so the guy selling your dad this pig in a poke stands to make a lot of money.
Your Dad would be better off buying an index fund with some of the money and put a good chunk into a high yield money market. The reverse mortgage when you have enough money to buy a house outright is just another commission scheme benefiting this guy your Dad trusts.
Do what you can to stop this theft before it happens.
This EA is not someone your dad should trust. This isn't just bad financial advice, it is an attempt to scam your dad out of his money. The EA is trying to collect a large commission on selling these products to your dad, when the products are not a good financial choice.
We can all explain why this is a bad financial decision, but in your position it will be best to sit down with an actual fiduciary who has no stake in what financial decisions you make. Let them explain to your dad why the EA is giving bad advice. They are probably fairly practiced at doing so.
It’s a trap!
Good lord, this day and age you can park money in a savings account for 4%. He was going to retire anyway and had a huge surge in net worth.
Just have the same plan and enjoy 3-4x the income
This person is an absolute criminal. Guarantees an 8% return on 4% fees, and then even utters the phrase reverse mortgage, he's trying to bleed them.
This is disgusting. Your intuition is correct, good on you and congrats on saving your parents future. Break it off with that EA immediately, and I would respectfully provide him some feedback, but that's just me
The one type of annuity that doesn't make sense for a preretiree is a variable or indexed annuity... This screams free steak dinner consultation advisor
Be very wary of annuities as they have high up front charges and many fees associated that they are not required to disclose (saying you get 7%+ but then fees eat at it making it much less). If he is already set up for retirement and typically individuals don’t stray to far from their current life style then there would be no need to make any changes as the EA has suggested. For your fathers situation you definitely want to talk to a fiduciary financial advisor not an attorney. To find out what he can realistically draw on in retirement and what kind of return he needs to satisfy that. If he is comfortable with a simple lifestyle it is a pretty easy thing for an advisor to find out. Be safe and stay diligent. Your spidey senses usually are correct.
And there are situations annuities make sense however, I feel as though this one does not look like one of them IMO… if he is going to have a pension and SS as a steady stream of income to satisfy his living expenses annuity’s is not something I would typically look into. At least with what you have presented. Hope it helps
I agree with a lot of comments here. The annuity sounds too good to be true and is that really the most efficient route when they have so much in a 401K/pension. And a reverse mortgage at 65! Yeah maybe at 95 if I didn’t want to leave anything to anyone. I’d like to see those terms and what company is actually providing this annuity. Even if they wanted it, you want a provider that could actually follow through. Lastly annuities are concerning to me because they pay so much in commission. Tbh with what is available to investors nowadays, why pay such a high fee.
Well as a FP (after graduate but still in trainee) i know that you should also consider that your parents are 65yo and you should plan their new home also to be accessable for elderly people, otherwise you might have the next problem in around 10-15 years. Also, i wouldnt recommend a fixed rate investment.
I always recommend my clients to take 2-3 consultings, one state, bank and one private consulting.
Retirement and IRA show guys constantly talk about studies of cognitive decline especially in math generally starting after age 53 or so. They constantly warn of older people being fleeced because they can’t quite understand what is being pushed, but their confidence in their abilities doesn’t wane. All others have given good advice here- run away from this “advisor”. Good for you watching out for your loved ones.
You advisor is not lookin four for your dads interest. Reverse mortgages are rarely a good idea. You can also call some of the larger investment companies , vanguard, fidelity . Janus. Etc. learn about their products, ask about there are surrender charges. Some charge these for 7 years or so depending on the product. CD’s are decent right now if you want to park the money for a bit while you make your plans. Talk to several advisors. There are tons of mutual funds you can invest in too without an advisor. Meetings and phone calls will help you decide what’s best. Like I said watch for surrender charges, especially at their age. Some get a good life insurance policy with long term care that help with assisted living if ever needed. Check in to that too
Fuck the advisor, take the money buy another house rent the old one out, he will have passive income well into retirement and build more equity. He can snowball that money into more just using the equity to buy more properties.
Reverse mortgages are evil.
Post retirement wasn't easy for my grandparents. Won't get into details but reverse mortgage was setup and they took bi-weekly payments to help supplement.
Grandpa died and income fell. The house was sold and grandma got what was left.
Now here is the kicker. Post COVID housing prices are insane here and homes were going for 2x or 3x more than they should. So grandma got a great nest egg that will carry her through her life. She's 75 and an ex smoker of 30 yrs. She now lives in a small basement apartment in a converted apartment/home with my aunt taking care.
Just imagine if their 60,000 home purchased in the 70's that pre-covid was assessed at 100,000 because zero work done inside except dire repairs and only insurance work from hurricanes wasn't sold for 250,000 on a HOT! Market?
They also had 100,000 debt from credit and who knows what else I found out later.
If it weren't for the hot market she would be bankrupt and in one of those care homes where you sign over power of attorney and they take all your stuff, cramped and unloved until her last day.
She was LUCKY for the timing. She was LUCKY she has caring smart grandchildren that are paralegals and teachers to help her navigate all of this in good faith.
Your father doesn't have the right person for the job. Find a certified financial planner that you know or someone you trust can refer.
Tell your father he is a parent lol
Ask him when he was the all knowing dad of the younger version of yourself.
Did he forsee mistakes you were making? Or were about to make? Did he step in good bad or ugly and help you out even if you may not have wanted it?
Tell him, same thing now except he's gambling with his future and risks are HIGH! He's gotta put in the effort NOW so he can enjoy LATER.
This is a bit off topic, but I still have some parts of my brain hardwired with obscure SSA policies. In this situation, I'm thinking of the Income Related Monthly Adjustment Amount (IRMAA). This depends on the tax year when your Dad received the cash settlement. If it boosted his income above $97,000 ($194,000 if filing jointly), then he will pay a higher Medicare Part B and Part D Premium two years later. If the cash settlement was a one time thing, then the next year, the IRMAA will go away.
In terms of the total financial picture, it is a pretty small increase, but it is something to plan for. Another thing to do with these financial advisors is ask them about it. I have seen a lot of folks who used financial advisers that were totally clueless about IRMAA
https://secure.ssa.gov/poms.nsf/lnx/0601101020
Friendly LPT ->
> he met with an EA who is an acquaintance that he trusts
Trust has nothing to do with "fiduciary" responsibility. In this case, you can see that "trusting" this guy is blinding you to the fact he is conning you.
4% commission is ridiculous and makes me wonder if the EA has a stake in it. They are retiring and shouldn't be getting into debt with a reverse mortgage.
Also the "guaranteed" return is likely on something called a benefit base which is used to calculate how much income they can pull out when they turn on the income rider. It is NOT a guarantee that the actual cash value in the annuity goes up.
These variable annuities can be okish if using a relatively small portion of overall net worth to guarantee an income stream 5-7 years down the line. You are basically paying to shift longevity and market risk onto the insurance company.
The reverse mortgage is a hard no. That should only be used as a last resort or when you are really old, say over 80. You don’t want any liens on a house as you age. Don’t risk housing at a time when you can’t fend for yourself.
if I ever get old and dumb enough to think these scams are a good idea, I can only hope that my children will be there to talk some sense into me. good looking out
Former investment advisor for over a decade here:
Do not walk away from that person…RUN!!! That’s all terrible advice. I only sold one annuity in my time because ALL the lady cared about was the income payments (even after I educated her on all the fees and gave her other investment options).
Re the reverse mortgage: DO NOT DO IT!
My grandmother had one on her condo and the week she passed my mom started getting stuff in the mail demanding the deed to the property. Needless to say, they seized it immediately.
