In most annuities, offered by life insurance companies, you give the agency a bucket of money ...

... and they guarantee to pay you a given amount periodically for whatever period has been agreed upon: 10 years, beneficiary's life, beneficiary's plus spouse's life, etc. Sometimes on beneficiary's life, possibly including spouse's, and may have a provision that, should both die within a few years, that the annuity would continue to be paid as before until the end of, say, 10 years, etc.

The rate that the carrier offers to pay varies with interest rates at the time of set-up.

As interest rates are low, and I'm pretty sure that they'll be rising, and that before too long, I would be disinclined to be tieing myself into an annutiy contract at present.

You can get a deferred annuity, where you give them the pot of money now and you begin to collect after a given number of years, beginning at 65, etc.

Or you can make a deal where you pay in a certain amount regularly for a number of years, and then set up the payout agreement later - or possibly move the accumulated money to another carrier ... but many deals don't allow for that, so when you want to collect, you're pretty well at the mercy of the carrier.

I prefer to manage my own money.

Quite a few consider that many quality stocks are on sale, these days.

The price may go lower ... but buying some now and some later, then more at a later date, continuing to do so over the bottom of the market ...

... may take courage now - but should put a smile on your face, after a period.

You don't have one foot in the grave, do you?

ole joyful

Whatever you do, don't do it in a panic mode. Sit back and think things out. Don't get into something you don't fully understand.

Before making any decisions, read up on annuities, especially the immediate - lots of information on the internet to sift through. And talk to someone you trust - financial planner, someone who has assisted you with your financial decisions up to this point etc. I'm suspecting, since the bank gave you this advice, the bank is wanting to sell you their product. There are pitfalls so you really need to be aware of all the angles before jumping into an annuity at this point in your lives. Would you feel comfortable making a large SPIA (Single Premium Immediate Annuity) investment right now?

In short, there are two basic types of annuities: deferred and immediate.

With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. But you indicate you're already retired and need interest and dividends.

If you opt for an immediate annuity (SPIA) you begin to receive payments soon after you make your initial investment.

Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.

You want to be sure that the company that issues the annuity is likely to be around in the future. If they aren't solvent then all they have to do is claim bankruptcy and you will lose whatever you paid into it. Even though AIG had excellent ratings, we saw what happened to them. They was lucky enough to get a (taxpayer subsidized) bailout. Imagine what would have happened to their customers if they'd tanked. I'd rather put my money elsewhere...

Crashproof funds? Don't count on it
By Joe Light, Money Magazine staff reporter
December 29, 2008

Equity-index annuities promise you stock market exposure without the downside. If only.

(Money Magazine) -- In a year when stocks have sunk more than 40% and even supposedly safe bond funds are down, all you probably want is a little peace of mind -- or an investment that won't sink with the rest of your portfolio.

Don't look now, but brokers and insurance salesmen know exactly how you feel. This explains why sales of equity-index annuities (EIAs), insurance products that promise you some of the gains of the stock market but none of the losses, surged more than 20% this past spring.

"Fear is driving sales of a lot of these annuities," says New Jersey financial planner Chris Cordaro. "Salesmen will push them harder, and I'm sure they'll get more purchases because of what we've just gone through."

In the past, Money has frowned on these investments because of their overly complicated terms and steep costs. But given the new push for EIAs -- and fears of further market losses -- we thought this was a good time to revisit these products.

Our conclusion: While some investors, like those who are so scared they're putting every cent into cash, might find them a useful alternative, from this point on you'll likely be better off building a diversified portfolio without all the fees and restrictions that come with an annuity.

EIAs didn't garner much attention in the past because they're designed to protect you from market losses over long periods, typically more than a decade. But for an entire generation, equities just didn't lose ground over such a lengthy stretch.

That is, until recently. This decade highlights the usefulness of EIAs, proponents say. In 2000, had you put $100,000 into the index annuity shown in the chart above, your account would have grown to $160,000 at the start of 2008. Had you invested the same amount in an S&P 500 index fund, your money would have shrunk to $75,000.

EIA critics, however, point to the steep fees many annuities charge. Even before the market tanked, equity-index annuities were under fire by state attorneys general and the Securities and Exchange Commission because of their high fees and commissions, which encourage salesmen to push them on investors who don't always know what they're getting into. It's critical to understand just how much you're paying for this peace of mind.

Problem no. 1: You just don't know what you're getting

In theory, an equity-index annuity should be simple to understand. You invest a lump sum of money for a set time, typically 10 years or longer. In return you are guaranteed a minimum rate of return -- typically up to 3% a year. If the market rises more than the minimum, your annuity has the potential to grow, up to a point. Meanwhile, your insurer promises that your EIA will never drop in value.

In practice, though, these annuities are among the hardest investments to understand -- partly because their terms can change over time. "Some of these products might pay off, but even a Ph.D. in finance can't tell you if it's worth it, because the returns are almost entirely at the discretion of the insurance company," says Boston University economics professor Laurence Kotlikoff.

No two annuities are alike. They can differ in fees, length of contracts, sales restrictions and the range of market gains you can expect. Even two annuities that track the same index may not deliver anywhere near the same performance. Why? Some EIAs will base your returns on how well a stock index did between the start and end of the year. But others rely on more complicated -- and frankly, head-scratching -- formulas.

For example, some average out all the month-end closing values for an index and use that instead of the actual year-end level to calculate what you're owed. Since stocks tend to rise more often than they fall, this could cut your potential gains. In 2006 the S&P rose 13.6% based on the year-end index level. But if you averaged out the monthly closing levels, your gain would have been a more modest 5.6%.

