February 18, 2014 — Now that all of us have assumed responsibility for our own retirements, conducting due diligence has become part of our job description. That responsibility extends to vetting the financial advisers and providers of financial services that we might hire to help with our retirement finances. If you decide to buy an annuity, which many experts believe most retirees should have a portion of their retirement in, you need to be especially careful.
The Wall Street Journal published an interesting article last week entitled “Who’s Training Your Financial Advisor“. The piece brings up how financial advisers salivate at the sheer size of the 401k and IRA market as the world has moved to them from defined benefit (pension) plans. Roll overs, which typically occur when workers change jobs or retire, are big – last year workers rolled over an estimated $258 billion from 401ks to Individual Retirement Accounts (IRAs). There is money to be made on these new accounts, so consumers have to be careful.
In the worst example of how much an adviser could make from steering you to certain financial products, the Journal reported that one company had sent emails to some advisers promising a new Maserati if they sold at least $7.5 million of annuities in 2014. Since a Maserati starts at around $126,000, it is easy to see the profit that must be in these annuities (for the record, $126,000 is 1.68% of $7.5 million). When companies are willing to pay bonuses of that size, due diligence seems like a good idea.
When you buy an annuity you are basically trading some of your savings for the promise of a regular payment for a certain number of years or the rest of your life. There are certain wrinkles available, such as annuities that are paid for the life of husband and wife.
Some things to think about
Here are some of the thoughts we have to help make a smart decision about annuities (by no means is this an exhaustive list, we hope others will add to it):
- Ask your advisor how and how much they are being compensated if you buy something they recommend. They might not tell you how much, but they should say if and how they might benefit
- Ask if they have any conflict of interest with advising you
- Compare the payouts, fees, terms, and fine print of several companies before you buy
- What are the tax implications of what they want to sell you
- Definitely include comparisons with some of the known low-cost providers like Vanguard, Schwab, Fidelity, and USAA
- If you don’t like the smell of the deal, walk away and get more comparisons.
Comments? What are your thoughts about due diligence and annuities? Any successes, or horror stories? Please share your thoughts with your fellow Topretirements members.
For further reading:
Newly Retired Owner’s Manual for Your 401k and IRA