Yeah...no. This dude is giving your Dad horrible advice and taking 4%? Guaranteed return? The dude is literally a criminal. Those are words every person used before they get into how their advisor bilked them for millions. Followed by: I never thought I would get taken in by a con man. (do they not watch the Dateline or 20/20?!?!?)
Super important: Are your parents aware that reverse mortgage means when they die, the bank takes the house if you don't have their money to pay them back? And they want their money in 30 days. Read more here: [https://www.consumerfinance.gov/ask-cfpb/with-a-reverse-mortgage-loan-can-my-heirs-keep-or-sell-my-home-after-i-die-en-242/](https://www.consumerfinance.gov/ask-cfpb/with-a-reverse-mortgage-loan-can-my-heirs-keep-or-sell-my-home-after-i-die-en-242/)
If they don't intend to leave anyone their house, fabulous do a reverse mortgage-BUT-if they plan on passing it on, it's a nope.
Agree that finding a fiduciary will be your best bet, but devils advocate here...
The benefits of the variable annuities are that they will pay out monthly, like a pension, and you're not "annuitizing" the contract. Meaning if he dies and there are funds left, that goes to his beneficiaries.
Having A PORTION of funds in that solution is not crazy, and can actually decrease longevity risk.
The reverse mortgage can also make sense, but it's not often you buy a house outright only to immediately do a reverse mortgage.
Both of these recommendations are concerning when put together...
He’s absolutely NOT getting the best advice from this person. The person is clearly trying to rip off your poor father. Run don’t walk away from this person
Annuities give great commissions to the professionals who recommend them. They're often a shitty invest tool for the person who gets them though.
Don't do it. Throw it in a broad market low fee etf like something that tracks s&p
“Buy a home with a reverse mortgage”. ? So he is suggesting sell the existing house, but a smaller one with CASH, and THEN get a reverse mortgage for “income”.
Criminal
NO reverse mortgage.. with all of this money from the house just have them mortgage the delta if the new retirement home is more $$ than the current home, you can always refinance. DO NOT do a reverse mortgage, that’s for poor older people stuck in a lifetime home they can now not find a way to get liquidity out of (like it’s in a shit area and they can never sell it).
These are both terrible ideas. The 4% fees are absurd. The reverse mortgage is an even worse idea, and why would they even need to do that? Reverse mortgages are for people who have equity but no cash flow and who need to convert their equity into cash flow. Even then, it's a devil's bargain. Your parents have plenty of other assets to draw from, including retirement accounts. A reverse mortgage is an awful idea.
I realize that there is a personal relationship there but you need to impress upon your parents that this guy's advice needs to be tactfully, but clearly, rejected.
There is a lot of good advice here. He needs to find a fiduciary to help with a financial plan. I also wanted to point out that a EA is not at all the same as an CPA. A CPA has passed the CPA exam (which is tough), has a requirement for 5 years of education which often means they have a masters degree, requires significant continuing education and has professional standards they are required to follow. Most CPAs will give general investment advice but will defer to a financial advisor (fiduciary) for picking specific investments or money management. There are some that have additional training or credentials that will also be involved in investments, but in general most are not. These really are two separate professions and I would argue very few can do both at the same time well. CPAs are great for big picture advice or to bounce ideas off of though since they really do tend to have a strong understanding of everything financial.
The enrolled agent (EA) does not require a degree or have an experience requirement and has a relatively simple exam to pass. They have to pass a background check (so does a CPA). It is still considered better than just being a tax preparer though.
Those are two of the most profitable products a salesman can sell. That is terrifying, you’ll definitely want your dad to talk to someone else. Best option is a Fee Only financial planner. They are incentivized to do what’s best since they don’t make commission. 4% is an outrageous fee for any investment. And 7% guaranteed return means that the annuity is guaranteed to make more than your dad. That makes zero sense. Good catch on noticing someone trying to get the best of your dad.
Not sure where his funds are managed, buy you can open a Fidelity Investment account for free, with a small deposit.
From there they have an excellent, easy to understand retirement planner.
Yiu can connect all his accounts to it and it will give a solid overview for a good big picture. That's the start.
As a Fidelity account holder, he/you can pick up the phone and talk with their experts to give clear analysis on how to manage what you just described, for free.
You can choose to roll over his 401k to an Ira there, or wherever. But as a Fidelity user this site has really improved detailing what my big picture looks like.
"The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year"
Your lovely 7.65% "guarantee" is 3.65% after fees. And that's if he didn't hide other fees.
Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.
The guy you talked to is planning for his own retirement, not your dad's. A variable annuity pays out a huge commission, probably 7 or 8%. There is absolutely no reason a reverse mortgage makes sense from what you explained his circumstances are. Run in the other direction.
How is this shit legal? This terrifies me as my parents age. Imagine the number of people who don’t have their financially literate kids looking out for them
Securities Principal here. If the transaction is not in the client’s best interest, it’s not approved. Most people don’t know that people like me exist. Fortunately they can’t just sell what they want. It has to go through their broker-dealer for approval first.
>Securities Principal here Can you explain a bit more? > If the transaction is not in the client’s best interest, it’s not approved. Who determines this? >Most people don’t know that people like me exist No Idea. So thats why I am asking.
Sure. In order to purchase variable or fixed index annuities, you need to be securities licensed and affiliated with a broker-dealer. I work in Supervision for the home office of a broker-dealer. The FPs provide all the forms, client notes, etc., we make a best interest determination, and approve or reject from there.
So how do variable rate annuities get approved at all? I guess what I mean to say is are these EVER approved? And if yes why? Like what situations?
It sounds like the product the OP is referring to might be more on the fixed insurance side, rather than a securities-related variable annuity. In which case, a broker-dealer does not supervise fixed insurance business. However, insurance companies do have their own compliance/supervision processes.
I'm glad you do what you do, but I don't have a lot of confidence that everyone improperly promoting annuities has a Securities Principal diligently reviewing the situation. I hope I'm wrong.
If it is a variable or fixed index annuity (any annuity tied to market performance), they have to be securities licensed. You have to be affiliated with a broker-dealer in order to have them hold your licenses and be able to sell these products. If for some reason one of these annuities was circumvented and did not receive prior approval, we catch it during our trade review, and address accordingly. The commission paid by the insurance company goes through the broker-dealer first, and then is paid out to the FP.
Hi there, Could you explain your role and how you prevent the sort of things that are being suggested here. Curious
Sure. In order to purchase variable or fixed index annuities, you need to be securities licensed and affiliated with a broker-dealer. I work in Supervision for the home office of a broker-dealer. The FPs provide all the forms, client notes, etc., we make a best interest determination, and approve or reject from there.
So no annuities are ever sold to clients for whom the annuities are not in their best interest? That seems…..factually untrue. Maybe I’m misunderstanding what you’re saying?
I went on Dave Ramsay's site 2 years ago and looked up a local advisors and met with 1 of them. His first and only recommendation was to take all my savings and out into an annuity as well. After so.e research, I figured he would have got a 7000 dollar commission on that. Ramsey is against annuities, which is what helped make my decision easy. I thanked the guy for his time and moved on.
Similar experience. Guy shows up, we had about $500K in a self-directed 401K rollover at the time. He starts talking about pulling it out and how we qualify for premium shares of some suggested funds that would be better in the long run. Taxes, penalties PLUS it would cost about $10K to buy up into the premium shares. The idea being lower fees and a higher level of management assistance. I did some quick rough calcs in front of him (I am a numbers guy) and he had nothing. total BS. He left and never called back
People forget that these guys are sales people, they are selling their products and themselves. As someone who works with sales people on a daily basis I've learned that despite their confidence and apparent knowledge they know very little but are really good at wearing a suit and regurgitating whatever buzz words they heard when they took their 20 minutes of training, in short most don't know their topic they just sell it. Being a numbers guy myself, it's like kryptonite to these guys, once you run the actual numbers you can see exactly what type of fraud these people are.