Problem no. 2: You won't get stock-like returns

Don't assume you'll earn the market's actual returns through an EIA. For starters, insurers won't count stocks' dividend yield when calculating your index returns. Right off the bat, that will shave around two to three percentage points a year in performance. Here are other things to consider:

Performance caps. Don't focus on just the guaranteed minimums. Many EIAs set a ceiling for what you can earn, regardless of how well stocks perform. For example, in 2003, when the S&P 500 rose 26%, an annuity with a performance cap might have limited your interest to only 8%.

Participation rates. Instead of a performance cap -- or sometimes in addition to one -- many EIAs set participation rates. So if your annuity has a 55% participation rate, you'd enjoy 55% of the market rise, which in 2003 worked out to around 14%.

A surrender charge. Unlike individual stocks, EIAs will penalize you for withdrawing money prematurely. Surrender fees vary. But if, say, you need to tap a $250,000 annuity with a 10-year surrender period in year five, you might be charged 5% ($12,500). You'll also have to pay ordinary income taxes, not the long-term capital-gains rate, on the gains. And the IRS will hit you with a 10% penalty if you're under 59½.

Factoring in all the caps and fees, the average annual return on an EIA over the past five years was around 5.6%, says Jack Marrion, a research consultant for the insurance industry. In other words, an investment that's often marketed as a safer way to own stocks delivered bond-like returns.

The real problem: Many investors with a long time horizon can afford to own riskier investments with the potential for greater gains. While you do need low-risk assets for short-term needs, the fees and penalties for early withdrawal make EIAs a lousy short-term solution.

Problem no. 3: There's a better way

There is a simpler strategy to get a guarantee. Say you have $100,000 to invest but you know that 10 years from now you'll need every last dime of that. And say you still want to participate in stocks. You could start by buying zero-coupon Treasury bonds. Because zero coupons don't pay interest annually but instead return your principal and the imputed income at maturity, all it takes is $70,000 to get back $100,000 a decade from now. Then invest your remaining $30,000 in an S&P 500 index fund. If the fund were to fall 10% over the next decade, your overall portfolio would still have gained 3% a year.

Keep in mind that if you'll be retiring several years from now, you won't need to tap your entire nest egg all at once. So don't assume that you need to commit to a guaranteed strategy.

Over long periods of time, a simple diversified mix of stock and bond funds will give you a decent amount of downside protection, plus long-term growth. Of course, today's market shows that a traditional balanced portfolio won't give you the guarantees that an equity-index annuity will.

But the fact is, you can't enjoy the market's full returns without assuming market risk. "There are products out there that will give you the illusion of having both," says Cordaro. "But if you're getting protection, you're paying for it."

Links that might be useful:

money.cnn.com/2008/12/23/pf/funds/equity_indexed_
annuities.moneymag/index.htm

Betting on a long life? Try an annuity-Feb 05
www.usatoday.com/money/perfi/columnist/
waggon/2005-02-10-invest_x.htm

AIG's Insurance division and Financial Securities units are separate, and regulated by different agencies - just so you know. AIG's insurance arm is profitable and its cash reserves are regulated by state agencies.

Annuities can be tricky purchases because the most popular ones; e.g., variable and equity-indexed, are set up to be more profitable for the agent and carrier, and less so for the policyowner. The "plain vanilla" annuity, known as an immediate annuity, gives the agent and carrier the least amount of your premium $$, and is thus usually relegated to little or no marketing push.

The payout for an immediate annuity will be dependent upon your age. It is generally recommended you put no more than 20% of your liquid assets into an annuity.

This is rather long, but a fairly comprehensive WSJournal article on annuities and the risk of carrier insolvency:

Are Annuities At Risk Now? Some Answers
WSJournal October 29, 2008

Many owners of variable annuities have endured a double whammy lately: Their investment-account balances have taken a hit, as have the financial-strength ratings on the insurers that issued their annuities.

Agents and brokers say they've received a flood of calls from clients in recent weeks concerned about the safety of their variable annuities, in part fueled by the stock-market turmoil and the government rescue of insurer American International Group Inc.

Regulators and consumer advocates say life-insurance companies rarely have failed and seldom do so suddenly, so there is no need for alarm. And in the rare instance a company becomes insolvent, states ensure that guaranty funds protect both cash values and death benefits up to certain limits.

And taking rash action is a potentially costly move: Cashing out of a variable annuity early can invoke surrender charges, generally as high as 10% for as long as 10 years. Those who cash out before age 59 also face tax liabilities and penalties.

In all, there were 35.1 million individual annuity contracts in force at the end of 2007, with a total value exceeding $2.02 trillion, according to LIMRA International, a nonprofit industry group that compiles life-insurance data, and Morningstar Inc. Here are answers to some common questions investors may have about annuities:

Q: How do annuities work?

A: Annuities are tax-deferred insurance contracts bought once, or with a series of payments, that offer the owners either a lump sum or a series of payouts after an accumulation period. Unlike other retirement vehicles such as an individual retirement account or a 401(k), annuities have no legal limits on tax-deferred contributions.

Q: What's the difference between fixed and variable annuities?

A: Fixed annuities earn a guaranteed interest rate during a certain period. They are backed by assets in an insurance company's general account, usually bonds. Fixed annuities depend entirely on the financial soundness of insurers, which are regulated primarily by state insurance departments.

Variable annuities can also come with guaranteed benefits, such as a death benefit and a minimum return, riders for which the buyers generally pay extra. In other ways, though, they're quite different: A portion of deposits go to the insurance company to cover administrative costs and guaranteed benefits; the rest is invested in a portfolio of mutual fund-like investments. These accounts are separate from the rest of the insurance contract and belong to the annuity owner, so they're not as vulnerable to the insurer's fate.

