ROTH Vs Permanent Insurance (More Specifically, FIUL)

[FBN]

You mentioned its in a bank variable account. It could be a in a CD with a floating rate. If thats the case then obviously your friend is risk averse. He would do much better off going forward with the IUL. Run a few IUL illustrations at a conservative crediting rate 6-7%. If its actually in a VA then ask him if he realizes that the value will reflect the volatility in the stock market and he could lose principal. Anyone that sold a VA to this guy in a Roth should be skewered over hot coals.

 

[smokin goose]

This thread makes my head hurt.

 

[Mattschmidt]

Nothing wrong with that if done for the right reasons. Primarily for the riders.

Although, I bet it is inside either a fixed annuity or more likely a CD or money market.

If you were that young, and understood Roth IRA would you want a VA?.. Not arguing but rather curious to why you would recommend an annuity product over investing in money markets, bonds etfs etc.
Unless this individual is a very cautious investor, I feel a VA is a horrible fit for funding a Roth IRA

 

[DHK]

Because the VA riders were VERY attractive.

I remember Metlife had what I called the 6-6-6 VA/rider combo.

6% up front bonus. (Yes, I know the internal expenses were higher).
6% step-up each year (OR the market gains locked in) to base a lifetime income.
6% lifetime withdrawal benefit - based on the highest step-up prior to withdrawals.

I LOVED that variable annuity! And I sold quite a few of them... back in 2007.

The variable annuity market has changed and the riders are more accurately priced for the true risk of the market. Variable annuities are not quite as sexy as they once were.

 

[Tahoe Ray]

Because the VA riders were VERY attractive.

I remember Metlife had what I called the 6-6-6 VA/rider combo.

6% up front bonus. (Yes, I know the internal expenses were higher).
6% step-up each year (OR the market gains locked in) to base a lifetime income.
6% lifetime withdrawal benefit - based on the highest step-up prior to withdrawals.

I LOVED that variable annuity! And I sold quite a few of them... back in 2007.

The variable annuity market has changed and the riders are more accurately priced for the true risk of the market. Variable annuities are not quite as sexy as they once were.

Rider nostalgia.....anyone who sells annuities has it.

 

[xrac]

If you were that young, and understood Roth IRA would you want a VA?.. Not arguing but rather curious to why you would recommend an annuity product over investing in money markets, bonds etfs etc.
Unless this individual is a very cautious investor, I feel a VA is a horrible fit for funding a Roth IRA

The answer is riders. However, most of the riders that made VAs so attractive are no longer available.

 

[scagnt83]

The answer is riders. However, most of the riders that made VAs so attractive are no longer available.

Exactly. VAs have gone to sh#t.

And most do not have stellar sub-accounts (investment choices).

These days IAs rule the Rider world.

4% cap with an 8% Income Rider is pretty attractive these days.
A young person can find a 5% or 6% Rider. Plenty of current retirees wish they would have locked in a guaranteed 6% at a young age.

Also, most Riders offer a payout rate of 4% or over at age 60.
A balanced portfolio should now use a 3% payout rate or even 2%.

So an Income Rider guarantees a very strong accumulation % along with a payout rate that is higher than one from a balanced portfolio.

But yeah, its stupid to put an Annuity in an IRA...

 

[Mattschmidt]

Exactly. VAs have gone to sh#t.

And most do not have stellar sub-accounts (investment choices).

These days IAs rule the Rider world.

4% cap with an 8% Income Rider is pretty attractive these days.
A young person can find a 5% or 6% Rider. Plenty of current retirees wish they would have locked in a guaranteed 6% at a young age.

Also, most Riders offer a payout rate of 4% or over at age 60.
A balanced portfolio should now use a 3% payout rate or even 2%.

So an Income Rider guarantees a very strong accumulation % along with a payout rate that is higher than one from a balanced portfolio.

But yeah, its stupid to put an Annuity in an IRA...

You make some good points, but why not use traditional equities, bonds, etc. for the accumulation phrase and then moving the account to some type of Indexed annuity at a later age?

 

[DHK]

Because this is an insurance forum... not the stockbroker, managed money forum.
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But yeah, its stupid to put an Annuity in an IRA...

Why is it 'stupid' to fund your IRA with an annuity?

I guess promises, protection and guarantees are really 'stupid' today?

 

[scagnt83]

You make some good points, but why not use traditional equities, bonds, etc. for the accumulation phrase and then moving the account to some type of Indexed annuity at a later age?

It is all dependent on the situation. There is never ever a one size fits all Retirement strategy, no matter how much the retirement industry wants you to believe that.


But lets go down your suggested road for a second.

How do you suggest he invest in those securities? By himself? Broker assisted? Financial Planner assisted?

A Planner will want a planning fee of some sort, or a minimum amount of assets (usually $250k min).
A Broker will take smaller accounts but will take a higher % in comp most of the time.

But for someone who is starting out with an IRA you arent going to find many Brokers going out of their way for a $6k account... if they accept if at all. Now if you have other assets either with them or available for them to capture then you will look a lot more attractive to them as a client.

But go call your local ML office and tell them you have zero retirement dollars and want to start a ROTH IRA.
They will transfer you to the newest broker in the office; who will spend at most about 30-45 minutes with you, just to stick you in the Mutual Fund lineup that he just learned about in the Monday morning power meeting.....

For someone starting out an IRA who wants securities, they are best off going through an etrade type platform.
But then you get into the problem of an uneducated investor making investment decisions that will have significant financial impacts on their life.
Most will spend hours and hours surfing the net and watch cnbc to decide on a mix of mutual funds and bond funds that will keep up with the major index if they are lucky.
Most would be best served just investing in the ultra low cost Index fund and bypassing the ultra expensive mutual funds.

And that brings us to the Fees.
Lets say that your securities portfolio makes 10%. You will most likely pay at least 1%, but most probably around 2% in fees.
So your 10% is really more like 8% or 8.5%

So now you have to ask yourself this:
Would you rather take a chance at 8.5% or 9%?
Or would you rather guarantee 8%?

There is no right or wrong answer to that question. It is purely personal opinion.


But the problem with retirement accumulation isnt the long term, it is the short term.
People start young and they have the mindset that they can take lots of risks. And they can to some extent.
But as they grow older very few scale back the risk like they should.
And very few Brokers recommend for them to. Especially since they usually make less from the more conservative investments like bonds.

Then all of a sudden a person is 59 years old, plans to retire at age 60, has 70% of their retirement in non-conservative equities, and 2008 hits.
Even worse, they are already retired and have 70% or 80% in equities and 2008 hits.
Then they have no choice but to take income from an already depleted portfolio and create an even greater loss for the year which takes an even longer amount of time to recover from.


My point is that an IA Rider does exactly what most people "plan" to happen with their retirement assets. And it doesnt guestimate, it guarantees it.
Most retirement plans produced by CFPs use a 6%-8% assumed rate of return on an equity portfolio over a 10-20 year period. Then they show 3%-4% of the account value being paid out in income for the life of the client.

So if you could guarantee that, why wouldnt you? Just to chase the statistically small possibility of a slightly higher return???

Again, its opinion. But this reasoning resonates very well with baby boomers... not so much with stock brokers... lol.


Dont get me wrong. I am not anti market. I own stocks and funds of various sorts. But for money that I have earmarked for retirement, the only equities I invest in are ultra low fee Indexed Funds.
The rest is "play money" that I can live without if it doesnt work out.

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Why is it 'stupid' to fund your IRA with an annuity?

I guess promises, protection and guarantees are really 'stupid' today?

It seems that my sarcastic typing skills are not on point today