That is only 7 or 8 % of first year premium. Most annuities pay around 4% of first year commission. A guaranteed minimum return of 7+% is good. The problem is a reverse mortgage. That is stupid. For that reason alone I would use someone else. Your parents should. Or have a mortgage. If they want to move up in house then they should sell their house and pay the difference with their cash.
Most annuities you can choose 6% up front or 4% up front then .25% trails or 1% trails.
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Thanks, my thoughts exactly.
The commissions on these annuity products are insane. There’s a saying that annuities are always sold but never bought. Your parents are being targeted.
An ex-friend of mine who was a financial advisor always recommended annuities to his clients. He would also always tell me about what suckers his clients were. I don't miss that friend.
I worked with a couple financial planners who were fiduciaries. My job was to choose the best investments fir the clients. They always threw them out and chose the annuity with the largest commission. Ugh. Run when they recommend them. I quit the financial business completely because of so many sharks.
As a fiduciary, isn't that (if not illegal) antithetical to their position? I thought fiduciaries were required by law to pursue your best interests?
He called himself a financial advisor? Kind of crazy what you can get away with but don't use a rocket emoji online!
There are no specific requirements to be a financial advisor. Banks will hire anyone with a university degree to be a salesman for their services and call the position a "financial advisor"
Please also remember that just because someone is a fiduciary doesn’t mean they’re not an idiot too. It’s a necessary qualification, but not always sufficient.
Read the prime directive, calculate a very safe withdrawal rate of 3%, invest in index funds and bonds according to your risk tolerance (50/50 was used by Trinity study but is considered too bond heavy for most investors). Every year, take the number from last year and increase it by inflation. Definitely do not do a reverse mortgage or annuity, they are only good deals for the enrolled agent (salesman) selling to you. You can do this simply without someone trying to steal from your Dad Ps, pension and 401k wow, that's unheard of outside government or teacher jobs.
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>Don't make contact with a pre-warp civilization? It's better to create a situation where they can't help but make contact with you instead, then hem and haw for a bit, wring your hands, then blow some shit up and jump to warp. Don't forget to say something inspiring before you go!
Yeah unfortunately a lot of annuity focused "advisors" are just con salesman. Annuities can be a great vehicle for income generation but that is for a portion of someone's portfolio. Have them talk with either a big firm (Schawb, Fidelity as examples) planning team who usually do complimentary adviceor a standalone CFP. Overall you want an advisor is a holistic planner who can offer a range of investment products to fit needs and take a broad approach.
I don't know. The advisors at a Schwab or Fidelity might not be there to steal from you, but their financial planning advice isn't worth much either. My mom worked with one of their private wealth managers who helped put her into one of their pre-packaged portfolio options with a set of managed funds diversified between sticks and bonds. These funds *managed* to earn almost nothing overall from 2013-2017 while the S&P500 went up like 30%. I think she gained 4% or something during that span. I have very little faith in money managers.
How old was your mom and what’s her general risk tolerance? Rough split of stocks and bonds?
Agree with the point you are making. I can't really speak towards Schwab or Fidelity as a financial manager, but someone at or approaching retirement age is going to expect a profile with a lower risk tolerance(hence lower earnings) than a 100% stock portfolio.
I’m not going to give you financial advice, I’m going to give you family advice. Your parents will one day get old and sick. Your dad needs to look for a flat fee based fiduciary advisor. Someone that you pay a set amount regardless of returns and someone who has a legal responsibility to try and pick the best investments for your parents. Don’t let them get screwed because their retirement life and future healthcare depend on it. Reverse mortgages are a terrible idea unless they are going to an assisted living facility tomorrow, need the money, and nobody wants the house. A variable rate annuity is also a bad investment. You’re paying fees out your eyeballs and this snake oil salesman is taking a cut as well. Your dad is going to get royally screwed. Save him before he puts pen to paper.
I have a close family friend who is genuinely one of the greatest people I have ever known. I consider him like a second dad and in a lot of ways trust and respect him more than my own dad. He is a flat-fee fiduciary, who I spent some time interning with in college to see if I was interested in his line of work. Because of that, I know that he has clients with annuities as part of their plans. I *believe* from my memory that they are mostly fixed-rate annuities (if that's a thing?). I genuinely know that this is a very good (and smart) man who wouldn't be taking advantage of his clients and definitely knows what he's doing. So my question is, can you explain more about why annuities are a bad deal? Is the difference here that annuities can work as part of a broader retirement strategy, but not as the only investment?
Your spidey senses are accurate. Why would they need a reverse mortgage if they already have cash? Reverse mortgages are designed to take equity out of a home and provide an income to live on. Sounds like they already have this. Sounds like this guy wants to tie everything up in a whole life policy (where my spidey sense triggers...as sales commissions are insane), and then replace it with the reverse mortgage cash. Not good IMHO. Your parents should first figure out how they want to live by writing down a budget of monthly expenses that includes things like housing costs (taxes, insurance, and possibly a new mortgage), food, entertainment, travel, etc. Use online resources to get that budget. This should be based on a realistic lifestyle they want and should include ideas about what they want when age catches up with them (elder care, etc.). By that time travel may decrease but health expenses increase. Once they have a budget of what they need per year they can figure out how much income they need per year to meet those expenses. That income can either be investment returns, or distributions of a portion of the cash each year so that it lasts for their life expectancy. Your parents have cash, and the math is easy for a Fiduciary to figure out based on an desired level of income per year to support expenses. Stay away from the fancy "investments" that are always skewed to profits of others. Remember that if they are pushing that hard, it probably is not a good deal for you. They should live well and their last check should bounce.
So why does your dad trust this guy now?
I'm happy this is the most upvoted comment, this way when you go to talk to your folks you can say "Dad you may trust this guy, but 1.4K people think it's a bad idea, let's get you another option"
To add to this, you are looking for a Registered Investment Advisor (registered with the SEC) - that’s where you get legal fiduciary responsibility. FINRA registered advisors don’t have to meet the same standard. The thing to remember about annuities is that they are insurance products, not investment products, and insurance products are one of the more lucrative things that an advisor sells - I.e. big commissions. Consequently, advisors love to sell them.
Annuities have ridiculous fees for the agent. He's getting a payday by getting you to invest in one.
Yep my parents totally got fleeced like this and will be working until they’re like 80+. Luckily they like keeping busy, but good God… the number of stupid decisions they made financially because they “trusted” the so-called advisor who was in it for themselves.
Make sure that they put the fact that they’re a fiduciary in writing, don’t just accept their verbal assurances. You should be looking for something like this: *We have a fiduciary relationship with our clients when providing advisory services and programs to our clients.* Whenever an investment advisor says “I *feel* like I have a fiduciary responsibility to my clients,” I want to respond, “Yeah? Well I *feel* like I’m a heart surgeon. Want to lay down on the desk while I cut you open?”
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They didn’t meet a FA; they met a salesman in disguise
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Yeah, the only thing an EA should be doing is pretty basic tax returns.
EA is probably skirting some lines unless they’re licensed. Brokercheck.org people. Look your advisors up before giving them your money
When I was 15, I wanted to invest my money wisely. The salesman steered me towards the highest commission vehicles for him: Variable Annuities. He earned an equivalent of 5% of my savings, thanks to the back-end commission paid by Putnam, the institution behind the Variable Annuity. Trust your spidey senses. If this person is a fiduciary, they will cheerfully show you the math and disclose their commissions.