Variable annuities, however, are more exposed to market risks. If annuity owners' investments perform well, there's the potential upside of a bigger payout. But if they do poorly, as many have recently, income falls, too. Investors can shift their fund holdings, however, to lower-volatility choices such as bond funds.

Q: How have annuities been affected by recent market conditions?

A: Many variable annuities have gone through the same gut-churning volatility as mutual funds in general. Partly as a result, while sales fixed annuities rose 39% in the first six months of 2008 from a year earlier, sales of variable annuities overall declined 6% in the same period, according to LIMRA International.

Q: Should I be worried if the share price of my insurer declines?

A: Not necessarily. In some cases, analysts say, publicly traded insurance companies' stock prices have plunged partly because of their efforts to raise capital. And while raising capital can dilute existing shares, it also improves an insurer's ability to pay claims. Hence, a decline in the stock value of a company doesn't always spell immediate trouble for annuities or life-insurance policies.

Q: Should I worry if the financial-strength rating of my insurer declines?

A: Possibly. Financial-strength ratings, supplied by rating agencies, are an evaluation of the ability of a company to make good on its guarantees. A slip from an excellent financial-strength rating from one of the five agencies -- Fitch Inc., A.M. Best Co., Moody's Investors Service, Standard & Poor's or TheStreet.com -- to a slightly lower rating that is still in the secure range isn't cause for alarm, experts say. But multiple downgrades are a good reason to keep an eye on the company.

Through Sept. 30, 6.5% of the life/annuity and health-insurance companies followed by rating agency A.M. Best had been downgraded, though most remained in the "secure" range, meaning they are still regarded as financially sound.

Of course, buyers of new annuities should only buy from top-rated companies, consumer advocates say. You can find information on financial strength of companies licensed in your state by linking to your state's insurance department, at www.naic.org, the Web site of the National Association of Insurance Commissioners.

Q: What happens when a company founders?

A: State regulators usually monitor struggling companies and work with them to try to get additional capital -- or to sell the company to a stronger insurer that can make good on all of its claims. State receivers, who include the state insurance commissioner of the company's home state, often help find other insurers to take over the annuities from the troubled company. Annuity owners then make payments to the new company and collect payouts from it. Otherwise the terms of the annuity usually remain the same.

Q: What happens if no insurer wants to take over the annuity contracts of a failed insurer?

A: If an insurer is declared insolvent by a court and is liquidated, state laws require companies to pay annuity (and insurance policy) owners first and in full before paying claims of other creditors. State guaranty associations -- funded by other insurers -- then make good on the annuities and policies. Death benefits, for instance, are often protected up to $300,000. Cash values are often protected to a maximum of $100,000. (See www.nolhga.com, the National Organization of Life and Health Insurance Guaranty Associations, for state-by-state terms.)

With variable annuities, as with fixed contracts, the associations protect the death benefits, guaranteed minimums, and other contract guarantees. But investment account losses because of market declines generally aren't covered.

Q: What are my options if my insurer is at risk of insolvency?

A: Regulators and consumer groups warn that annuity owners, especially those who bought contracts recently, often stand to lose more when rashly surrendering an annuity than they would risk from the insurance company's failure. That's because the guaranty funds protect their money up to legal limits, while surrender charges and other penalties can take a chunk of an annuity's balance.

Check with your state insurance department for updates about the financial strength of insurers. If your annuity contract is still in the surrender period, often five to seven years, and the contract is below state guaranty limits, you may decide to wait and see if the company can muddle through. But if your surrender period is over or nearly finished, and a company has deteriorated enough to make you uncomfortable, you could consider a Section 1035 tax-free exchange, named for a section of the Internal Revenue Code, into another annuity contract from a higher-rated insurer. Don't forget, however, that starting a new contract will involve a new surrender period and charges, new commissions and new fees.

Don't allow a sales rep from a competing company to scare you, however, into replacing an annuity. There are state laws against "poaching" customers by making false claims about the financial condition of another insurer.

In Case of Insolvency: Both fixed and variable annuities are protected by state guaranty funds:
-Death benefits are often protected up to $300,000.
-Cash values are often protected to a maximum of $100,000.
With a variable annuity, some insurer guarantees are protected, but losses due to market declines generally are not.

I must be missing something. How is this different from (better than) investing in CD's, T-notes, a MM fund, Mutual funds, Dividend-paying stocks, Life insurance?

Do I understand correctly: I put in a hunk of dollars and get my own money back in increments, plus an interest rate set by either a contract term or my lifespan index.

For whom is this a good deal (aside from the issuer)?

Have you thought about maybe purchasing some quality stocks, that have consistently paid decent dividends?

With the prices of the stocks down, the yields are even better than in past years, though there is no guarantee that they will continue that way.

Some that come to mind are
CONSTELLATION ENGY (CEG) yield 7.60%
DOW CHEMICAL (DOW) 11.10%
D T E ENERGY CO HLDG (DTE) 5.90%
DUKE ENERGY (DUK) 6.10%
AT&T INC. (T) 5.80%
VERIZON COMMUN (VZ) 5.40%

These are a few I have been pondering a bit.

Oh...I found this on the site linked below.
What happens to my annuity after I die?

It depends on the type of annuity and how your payouts are calculated. There are several different methods.

You do have the option of naming a beneficiary on your annuity, and with certain types of payout options that beneficially could receive the money in your annuity when you die. Other options just pay out during your lifetime, and the payments stop when you die.
CNN Money

Sue

For whom is this a good deal (aside from the issuer)?

Aye! There's the rub. You give them your money and they dole it back to you.

But going back to the OP, Jane states she and her husband are already retired and the need is for income from interest and dividends. No experience at all with Keoghs other than a basic idea. Do Keoghs exclude an integration with Social Security? Are you already drawing on your Keogh Plan? I'm guessing when reaching a certain age plateau, a Keogh can be rolled over into other investment vehicles without incurring penalties, etc.