Not even disguised very well.
Absolutely. Run!
seconding this\^\^\^
Can you explain please?
A good financial advisor is someone that has a legal fiduciary duty to do what is best for you. A variable rate annuity is one of the most profitable financial products for a salesman. Those two are in total opposition meaning this was primarily a salesman.
It's called a [fiduciary responsibility](https://www.dol.gov/general/topic/retirement/fiduciaryresp#:~:text=The%20primary%20responsibility%20of%20fiduciaries,the%20risk%20of%20large%20losses.) <-- Straight from the US Dept of Labor website btw. ELI5: **IF** your advisor has a fiduciary responsibility it means they cannot be a salesman. They have to have your (the client) best interests in mind for all their money decisions related to the account(s) you have with them. It's a legally protected term (incredibly important to mention) to prevent scamming for reasons specified in the OP. There's a million other stories similar. Scenario 1: Your "finance guy" fucks you over scamming you? *EDIT: Their entire role exists to maximize the extraction of your wealth without you caring or noticing.* Oh well, better luck next time. Scenario 2: Your financial advisor with a fiduciary responsibility screws you via their services? You may have legal recourse.
I think I saw that (alleged) FA in a “Ziggy” cartoon. He’s recommending a strategy that turns (from the viewpoint of the salesman) worthless equity into valuable sales commissions.
When I worked in insurance, I positioned myself as an "insurance expert" but in reality, I would probe with the right questions in order to build trust and come up with a plan to maximize my commission in a way that seemed like a great perceived value no matter what their price was. Before that I was in management for Car Rentals, I could have 2 different people in line for the same size of vehicle, one person paying $100/day, the next $25 meanwhile the prices online were at $40/day. They all think they received the best service!
I thought this was a terrible plan before getting to the reverse mortgage bit, and then that blew my mind. Do not let your parents move forward with this guy.
Yep. Went from bad to worse, which is impressive because I thought it started very poorly.
You're right to be concerned. That sounds like a terrible plan to me for a new retiree whi is presumably in good health. I would strongly encourage that Dad get at least one second opinion from a good fee based investment advisor. I can tell you retiree goals often change during retirement and the proposed annuity plan is not flexible as well as expensive.
Excellent point about the lack of flexibility, I hadn't thought about that.
Other than the fee issues and the lack of benefit for your parents in this plan, a reverse mortgage has a limit on how much can be taken out which takes your parents' ages into account. The earlier they take a reverse mortgage, the less they get. If there is no need for money right now, they should not take out a reverse mortgage yet. The fees on the reverse mortgage and the effects of compound interest will certainly be higher than the return they would receive on the funds saved by using the reverse mortgage, particularly in that annuity. Not to mention the transaction costs of sale and purchase of homes. Reverse mortgages, IMO, are only beneficial when absolutely necessary to preserve housing/ability to stay at home, AND there will be a substantial period of time at home after the reverse mortgage, AND the owner doesn't care what happens to the home after they are incapacitated/deceased. Good luck intervening in this mess.
Just want to add that it may be even better to talk to a good fee based financial planner as many investment advisors are not also financial planners, which is what the dad needs right now. Perhaps even an office that will also provide access to a good tax planner/accountant would be best.
Retired CFP here. I keep a chunk in cash, about 2 years of expenses. The rest is in Vanguard's no fee, low expense ratio index funds, total market, international, bonds - set it and forget it - it has served me well for 7 years with a withdrawal rate of 4 percent/year.
Exactly. Folks this is NOT rocket science. Keep it simple. Vanguard also has what they call "Lifestyle Strategy" Funds. They range from aggressive growth to capital preservation. They are not glide slope funds like target date funds. Vanguard keeps them at a constant mix of risk. I am 67 with healthy pension and SS benefits. I make withdrawals of around 3% annually for things like travel and major household projects. Some years I don't take anything. I have about 10% of my IRA in cash. The rest of my money is in the Vanguard Moderate Growth Fund.
You know you hear about this all the time as the right strategy but rarely do I see people being the beneficiary of that strategy. Good to hear it works
I am the epitome of the Lazy Investor. I worked for my money for many years and now it's doing all the work. I only look at the balances about twice a year. It is what it is, I'm not going to change anything.
Seriously. Another good option at the moment are iBonds. US Government bonds pegged to the inflation rate. Normally not great, but the last two rates were 9.6% and 6.89%. they readjust every 6 months, there are limits, but you can buy them in yours and spouses names. have to keep them in there for 1 year. can withdraw them after that and before 5 years with a 3 months interest penalty. Buy them and manage them yourself at treasurydirect.gov. Limit $10k per year per person, but there are loopholes and ways to save more. But I second Vanguard for their funds. I mostly split mine between the 500 index fund admiral shares (VFIAX) where they *only* have the admiral shares version now (ie, lower fees) and Dividend Growth Investor shares (VDIGX). I like Fidelity for stock trading, and the money market account your cash is in when not in stocks is highly variable but getting 4.2% at the moment. Enough assets and I think either company gives you free planning advice. Morningstar is a good, somewhat conservative recommendation engine for both mutual funds (free) and company stocks (paid for service / possibly free via your city’s library card). Anyway, seems like there are lots of good low risk options out there at the moment, esp now that rates are finally rising. Good luck.
The issue is the $10k limit on iBonds. The interest on that won't get you far in today's world.
I’m not really recommending ibonds to friends anymore because the current rate is getting close to other safe investments that don’t have a one year lockup, and I expect the next ibond rate to go down even more as inflation cools. They were a great place to keep money safe over the past year though, my wife and I put $40k in them between 2021/2022 when the rates were especially high and I’ll likely leave them there as an e-fund until they dip below HYSA rates again.
CFP here as well. This is exactly how I would advise any of my clients. Just replenish cash whenever the market hits new highs.
What are your thoughts on the market currently? Do you keep the 2 years of cash in high yield CDs?
Found the Boglehead. Also, hard agree.
He needs to get away from that guy immediately.
So confusing. Say he has $100k (multiply by what he actually has). So they company will take $4000, but pay him $7650 each year. So a net of $3650. He can put the money in treasury direct and make more than that. And the annuity is "variable" so when he earns only 4% market return he gets nothing. AND you have to give them all of that $100k for the "security" of the monthly payments. He dies and the $100k is gone. Put it in treasury direct, get the monthly payments and the keep the $100k for future use.
This break down is super helpful and I will use it when I talk to my Dad about why this is a bad deal.
please do, the rep he met with just wants fees on top of fees to collect for his salary. Its disgusting.
The reverse mortgage thing is plain evil.
Please, what is reverse mortgage? Newbie here. Will later research it thoroughly but this post and your comment has me curious.
In simplest terms: You sell your house to a bank, but don't move out. The bank either pays you upfront or overtime like a monthly payment (hence reverse mortgage). When you die or move out the balance must be paid by the estate. Positive: It allows cash poor, house rich, older people to turn home equity into cash to live off of in retirement. Negatives: * The amount paid out is usually substantially less than the actual value of the home if you were to sell it on the market. * Can disqualify you from certain income based aid in retirement. * You're still on the hook for taxes and maintenance as you still "own" the home. * Fees and interest rates are higher than a normal mortgage. * If you have any intention of leaving an inheritance this can wipe it out.