What would be a plan for someone to start generating income with what is left of a primary investment?

Being well diversified with stocks paying dividends, a series of Treasuries laddered in such a way as to always having one up for reinvestment or paying out interest over the course of the year, munis paying interest, what's "left" in a 401k or 403(b) to draw on at some future date, Social Security now or later, cash reserves in money markets, CDs, Savings Bonds thrown in a drawer for an unforseen emergency, interest bearing checking accounts? These are all things that you do when you can and when discretionary funds are available to do them. It's not quite as easy when you find yourself between a financial rock and a hard place to, in effect, start over without the added luxury of time.

I can only reommend a professional - one who has no agenda and has no interest in selling you on his product du jour.

Was out of town and just checked back. Thank you all very much. We have the appt today at the bank and you've all convinced me we better research this more. My husband is 76 and still works part-time. I work for him at no salary doing billing.

A keogh is like a 401k except for self-employed people. We were living off the dividends until the market crashed and we lost almost 50%. Most of our investment was in stock 90%.
Big mistake!

Now we need to take the crumbs and try to find a way to supplement our income before we move into a cardboard box. Annuity was recommended because it pays a dividend of approx. $20,00 a year. Two types were offered - fixed and variable. Each broker - bank & Oppenheimer broker say theirs is the best. We had heard the brokers make alot of money off annuities but wanted to check on that. Someone told us 7%.

We still have the money in stocks which have gone up, but not anywhere near where they were. Not sure what to do, but we need the dividends to make it.

Thanks very much,
Jane

I recommend the books "The Truth About Money" and "The Lies About Money" by Ric Edelman. Annuities are not the right answer for every investor.
Don't forget, the bank is selling you a product for which they will earn a commission, whether it is the right product for you or not.

when my husband retired the money men hit us from all directions. one of them suggested we put our life savings in an annuity. when i ask if we could get it out if we wanted or needed the money, the guy said no. then my husband suggested a broker who his coworkers use. when i told my husband that a broker could take our money and leave the country, he was shocked. when i explained to my husband that protecting the principle is more important than accumulating interest, he agreed to put it in CD's.

stargazzer - you might be interested in the following from the SIPC:

SIPC is the safeguard in the event a brokerage firm fails owing customers cash and securities that are missing from customer accounts. Not every investor is protected by SIPC, but 99% of persons who are eligible get their investments back from SIPC.

When a brokerage is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in and, within certain limits, works to return customers cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait years while their assets are tied up in court.

However, not everyone, and not every loss, is protected by SIPC. The SIPC is not the FDIC. The Securities Investor Protection Corporation does not offer investors the same blanket protection that the Federal Deposit Insurance Corporation provides to bank depositors.

When a member bank fails, the FDIC insures all depositors at that institution against loss up to a certain dollar limit. The FDICs no-questions-asked approach makes sense because the banking world is "risk averse." Most savers put their money in FDIC-insured bank accounts because they cant afford to lose their money.

That is precisely the opposite of how investors behave in the stock market, in which rewards are only possible with risk. Most market losses are a normal part of the ups and downs of the risk-oriented world of investing. That is why SIPC does not bail out investors when the value of their stocks, bonds and other investments falls for any reason. Instead, SIPC replaces missing stocks and other securities where it is possible, even when the investments have increased in value.

SIPC does not cover individuals who are sold worthless stocks and other securities - the onus is on the investor to do a little homework. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons.

And fortunately for most of us there is not a Bernie Madoff sitting on every chair in every brokerage.

For what its worth I was recently offered the option of taking in cash the value of a (small) pension plan from a former employer. The alternatives were taking an annuity amounting to 8% from age 65, which would be worthless once I die, or rolling the cash value into my registered retirement account. BTW I will be 65 in a little over 3 years.

After discussing this with my broker I have opted to have the cash placed into my retirement account. In the current investment climate I can make 8% in dividends and still keep the stock to pass along to the younger generation.

While my retirement account has taken a big paper loss this past year my income from my investments has changed little. (Teck Cominco has cut its dividend.)

One of the financial newsletters I subscribe to pointed out that much of the price drop in financial markets has been due to distress selling. I would think that, once the current crisis has run its course, values in good financial instruments will revert to the mean.

As a Canadian one thing that I might suggest to US residents is to diversify out of the US dollar while exchange rates are in your favour.

jkom51-"AIG's Insurance division and Financial Securities units are separate, and regulated by different agencies - just so you know. AIG's insurance arm is profitable and its cash reserves are regulated by state agencies."

What difference does it make if AIG's Insurance division and Financial Securities units are separate? If AIG's insurance arm was so profitable, I wonder why they asked for a for a bailout instead of using money from their more 'profitable' division to make their failing division whole?

How ironic was it to give an insurance company (that managed to drive itself to the brink of failure) taxpayer money when they proved THEY weren't a good risk to begin with? Do you think they should have been allowed to use OUR money to send their loser execs to a posh retreat? I think a more appropriate reward would have been to send them on a 'retreat' to Gitmo and include some 'water-boarding' sports to thank them for their arrogance.

As for the regulators, how 'impartial' can they be when they are paid by those they regulate?

Examples:

"In the 1990s state insurance regulators swore to the safety of annuities and life insurance policies, even as six million policyholders were being trapped in failed companies."

"At Mutual Benefit Life, which failed in the early 1990s, hundreds of thousands of annuity holders had only limited access to their money for some eight years.

After the North Carolina commissioner placed London Pacific Life & Annuity in rehab last August (2002), for example, holders of fixed annuities were allowed to take out only 10 to 20 percent of the value of their accounts, although they could apply for hardship withdrawals to meet "basic life support needs" or college tuition. North Carolina officials estimate that the moratorium will last two to three years, although the process can drag out much longer."

I don't think most retiree's would purposely put themselves in a situation/annuity where they might have to worry about being able to access their money at a time when they need it most.

Like chisue said: "For whom is this a good deal (aside from the issuer)?"

Links that might be useful:
Distortions, Deceptions and Outright Lies
by Martin D. Weiss, Ph.D./April 7, 2008
www.moneyandmarkets.com/issues.aspx?
Distortions-Deceptions-and-Outright-Lies-1640

Is your annuity safe?
How to tell if insurers' financial woes threaten your investment.
January 22, 2003
By Walter Updegrave, Money Magazine
money.cnn.com/2003/01/20/retirement/
updegrave_annuity/index.htm

The Wrong Approach
www.davebudge.com/The wrong approach

FYI- More info about 'regulatory' rules.

The Wrong Approach
Dave Budge
July 18th, 2008

I just got this nugget in my email box:

The SEC has proposed Rule 151A to classify Index Annuities as Securities.

If 151A is approved you will be required to have a securities license & index annuity sales will be reviewed by your broker dealer.

If youre unfamiliar, an index annuity is an insurance company product that pays a low, but safe, guaranteed rate of return but enables the buyer to participate in market returns at some level. What I have seen are things like a 2% guaranteed rate or, if the market goes up, a 60% participation in the gains of some market index. So, for example, if the contracts allows the buyer to participate in the S&P 500 and the index goes up 8% in a year the yield is 4.8%. If the Spooz go down the guaranteed yield is 2%. The contracts, though, are complicated and not a easy to understand as they seem on the cover. For example, some contracts use the average gain of an index over the years 4 quarterly ends. Some use the simple math that I used in my example. But the horrific feature is the long an steep early redemption penalties that are baked into the deal to pay huge commissions to producers. If you cant tell, Im not a fan of the products.

That said, there are some circumstances when they work. If one has a large cash buildup in a live insurance policy the gains can be rolled over tax deferred to an annuity. But considerations of doing such things usually should involve a tax accountant or a savvy financial adviser.

There has been a big push of these products by insurance companies lately which has caused many insurance professionals to pile on the bandwagon and convert assets in exchange of 7%+ commissions. Worse yet, the retired community has been barraged by teams of mortgage bankers and insurance salespeople who are selling the dual product of a reverse mortgage with the proceeds going into a index annuity. As far as I can tell, and if the market continues to underperform bonds, many of these unsophisticated arbitrages will produce a negative yield for years. It just doesnt make sense.

What the proposed rules do, however, is simply restrict competition to the benefit of securities brokers and does nothing to add transparency to the transaction. And as most of my readers know, I have as little respect for the financial advisory abilities of brokers as I do insurance salespeople. The 80/20 rule pervades the financial services industry and, unfortunately the bulk of the best sales people are among the 80% of incompetents. Just my opinion.

Heres a better regulatory rule. Inasmuch as there really are some competent insurance people, the rules should be about disclosure. The commission on the contract should a primary disclosure item. Customers deserve to know how much of their yield is going to pay the producer (as a general note I think this should be part of all financial transactions.) Secondly, if the funds used come from another financial transaction, such as a 2nd mortgage or a reverse mortgage, the imputed cost of those funds should be required to be considered in any illustrations that are part of the existing annuity disclosure requirements.

The SEC knows from where the butter comes that it applies to its bread. It can be argued that Series 7 and 63 licensees have a modicum of more economics training. But certainly not enough more to wholesale exclude life professionals. The SEC did the same thing with viatical contracts. Instead of disclosure and pre-purchase education they have deferred to industry pressure. That doesnt help the issue.

A link that might be useful:
www.davebudge.com/The wrong approach

>>why they (AIG) asked for a for a bailout instead of using money from their more 'profitable' division to make their failing division whole?They can't do that. That cash MUST be held in liquid reserves, untouchable for any reason except for insurance claims. They can sell the insurance division, but they can't raid it.

Wow, so much information. I just don't understand it all. We canceled the appointment with the Banks financial person. Spoke to him on the phone voicing our concern about annuities. He completely disagreed explaining that all investments have costs factored in. CD's have costs built in to them as do all investment or else no one would make money.
When I asked about commission he said its built into the product. He said the annuity would be for 3 yrs guaranteed 4 1/2% interest. It would be fixed and is guaranteed by 'something' involving the state backing up insurance investments. Sorry, really didn't understand.

He asked how dangerous it could be when we lost almost 60% of our money by investing in stocks! Made me feel like a moron who didn't know what I was talking about.

Meanwhile, our money is still sitting in the stock market and we don't know what to do with it. CD's are giving 3%.

We need financial advice and don't know who to trust.

Hello Jane,
My experience with bank employees is that they are often not well paid, tend to be narrowly focused and are taught to push product. Your experience may vary.

I have had the dubious distinction of working nights with a former bank branch manager who discovered that he could make a better income as a janitor in my industry than in banking.

In my opinion annuities are appropriate for somebody who needs a fixed income and absolutely cannot tolerate risk.

My opinion on stocks is that much of the downside risk is already out of the market and that there is a lot of potential for gain for those who can tolerate risk.

As to financial advice ask friends/family/co-workers about financial advisers they have been happy with. That is what I did when I went looking for a broker. I have been dealing with the same one for about 20 years.

At this point, I, too, would ask a trusted friend or family member for a recommendation of someone they trust.

At least for the short haul, some of the stock market bleeding seems to have been stemmed - how temporary is this, how much of a recovery will there be? Hard to say, but I'm sure 2009 will still be a bumpy ride. It's true some good stocks paying good dividends, and promising stocks that don't pay dividends can be had for bargain prices - but the OP has to weigh risk tolerances vs instruments that provide immediate income.