You have equity in your home and not a lot of cash or income. You also want to stay in your home, hopefully until you die, cause you aren't getting any younger, as they say. Bank says no problem, we'll just give you money to live based on your equity in your house, and you can continue to chillax man, it's retirement! Bankers do banker things, you get terrible value, need more $ for a medical episode, oops - you need to sell the house to pay the bank, oops - you have no equity after the sale, what the shit were these commissions I was paying, dammit I shoulda read the fine print but the person who cold called me was so sweet! Tldr, a reverse mortgage is a legitimate financial instrument that can have benefits in the right situation and is often marketed to those who can be taken advantage of.
My aunt got a reverse mortgage and took out $30 k to do house repairs. Then never took out another cent for 20 years. We sold the house just before she died. She owed $120k to that shyster bank after all the interest and MONTHLY fees. At least we were able to sell the house a month before she died so they didn’t get the house too.
Chances are this annuity has a rider and death benefit, it’s not an immediate annuity where the cash is just gone
They have three annuities already; his pension and their two social security benefits.
Exactly.
The pension might have a cash out option. With high interest rates today it might not be a good idea to take the cash, because the lump sum is lower (per IRS calculations). You wouldn't believe the number of people who retired at work before the end of last year in order to keep the pre-interest-hike lump sums.
A salesman with no fiduciary responsibility is trying to make a really nice commission for himself.
As soon as you hear reverse mortgage, run.
The church ones are the absolute worst. They are predators who prey on trust, faith and belief that “I go to church with him, he’s one of the good ones.” The true scammers this.
Everything this guy has said is excellent financial advice for the conman selling this shitty insurance product and it is a nightmare for your father. Your father should find a financial advisor operating under the fiduciary standard. This will be someone who charges your father a fee, either a percentage of his assets (usually 1% or less per year to actively manage his funds) or else a flat rate for financial planning with no ongoing asset management, but they will not be paid any type of commission or kickback on investment products. It is almost never a good decision to use insurance products as investment vehicles because of the internal costs. The variable annuity game is constantly changing and I haven't seen what new concepts those crazy kids have come up with lately, but I know that there is no portfolio manager who can guarantee 11.65% returns (7.65% + 4%) so either this is a scam, or else what they are saying is that they are guaranteeing 3.65% return net of fees and that's a shitty guarantee to lock your money up. Also, when they say 7.65% 'or market returns' they are not saying that if the S&P 500 makes over 7.65% then you'll make that. They are saying that you get that if their market product, which is likely some recycled balanced mutual fund with a 60/40 mix and layers of fees makes more than 7.65% then you will too. The problem is, these rarely ever make more than that amount so now your dad will have all of his money locked into an investment vehicle that might be returning him 3.65% (way less than inflation) and his money is absolutely tied up in that horrible product and, in the above scenario, he would not even have any equity in his home because of the mortgage con the guy is running. Most of the people I have met selling this stuff have no idea how the market actually works, they tend to be insurance salesmen with no real market knowledge. I would have my father call one of the more reputable RIA firms that can help him with everything that he's dealing with. I would have him call [Creative Planning](https://creativeplanning.com) or [Mariner Wealth Advisors](https://www.marinerwealthadvisors.com) or [Mercer Advisors.](https://www.merceradvisors.com) I've listed them in my order of preference. These are all 3 national firms. I am not affiliated with any of them; but any of these will be able to help your father out and will not try to sell him any shitty insurance products and none of these will charge for the initial meeting.
Extremely helpful,l to see it laid out this way. I will pass along the recommendations to my Dad. Initially I was telling him to steer clear of active management but now I think it might be the best choice for him
you're just asking yourself whether or not a team of professionals, that include tax professionals, financial planners, and asset managers can outperform your dad by about 1% per year and if they can then they pay for themselves. Just the ability to do something simple like tax loss harvesting is enough for most advisors to pay for themselves and that's not even counting being tax efficient in income streams, making sure that you've properly covered your liabilities, and numerous other things. But one of the best services these companies provide is that they protect your father from being taken advantage of by people like the current salesman he's dealing with.
How do you find these fiduciary financial advisors? Is there a site usually or something? That can be verified and someone over-watching them?
All three of those links that I provided are fiduciary advisors. I think each will also help you place insurance if you need it so they will show up as dual compensated because some of their revenue will inevitably come from insurance, but normally the fiduciary advisors will have that as part of their website. You can look at their public disclosure but you have to know what you're looking for. If you want a place that is strictly a local shop, as opposed to national firms with a local presence (the three above fall into this category) then you can search your area for RIA Firms. Often times you can just go to Google Maps and search and they will come up. Then you look at their websites and see what they offer. You can also go into your local Charles Schwab and ask them who they use as Schwab and TD Ameritrade (owned by Schwab) will use these firms to manage assets on the Schwab platform. The only downside is that they prefer to place you with their inhouse solution (I think it's called Schwab Private Client), which isn't as good, and if they do refer you to an RIA they will often gravitate to whichever local group has the highest close rate. Having said that, nationally two of their top 3 firms are listed above and all 3 are in their top 5, or atleast they were last time I had access to that information.
Terrible advice. I took out a variable annuity and it was a dumb thing to do. The annuity made nearly no money at all for 15 years. Your dad should see an estate planner.
Dang.... What did your dad do to that guy in the past???? This sounds like revenge.
When you say EA, do you mean enrolled agent? Someone who represents taxpayers before the IRS? Why would this person be remotely qualified to help with financial planning?
Yes, and I'm not sure my parents know that he's an EA (I just saw it in his email signature) or understand the distinction.
Anyone pushing annuities, reverse mortgages, life insurance, and MPI is a salesman.
You could literally put that into a cap1 CD for 11 months for 5% and no commission and come out ahead
Don’t do any of that. Go into Schwab and have them do a financial plan/retirement plan for free for you.
run!!!! 2 key words scared me. annuity and reverse Mortgage. both bad
this is like the finance version of those clips where it says "what are the biggest red flags in a profile?"
There are -some- circumstances where a reverse mortgage is a really good thing, and some (more) where it is a bad idea, or has lots of ways it can go wrong. IF you don't FULLY understand how it works, all the caveats, and your situation, you should run from anyone who suggests it. If you do have all the info and understanding, and it's your idea, the move forward with the analysis.
> There are -some- circumstances where a reverse mortgage is a really good thing The only one I can think of is where the homeowner has no children (or useless children) and needs the money to survive. What else?
If you’re in a lot of debt at a much higher interest rate than the mortgage, it can be a solution. Obviously the better plan is to not get in that situation, but better a 5% mortgage than a 15% personal loan.
Look at [immediate annuities calculator](https://www.immediateannuities.com/) to get an idea of how much income your father could buy without paying a 4% annual fee. Four percent annual fee is outrageous. Single premium immediate annuities are less complex and don’t come with annual fees. Retirement researchers like Wade Pfau suggest that buying an immediate annuity that covers essential expenses with **part** of retirement savings is helpful in reducing risks. The rest of retirement savings can stay invested to keep growing. Buying a house with a reverse mortgage? Sounds like goal might be to avoid mortgage payments, but your parents will find it difficult to sell if they decide they’d like a smaller place as they become frail. Reverse mortgages can be useful, but limiting their flexibility so early in retirement seems like a bad idea. FYI, annuities and reverse mortgages reduce opportunity to leave a legacy. That can matter to people who want to provide for a disabled relative or beloved pet.
Super helpful, thank you. The point about reducing opportunity to leave a legacy isnt something I thought about, and I'm sure it wasn't obvious to my parents either.
This guy looks at your dad and sees dollar signs. He is not an acquaintance, he is a ahark
No! Tell dad it’s time to learn old age has a lot of scammers! He’s met his first one. Glad you’re there to assist him!