How much (asked rhetorically) income per month does the OP need to maintain a lifestyle that includes being able to pay bills, buy food and not sacrifice needed prescriptions, etc. You have to be armed with a complete and honest evaluation of your own personal situation to go in to a professional and ask - "what do I need to do to accomplish this?"

A higher rate of return usually involves a greater level of risk. I'm guessing the OP and her husband are beyond risk taking. And one should never feel inadequate for asking questions; and asking questions over and over again until you understand. And asking them point blank the exact % they'll take in fees and commissions. Any professional should be made aware, right off the bat, that any strategy should be geared for income generation and not necessarily long term growth - which would be an added bonus right now.

These kinds of situations on a public forum often generate the well meaning advice to "live frugally"; stretch your food dollars; if you have two cars get rid of one eliminating something that needs gas, maintenance, and insurance premiums; sell your possessions on Ebay or Craig's List; get rid of cable; downsize your life to the point it's no longer worth getting up in the morning. When times are tough, many people arrive at being frugal naturally.

Finances are not a one size fits all - different needs, different comfort levels.

>>why they (AIG) asked for a for a bailout instead of using money from their more 'profitable' division to make their failing division whole?jkom51-"They can't do that. That cash MUST be held in liquid reserves, untouchable for any reason except for insurance claims. They can sell the insurance division, but they can't raid it."

They can sell the insurance division, but they can't raid it? WHO do you think AIG 'raided' when they asked the government to bail them out for their poor investment decisions?

THE TAXPAYERS.

I wonder why the 'rules' always seem to work in favor of those companies and corporations that injure others. If AIG has a sector that is profitable then I couldn't care less what other part of their business that they have to 'raid' in order to clear up their debt. It should NOT be up to the taxpayers to clean up their mess for them.

I wonder why the 'rules' always seem to work in favor of those companies and corporations that injure others.

Because there's truth in the old adage - "Profits are privatized, losses socialized."

>>He said the annuity would be for 3 yrs guaranteed 4 1/2% interest. It would be fixed and is guaranteed by 'something' involving the state backing up insurance investments.The Annuity payments are insured by the cash reserves required by the State (wherever the carrier is domiciled).

Commissions and fees on insurance contracts (which is what an annuity is) vary widely. Don't compare just the interest payment - find out specifically how much you paying in fees and commissions. That will lower your true ROI.

It will take several years before we know the actual cost to the taxpayers for the AIG loan. It was the only contract that was well negotiated by Treasury/Paulson, with considerable upside potential. Until the CDS (Collateralized Debt Swaps) exchange is set up (probably on the CME [Chicago Mercantile Exchange], according to analysts) there isn't enough stability on prices to value the swaps properly. It is highly probable they are being undervalued on the current market, and financial institutions who have already devalued their CLOs, such as Merrill Lynch, will be booking some extremely profitable "cookies" in the next few years. The AIG loan by far has the best negotiated loan terms from the taxpayer point of view.

Currently the government is offsetting the huge amounts of money it's loaning out by the investors who have rushed into Treasuries, forcing yields down to virtually nothing. The Fed is getting deposits while paying out minimal interest, while loaning it out to financial institutions at 300 to 800 basis points.

Jane -- Your banker is insulting. He's trying to browbeat you. He didn't answer your question about the commission, only said the costs are 'built in'. That tells me *nothing* -- except that he can't be trusted.

If you want to remove money from the market, it doesn't have to be a clean sweep. Do you have some stocks you want to hold on to? You could put some money into CDs (currently earning around 3.5%/APY for one to three year maturities). Money Market Funds are another option. Look at www.bankrate.com for nationwide offerings.

Thank you and I agree he wouldn't be straight with me. He repeated over and over that all products have costs built in. That the bottom line was to have something which would pay dividends which would remain stable.

We had been supplementing our income with the dividends we were receiving from our investment set-up which was primarily various stocks. The original set-up was done by this bank, but unfortunately they had us in a high risk portfolio. We had never agreed to that. We thought we were in a conservative arrangement.

The original financial person disappeared when the market crashed. The people at the bank would not tell us what happened to her. We then discovered how much money we lost due to the market. They brought in a new person who has a long financial resume and this is what he proposed we do.

The bank is Chase and I'm thinking there must be a better choice. What do other people do?

Jane

chisue-"Jane -- Your banker is insulting. He's trying to browbeat you. He didn't answer your question about the commission, only said the costs are 'built in'. That tells me *nothing* -- except that he can't be trusted."

That was my thought as well, I wouldn't trust him either. It figures that he completely disagreed with you. Did he bother to tell you that he stands to make more on the sale of this product than he would on anything else his bank has to offer?

This kind of insulting behavior is typical for some 'financial pro's' who just want you to be quiet and take their advice without proper due diligence. We have experienced this from many of the people we sought advice from.

The bottom line is that if you cannot understand an investment then you probably shouldn't be in it.

If you want to understand more about how the securities business works (or doesn't!) then borrow the following book from your library (or check out the authors website-below). One of the authors is a former judge and NASD and NYSE arbitrator. The other an arbitrator as well as an expert witness for securities fraud cases. Great advice on how to avoid problems in a number of areas.

Brokerage Fraud-What Wall Street Doesn't Want You to Know
by Tracy P. Stoneman & Douglas J. Schulz

Here is an excerpt from their book regarding annuities:

"Brokerage Fraud-p.257

Whenever Douglas is hired to evaluate someone's portfolio and he see annuities in an IRA or qualified retirement plan, he knows that the investor has been scammed.

There is little justification for putting an annuity into an account that already has the same tax advantages, although some will make such an argument. You can almost always accomplish the same goals by buying a mutual fund for your IRA, and you can do it for a lot less in fees and costs. In addition, you lose one of the major benefits of an annuity when you purchase it for an IRA, as many annuities don't have to be cashed in until you reach your mid-to late 80's.. But with an IRA, you must start withdrawing monies much earlier. You should see the brokers and insurance agents explain their rationale on the witness stand. They may try to argue that their client absolutely wanted and needed the life insurance benefit and was willing to pay for it. But the reality usually is that the salesperson made a 4 percent commission.

The SEC and the NASQ have been critical of annuity sales, particularly variable annuities. The SEC published a brochure about variable annuities that can be found on the SEC's Web site at www.sec.gov/consumer/varannty.htm.";

Another good article to read is "The Annuity Con Game". It talks about a retired couple who were suckered into getting an annuity and then lost a large part of it when the husband came down with terminal cancer and they were unable to get the money out early without incurring huge losses. I'll put it in a separate post.

Links that might be useful:

www.brokeragefraud.com/wsj.htm
www.brokeragefraud.com/articles.htm

The Annuity Con Game
2/29/2001

Many prospective clients that call us to discuss working with us have already met with a financial planner or insurance agent that recommends the purchase of a large annuity for tax benefits. What these people fail to realize really how lucrative the commissions are on these products.

Annuities may add up for you in some cases, but normally they don't unless you happen to own shares in a company pushing them. The most common type is the tax deferred annuity. In the case of a deferred annuity, you pay up front or with a whole series of installments, and then your investment will increase without the IRS taking its pound of flesh until you withdraw. You can then look forward to regular income to tide you over in your old age.

Does much of this sound familiar? Of course. Retirement plans like an ordinary IRA can postpone the day of reckoning with the IRS until long after your investments have compounded mightily. You might say that tax-deferred annuities are redundant since other plans are already posting the payments. Why buy them, then? In fact, with some important exceptions, we believe that you normally should pass on annuities unless you wish to live the good life vicariously through the broker or life insurance rep whom you put in that multimillion-dollar mansion.

Forbes' latest advice, offered in an article mentioning an SEC examination of the practices of some leading annuity marketers, does not even come with a qualifier: "Don't buy an annuity." The magazine passes on the horror story of a retired couple in Potomac, Maryland, who lost many thousands of dollars by following the suggestion of a Certified Financial Planner peddling annuities on commission. Not all CFPs, alas, are Fee-Only.

Here is the case that the Motley Fool, business magazines and Fee-Only investment advisors have made against annuities:

1. Tax-related arguments exist beyond those already given. Remember, capital gains that you make in the market are taxed at a lower rate if you hold your stocks long enough before selling. On the other hand, Uncle treats annuity payouts as ordinary income (minus the amount you've paid for the annuity).

2. Most annuities cost too much. With everything added in, you do not enjoy the same low fees over time that you would through a Fee-Only planner or Vanguard-style index fund. You're hit with all kinds of bizarre charges such as "mortality and expenses charges."

Certain annuities are not so bad (some of the better possibilities come from Vanguard, T. Rowe Price and TD Waterhouse and have low yearly expenses). But Fortune says most are "still sold by commission-paid insurance agents, stockbrokers, and financial planners. These folks earn more selling annuities than they could selling virtually any other investments." Fortune says that the sales commissions on variable annuities--discussed later in this article--"average six to seven percent and go as high as 15 percent. Commissions on load mutual funds average more like three to four percent."

On top of other outrages, you may pay surrender charges as high as seven percent the first year if you cash your annuity in ahead of time.

Plus, you'll pay management fees, just as with a mutual fund. Normally they will be lower--but not as small as those that an index fund charges. When all's said and done, your annual fees may approach two percent--or just about twice as what a Fee-Only planner would charge.

3. The insurance coverage that annuities offer isn't that great a deal. They don't even work out well as death benefits. Fortune has said that annuities are "an inefficient way to buy life insurance, and almost no one collects on it anyway."

4. To grow your investment, the annuity providers will often rely on means that are less than stellar in yields. Fixed annuities mean assure you a certain return ahead of time, but then it's so low that inflation could pose a real threat to you in retirement.

Within a variable annuity, you can indeed decide to an extent how to invest your money. But it will have to end up in the equivalent of in-house mutual funds. Some choice, eh? Does this not sound a little like the incestuous dealings of brokerages where not-so-objective planners direct you to their own dogs?

Another choice might be a equity-index annuities. Yes, you'll be guaranteed a return of perhaps several percent, but then your upside from the stock market would be limited, too. If you're a long-term investor, why not simply invest in the funds yourself--perhaps in an index without the handicap?

5. Annuities tie up your money so you can't invest it more profitably.

In fairness to annuities, there are occasions when they might make sense. According to the Motley Fool, they "are desirable only (if ever) for those who:

* "Have contributed the maximum to their 401(k) plans and IRAs and desire further tax deferral on investment gains."

* "Prefer investing in mutual funds as opposed to individual securities.

* "Will keep the annuity for at least 15 to 20 years." But, let us add here at ElderAdo, that argument is rather irrelevant to most people who are retired or close to it.

* "Are in a 28 percent or higher income tax bracket today, but expect to be in a lower income tax bracket in retirement."

* "Don't need the annuity proceeds prior to age 59 1/2.

* "Are unconcerned that heirs must pay ordinary income taxes on any appreciation.

* "Desire a 'guaranteed' income for life in retirement."

The later argument can be powerful. But remember the tradeoff. If history repeats itself, the "guaranteed income will most likely be much smaller than the rewards of investing regularly and prudently in the market.