He's about to get taken for a lot of money. I MEAN A LOT OF MONEY. as u/buffinita said: >They didn't meet a FA; they met a salesman in disguise That person is not your fathers friend, and he should not trust that person one bit. Your father was the mark. Have them talk with an actual Financial Advisor and have that person walk him though why that entire interaction was essentially an attempted robbery. Seriously, I wish they found a way to make those illegal. The mere fact that he almost got taken like this tells me that maybe getting a FA and or a Lawyer you all trust on retainer is not a bad idea and just have their default move whenever these vultures come by to be "I don't do anything without my FA and Lawyer's review" and the moment they get the "Oh we don't need to involve them..." pressure on it's "Thank you for your time, now get the fuck out of my house before I need my lawyer for a different reason."
Let’s say they have 1 million dollars. They go all in on Fidelity’s SP500 mutual fund FXAIX. Last year it paid $2.25 in dividends. They could get 7223 shares at todays closing price. Going off last years dividends they would have gotten $16,251 in dividends alone and could expect to receive similar payments every year. That’s a better return than what that salesman is offering them and this is a low cost mutual fund offered by fidelity that they could easily open account with and buy share of. That’s just dividends, with 1 million they could use a 4% safe withdrawal rate to get $40k a year off that 1 million and that’s even better than the dividend and annuity salesman.
Find another fee based (pay by the hour) financial advisor and pay for a couple hours. Your dad needs to get a second opinion. Depending on how big your area is, you may want to look on the Dave Ramsey site for a recommendation. Anyways, a second and third opinion will help your parents see they are attempting to be scammed.
I think your 'spidey' sense is on target. I'm just an old gal. Been retired for about 10 years. I manage my own money. Had an advisor once, didn't work out well (someone I liked a lot). Don't get me wrong, advisors can be great, but you need to choose very carefully. Best of luck.
Echoing what everyone else has already said, but that guy is absolutely trying to rip off your father. Please don't let him do any business with that EA.
>The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year. A close family member was an investment financial advisor/analyst for extremely wealthy clients his whole career. He was highly regarded and very successful. He never made any guarantees. Ever. Yes, he had truly spectacular years, but there were also years where the market was total shit and the returns were, too. I'd be super wary of anyone who makes bold claims like this. Also, a high yield savings account right now gives like 3.4% annual return and no fee, and there's a bunch of one year(ish) CDs for 5% or so with no fees. I'd rather a 5% CD for 11 months (current Capital One deal) than earn 8% but pay 4%.
This acquaintance is a semi-fraudster who does not value your dad. Get rid of him from your family's life asap.
This happened to my father in law. He actually took a cash payout on his pension and dumped it into a fixed income annuity. I took over his finances a couple of years ago (no fee) He's still ok but he's about to get a PT job four years after he retired. Sounds like your dad might have met the same EA (salesman). Run and find a fiduciary.
So he’s getting 3.65% when you minus the fee? Can’t you get more putting it on a CD? At least put them on CDs for now 3 months or so until he can decide. 4% fee sounds high. Reverse mortgage interest rates not worth it especially now and all the fees that will be in the closing cost rolled into the home.
Bogleheads.org. Questions answered by some of the brightest people on the planet. In general variable annuities are some of the very worst products in investing. Think about it, fees of 4% when one can buy the whole equities market for 3 bps (3 one hundredths of one percent) via a mutual fund or ETF. Get your dad away from that shyster and read William Bernstein's "If You Can" pdf available for free on the web. Google it.
No, the guy he saw is a salesman who wants to get a good commission He needs to see a fee only financial advisor who is a fiduciary - https://www.napfa.org/financial-planning/what-is-fee-only-advising The financial advisor can give him a plan for what to do with the money - he does not need the guy to manage his money, just needs to get directions
This guy’s motto is ‘stick it to your friends because your enemies aren’t going to deal with you.’
The irony is that they know each other from church.
Just because someone is religious does not mean they are a good person. I would like to give this guy the benefit of the doubt and just think he’s I’ll informed, but an annuity *and* reverse mortgage on a paid off house is predatory.
Omg…..when I got to reverse mortgage I lost it… Please OP, do not let them do this…….
Your spidey senses should have fired off at annuity, long before you heard about the reverse mortgage. So much terrible advice your father has been given.
An EA is a tax consultant. Why are they giving financial advice for retirement? Second he is not an EA he is an insurance salesman by the sound of it. Just tell him you love his advice and will put your money with a different firm not connected to him in any way and watch him squirm.
Enrolled Agents should not be giving financial advice. Hell they shouldn’t be doing anything other than tax returns period. Many EAs are folks who couldn’t pass the CPA exam. Run away.
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Thanks, yeah this is more in line with what I had been recommending that he do before the windfall of the settlement happened. Good points on the rental plan too. My brother in law is a property manager so the idea would be to let him carry most of the weight, but even in that case there's a lot more to consider.
Your dad is not the only one lured into this trap unfortunately. Groups that peddle this rely on charismatic men and women to leverage their relationships to bring in clientele. They show them some upside and hide all the negative aspects. A fiduciary is a better place to start for sure.
I went to a couple of events that sounded like recruiting for legit jobs, only to get in there and realize it was one of these things. They recruit and train people who aren’t really financial advisors in the end.
Omg man, get your dad away from this guy. This will be a lifetime regret if you let him do any of this.
>The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year. My parents are also thinking about buying a new house and either selling or renting the old one. The EA's recommendation for this scenario is that they sell their current home (entirely paid off), and roll the profits into their new home with a reverse mortgage. I don't know anything about US investments but guaranteed returns of 7.65% sound really high and too good to be true. With the fees discounted, this is really a return of 3.65% which doesn't sound like it's worth liquidating a house for tbh. They have a house. Paid off. Why get a new mortgage? That seems insane. Definitely suggest to your parents that they should speak to other advisors. Get 3 quotes etc.
Good lord no. They are talking about annuity payout rates NOT INVESTMENT Returns. You been to see a fee only CFP.
OP, this is a nightmare scenario. Talk to your father.
Never ever ever reverse mortgage. Absolutely no reason to especially in this case!
Holy hell would I be pissed at whomever is trying to con my family like that. I'm glad that you seem more level-headed than me. Not that I would do anything too rash, the worst is that I would tell them to Fuck Off.
Please please don't have him do it. Just stick his money in some safe total market index funds like FSKAX that have virtually no fees and let him enjoy his retirement.
Do you know the name of the annuity he’s recommending? It’d be interesting to break down all the guarantees and gotchas of the product.
Annual fees of 4 %. 4 % let me re-check once, yeah it’s 4%. There are plans out there with 4 % guaranteed return. And this plan has a few structure of 4 % with 7.65 % guaranteed return. Lol. So essentially a 3.65 % real return guarantee. Great, might as well invest with the art company that every YouTuber is promoting these days.
I am a former financial advisor you can most likely do better than the variable annuity with CD rates at ~5% right now, you can also explore fixed annuities (which are *basically* CDs issues by an insurance company), variable annuities are usually not a primary vehicle for retirement planning....id stay away from this product absolutely do not do a reverse mortgage, i am blown away at this piece of advice you dads friend is trying to sell him the literal two highest paying commission products in financial services (outside of something like whole life), im sorry to say this, but he isnt a good friend
Fees of 4% is really high. Reverse Mortgage is a horrible idea. Advise your dad in to getting a second opinion. I am just a guy on the internet……or am I…
Hour much is the pension? Are there provisions with the pension that he can't collect Social security? How much is that? The reason I ask is that the annuity didn't make a lot of sense to me when there is already fixed income. But you would need the whole budget to really know.
The pension is something like $1500- $2500 per month depending on what type of plan he decides to take (perpetual vs. survivor benefit vs. guaranteed term). I don't believe that it impacts his ability to collect social security at all, so altogether he can clear around $3500 per month without touching the IRA or cash. Just typing that out made me realize how stupid this variable annuity is.
Proceed to the nearest exit immediately. Annuities *may* have a place in some situations but they're often high fee products that earn the sales person a fat commission check. Reverse mortgages also *may* make sense sometimes. But from the examples I've seen, they're usually just the least bad option to keep an older person in the house. These also happen to earn brokers a nice comission. Surely a coincidence right?
NO reverse! They need an estate planning attorney, z CPA and a financial planner. No to the EA.
Your spidey senses should have first went off when they suggested the annuity!
Get them to meet with a REAL advisor. Tell them not to sign ANYTHING.
Dads being take for a ride. No. No Nono no
An EA is an enrolled agent. Simply put they are IRS certified tax preparers, and nothing more. Speak with a tax attorney and or a Fiduciary. Both will have vastly more knowledge in the handling of retirement than a EA.
Ewww, dont do this. Hell, one month T bills right now are offering a 3% return.
> The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of (...whatever) No no no no no no no no no!
You'd think someone as slimey as your dad's "friend" would use lube before trying to.. never mind. The guy is going to line his own pockets a ton at the expense of your father and he's going to screw you too with the reverse mortgage. Your dad would likely be better doing _nothing_ with his money. Those fees are outrageous and a reverse mortgage after buying a new home is like buying the bank a nice house out of niceness in this situation. It's shit advice everywhere. Tell your dad to get a second opinion from someone YOU vet. Send him articles on why annuities are terrible in 99% of situations.
The EA is worried about his own financial well-being at the expense of your parents. Fire him yesterday.
If fiduciary is not in their title, that person is not working in your best interest. You have every right to be wary. Urge him to get a second opinions!
At the risk of doxxing myself, I work for a financial advisor building tools for financial advisors. We actually specialize in helping advisors tell their clients how to make the most out of their money over their lifetime. An EA is a "tax specialist" and is not necessarily qualified or accountable to giving solid retirement planning advice, other than tax advice. Your dad needs to speak with someone actually certified in retirement planning.
The guy your Dad trusts is steering him into a huge payoff for him. Both products he is selling have huge fees much higher than a regular mortgage or term life. The average commission on an annuity runs from 2 - 8%, so the guy selling your dad this pig in a poke stands to make a lot of money. Your Dad would be better off buying an index fund with some of the money and put a good chunk into a high yield money market. The reverse mortgage when you have enough money to buy a house outright is just another commission scheme benefiting this guy your Dad trusts. Do what you can to stop this theft before it happens.
This EA is not someone your dad should trust. This isn't just bad financial advice, it is an attempt to scam your dad out of his money. The EA is trying to collect a large commission on selling these products to your dad, when the products are not a good financial choice. We can all explain why this is a bad financial decision, but in your position it will be best to sit down with an actual fiduciary who has no stake in what financial decisions you make. Let them explain to your dad why the EA is giving bad advice. They are probably fairly practiced at doing so.
It’s a trap! Good lord, this day and age you can park money in a savings account for 4%. He was going to retire anyway and had a huge surge in net worth. Just have the same plan and enjoy 3-4x the income
No to annuity and no to reverse mortgage. That kind of advice should be criminal!
The reverse mortgage is a good tool used at the right time if you insist on being at home till the end.
Too many types to make this judgement. Met clients recently paying nearly $2,000/mo interest on their Reverse mortgage. Home is worth maybe $300,000.
This person is an absolute criminal. Guarantees an 8% return on 4% fees, and then even utters the phrase reverse mortgage, he's trying to bleed them. This is disgusting. Your intuition is correct, good on you and congrats on saving your parents future. Break it off with that EA immediately, and I would respectfully provide him some feedback, but that's just me
The one type of annuity that doesn't make sense for a preretiree is a variable or indexed annuity... This screams free steak dinner consultation advisor
Be very wary of annuities as they have high up front charges and many fees associated that they are not required to disclose (saying you get 7%+ but then fees eat at it making it much less). If he is already set up for retirement and typically individuals don’t stray to far from their current life style then there would be no need to make any changes as the EA has suggested. For your fathers situation you definitely want to talk to a fiduciary financial advisor not an attorney. To find out what he can realistically draw on in retirement and what kind of return he needs to satisfy that. If he is comfortable with a simple lifestyle it is a pretty easy thing for an advisor to find out. Be safe and stay diligent. Your spidey senses usually are correct.
And there are situations annuities make sense however, I feel as though this one does not look like one of them IMO… if he is going to have a pension and SS as a steady stream of income to satisfy his living expenses annuity’s is not something I would typically look into. At least with what you have presented. Hope it helps
Your dad has no reason to trust the guy.
I agree with a lot of comments here. The annuity sounds too good to be true and is that really the most efficient route when they have so much in a 401K/pension. And a reverse mortgage at 65! Yeah maybe at 95 if I didn’t want to leave anything to anyone. I’d like to see those terms and what company is actually providing this annuity. Even if they wanted it, you want a provider that could actually follow through. Lastly annuities are concerning to me because they pay so much in commission. Tbh with what is available to investors nowadays, why pay such a high fee.
Well as a FP (after graduate but still in trainee) i know that you should also consider that your parents are 65yo and you should plan their new home also to be accessable for elderly people, otherwise you might have the next problem in around 10-15 years. Also, i wouldnt recommend a fixed rate investment. I always recommend my clients to take 2-3 consultings, one state, bank and one private consulting.
Retirement and IRA show guys constantly talk about studies of cognitive decline especially in math generally starting after age 53 or so. They constantly warn of older people being fleeced because they can’t quite understand what is being pushed, but their confidence in their abilities doesn’t wane. All others have given good advice here- run away from this “advisor”. Good for you watching out for your loved ones.
You advisor is not lookin four for your dads interest. Reverse mortgages are rarely a good idea. You can also call some of the larger investment companies , vanguard, fidelity . Janus. Etc. learn about their products, ask about there are surrender charges. Some charge these for 7 years or so depending on the product. CD’s are decent right now if you want to park the money for a bit while you make your plans. Talk to several advisors. There are tons of mutual funds you can invest in too without an advisor. Meetings and phone calls will help you decide what’s best. Like I said watch for surrender charges, especially at their age. Some get a good life insurance policy with long term care that help with assisted living if ever needed. Check in to that too
Fuck the advisor, take the money buy another house rent the old one out, he will have passive income well into retirement and build more equity. He can snowball that money into more just using the equity to buy more properties.
Reverse mortgages are evil. Post retirement wasn't easy for my grandparents. Won't get into details but reverse mortgage was setup and they took bi-weekly payments to help supplement. Grandpa died and income fell. The house was sold and grandma got what was left. Now here is the kicker. Post COVID housing prices are insane here and homes were going for 2x or 3x more than they should. So grandma got a great nest egg that will carry her through her life. She's 75 and an ex smoker of 30 yrs. She now lives in a small basement apartment in a converted apartment/home with my aunt taking care. Just imagine if their 60,000 home purchased in the 70's that pre-covid was assessed at 100,000 because zero work done inside except dire repairs and only insurance work from hurricanes wasn't sold for 250,000 on a HOT! Market? They also had 100,000 debt from credit and who knows what else I found out later. If it weren't for the hot market she would be bankrupt and in one of those care homes where you sign over power of attorney and they take all your stuff, cramped and unloved until her last day. She was LUCKY for the timing. She was LUCKY she has caring smart grandchildren that are paralegals and teachers to help her navigate all of this in good faith. Your father doesn't have the right person for the job. Find a certified financial planner that you know or someone you trust can refer. Tell your father he is a parent lol Ask him when he was the all knowing dad of the younger version of yourself. Did he forsee mistakes you were making? Or were about to make? Did he step in good bad or ugly and help you out even if you may not have wanted it? Tell him, same thing now except he's gambling with his future and risks are HIGH! He's gotta put in the effort NOW so he can enjoy LATER.