A outrageous example of the risk of trusting annuity-pushers comes from our own back yard in Potomac, Maryland, where a CFP urged an elderly couple to trade in an annuity he had sold them four years before. He said they would get a $50,000 reward for making the switch. He said it would more than cover the old model's $25,200 surrender charge, which was 1/25 of the original investment ($630,000). They would enjoy a $24,800 profit.

But as Forbes revealed, there was a catch: "The annual expense was 1.7 percent compared with 1.25 percent on the old account, and the surrender charge, which started out at an exorbitant eight percent, would take nine years to go away. If the couple had kept their original annuity for three more years, they could have surrender it with no penalty.

"Sadly, the husband then was diagnosed with terminal cancer, and he needed cash for estate tax purposes and medical expenses. "But getting out meant paying a surrender fee of $80,000 plus reimbursing the insurer the entire $50,000 bonus. The market's 2000 slump eroded the annuity's value, so they walked away with a paltry $605,000. Now they're suing their planner for deceptive sales practices."

Did this happen to financially naive people? Hardly. The couple had gotten well off through ownership of apartment buildings.

With such cases in mind, the SEC is examining the marketing materials of the biggest underwriters of annuities, including, says Forbes, ING Golden American, American Skandia and Allianz Life. It quotes Paul Roye, director of the agency's Divsion of Investment Management: "The industry is on notice."

Enough said. If you feel you must buy an annuity, just be certain that the person recommending it is not on commission. Do not shy away from asking how he or she will benefit directly or indirectly from a sale, and watch out not just for present fees but for those down the road.

Links that might be useful:

www.prestigeadvisors.com/The_Annuity_Con_Game.htm

Annuity Gratuity
Carrie Coolidge-Forbes.com
02.19.01
www.forbes.com/global/2001/0219/064.html

>> If you feel you must buy an annuity, just be certain that the person recommending it is not on commission.Unfortunately, if you held this as your standard, you would never buy ANY insurance. It is always sold on a commission basis. You can buy directly from some companies, but many will assign you an agent for customer service purposes no matter what you do, and thus the agent will in fact receive a commission for your business even if you did not solicit the policy through him/her.

I believe that financial education should be taught in schools as a standard part of the curriculum. There is a very large difference between MAKING money and money MANAGEMENT.

Although Suze Orman's TV persona sometimes irritates me, her advice is extremely good. She is far more knowledgeable than Carmen Wong Ullrich, although Ms. Ullrich has her moments. I strongly suggest the OP pick up one of Ms. Orman's books and start reading.

Just posted today on the MSN Money website - an excellent article on conservative investing, which fortunately includes the pros and cons of fixed rate and immediate annuities. Link below:

Wow Dreamgarden so much information. I thank you for it and I've printed it to show my husband. Thanks to you we told the bank guy we weren't interested right now. We need to get our money out of the stock market. Too much is tied up but because its in a keogh it requires paperwork to change the portfolio. Meanwhile, the market took another dive this week.

We had no idea what an Annuity was but it sounded fairly safe and guaranteed a fixed amount of income.

Again, thank you for your advice,

Jane

Jane-"Again, thank you for your advice"

Your welcome.

"The original set-up was done by this bank, but unfortunately they had us in a high risk portfolio. We had never agreed to that. We thought we were in a conservative arrangement. The original financial person disappeared when the market crashed. The people at the bank would not tell us what happened to her. We then discovered how much money we lost due to the market. They brought in a new person who has a long financial resume and this is what he proposed we do. "

The original financial person disappeared and now the new person wants you to risk what money you have left by tying it up in an annuity? Not surprising. Does your investment agreement say you only wanted to be in low risk investments?

It just might be worth it to chat with Tracy Stoneman/Doug Shulz of Brokerage Fraud, or the NY state securities office to see what they have to say. I'd want more answers than this bank is giving you.

Here is another link you might find helpful. Martin Weiss started talking about the subprime market YEARS ago. We didn't invest with him, just subscribed to the free newsletter. We thought what he said made sense and have him to thank for not being worse off than we are. Here are his latest thoughts about the market and what he thinks we have to look forward to.

Last Nail in the Coffin
by Martin D. Weiss, Ph.D.
January 12, 2009

www.moneyandmarkets.com/last-nail-in-the-coffin-29223

If the OP's financial advisors were acting in the usual manner, it is doubtful they can be held for fraud if they were only advising on "suitability" grounds. Fraud has to be proven in writing or recorded phone conversations. It's been done - my ex-boss was the leading 'expert witness' for defense attorneys in the SF Bay Area - but at least 50% of the time, the brokerage customer had no case.

From a great article by Jonathan Clements in the WSJournal from 2006:

" Advisers don't necessarily act in their clients' best interest. This issue has been brought into sharp relief by the heated debate over the Securities and Exchange Commission's so-called Merrill Lynch rule. Under the rule, fee-based advisers at brokerage firms aren't considered fiduciaries (fiduciaries are legally obligated to recommend products that are best for their clients).

Instead, they are held to a lower "suitability" standard, which means they are only required to recommend products that are a reasonable choice for their customers. To protect yourself, avoid advisers who won't commit to acting as a fiduciary - and get that in writing!

Most advisers have had little formal financial education. For instance, maybe 5% of brokers, financial planners and insurance agents have bothered to become a certified financial planner, or CFP, which has become the basic credential for any half-decent adviser.

To ensure your adviser is knowledgeable, stick with CFPs or, alternatively, folks who have qualified to be chartered financial consultants, chartered financial analysts or certified public accountants-personal financial specialists.

That brings me to today's fun fact. In Malaysia, to call yourself a financial planner, you must be qualified, such as earning the local equivalent of the CFP or the chartered financial consultant designation. But in the U.S., to hang out a shingle as a financial planner, all you need is a shingle and a place to hang it."