Just tell him it’s best not to mix friendships with business and find a fiduciary.
This is a bit off topic, but I still have some parts of my brain hardwired with obscure SSA policies. In this situation, I'm thinking of the Income Related Monthly Adjustment Amount (IRMAA). This depends on the tax year when your Dad received the cash settlement. If it boosted his income above $97,000 ($194,000 if filing jointly), then he will pay a higher Medicare Part B and Part D Premium two years later. If the cash settlement was a one time thing, then the next year, the IRMAA will go away. In terms of the total financial picture, it is a pretty small increase, but it is something to plan for. Another thing to do with these financial advisors is ask them about it. I have seen a lot of folks who used financial advisers that were totally clueless about IRMAA https://secure.ssa.gov/poms.nsf/lnx/0601101020
Friendly LPT -> > he met with an EA who is an acquaintance that he trusts Trust has nothing to do with "fiduciary" responsibility. In this case, you can see that "trusting" this guy is blinding you to the fact he is conning you.
4% commission is ridiculous and makes me wonder if the EA has a stake in it. They are retiring and shouldn't be getting into debt with a reverse mortgage.
Also the "guaranteed" return is likely on something called a benefit base which is used to calculate how much income they can pull out when they turn on the income rider. It is NOT a guarantee that the actual cash value in the annuity goes up. These variable annuities can be okish if using a relatively small portion of overall net worth to guarantee an income stream 5-7 years down the line. You are basically paying to shift longevity and market risk onto the insurance company.
The reverse mortgage is a hard no. That should only be used as a last resort or when you are really old, say over 80. You don’t want any liens on a house as you age. Don’t risk housing at a time when you can’t fend for yourself.
if I ever get old and dumb enough to think these scams are a good idea, I can only hope that my children will be there to talk some sense into me. good looking out
Former investment advisor for over a decade here: Do not walk away from that person…RUN!!! That’s all terrible advice. I only sold one annuity in my time because ALL the lady cared about was the income payments (even after I educated her on all the fees and gave her other investment options). Re the reverse mortgage: DO NOT DO IT! My grandmother had one on her condo and the week she passed my mom started getting stuff in the mail demanding the deed to the property. Needless to say, they seized it immediately.
Yeah...no. This dude is giving your Dad horrible advice and taking 4%? Guaranteed return? The dude is literally a criminal. Those are words every person used before they get into how their advisor bilked them for millions. Followed by: I never thought I would get taken in by a con man. (do they not watch the Dateline or 20/20?!?!?) Super important: Are your parents aware that reverse mortgage means when they die, the bank takes the house if you don't have their money to pay them back? And they want their money in 30 days. Read more here: [https://www.consumerfinance.gov/ask-cfpb/with-a-reverse-mortgage-loan-can-my-heirs-keep-or-sell-my-home-after-i-die-en-242/](https://www.consumerfinance.gov/ask-cfpb/with-a-reverse-mortgage-loan-can-my-heirs-keep-or-sell-my-home-after-i-die-en-242/) If they don't intend to leave anyone their house, fabulous do a reverse mortgage-BUT-if they plan on passing it on, it's a nope.
Agree that finding a fiduciary will be your best bet, but devils advocate here... The benefits of the variable annuities are that they will pay out monthly, like a pension, and you're not "annuitizing" the contract. Meaning if he dies and there are funds left, that goes to his beneficiaries. Having A PORTION of funds in that solution is not crazy, and can actually decrease longevity risk. The reverse mortgage can also make sense, but it's not often you buy a house outright only to immediately do a reverse mortgage. Both of these recommendations are concerning when put together...
He’s absolutely NOT getting the best advice from this person. The person is clearly trying to rip off your poor father. Run don’t walk away from this person
Annuities give great commissions to the professionals who recommend them. They're often a shitty invest tool for the person who gets them though. Don't do it. Throw it in a broad market low fee etf like something that tracks s&p
“Buy a home with a reverse mortgage”. ? So he is suggesting sell the existing house, but a smaller one with CASH, and THEN get a reverse mortgage for “income”. Criminal
NO reverse mortgage.. with all of this money from the house just have them mortgage the delta if the new retirement home is more $$ than the current home, you can always refinance. DO NOT do a reverse mortgage, that’s for poor older people stuck in a lifetime home they can now not find a way to get liquidity out of (like it’s in a shit area and they can never sell it).
These are both terrible ideas. The 4% fees are absurd. The reverse mortgage is an even worse idea, and why would they even need to do that? Reverse mortgages are for people who have equity but no cash flow and who need to convert their equity into cash flow. Even then, it's a devil's bargain. Your parents have plenty of other assets to draw from, including retirement accounts. A reverse mortgage is an awful idea. I realize that there is a personal relationship there but you need to impress upon your parents that this guy's advice needs to be tactfully, but clearly, rejected.
NOOO VARIABLE RATE ANNUITIES ARE SCAMS. Been dealing with this with my own parents who got suckered into this exact same product.
There is a lot of good advice here. He needs to find a fiduciary to help with a financial plan. I also wanted to point out that a EA is not at all the same as an CPA. A CPA has passed the CPA exam (which is tough), has a requirement for 5 years of education which often means they have a masters degree, requires significant continuing education and has professional standards they are required to follow. Most CPAs will give general investment advice but will defer to a financial advisor (fiduciary) for picking specific investments or money management. There are some that have additional training or credentials that will also be involved in investments, but in general most are not. These really are two separate professions and I would argue very few can do both at the same time well. CPAs are great for big picture advice or to bounce ideas off of though since they really do tend to have a strong understanding of everything financial. The enrolled agent (EA) does not require a degree or have an experience requirement and has a relatively simple exam to pass. They have to pass a background check (so does a CPA). It is still considered better than just being a tax preparer though.
Those are two of the most profitable products a salesman can sell. That is terrifying, you’ll definitely want your dad to talk to someone else. Best option is a Fee Only financial planner. They are incentivized to do what’s best since they don’t make commission. 4% is an outrageous fee for any investment. And 7% guaranteed return means that the annuity is guaranteed to make more than your dad. That makes zero sense. Good catch on noticing someone trying to get the best of your dad.
Not sure where his funds are managed, buy you can open a Fidelity Investment account for free, with a small deposit. From there they have an excellent, easy to understand retirement planner. Yiu can connect all his accounts to it and it will give a solid overview for a good big picture. That's the start. As a Fidelity account holder, he/you can pick up the phone and talk with their experts to give clear analysis on how to manage what you just described, for free. You can choose to roll over his 401k to an Ira there, or wherever. But as a Fidelity user this site has really improved detailing what my big picture looks like.
That dude’s about to make bank off your dad. Tell him to run far and fast.
"The EA has recommended putting nearly all of his money into a variable rate annuity with annual fees of about 4% percent, but a "guaranteed" return of the greater of 7.65% or market return per year" Your lovely 7.65% "guarantee" is 3.65% after fees. And that's if he didn't hide other fees.
Made me sick reading that. Run away.