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Posted by Mark Freeland on March 28, 2008, 6:10 pm
>
>
> My wife has a broker acquaintance that wants her to invest her
> retirement fund (all of it) in a Pacific Life annuity. The annuity is
> supposed to double your money in 10 years or sooner. I noticed on the
> cover of the Pacific Life brochure that it states "may lose money"
It seems that every investment that is not federally insured caries that
warning. For example, Vanguard Prime MMF's prospectus says: "it is possible
to lose money by investing in the fund". In the case of fixed annuities,
they are guaranteed by the insurance company. Pacific Life isn't as solid
as, say, Met Life, but it seems to be quite sound.
> What sort of guarantee do these things have if the company goes belly
> up?
If it's a fixed annuity, state regulators generally work with the company to
make investors whole, or nearly so. See, e.g. ELNY (Executive Life of New
York), 1992:
http://query.nytimes.com/gst/fullpage.html?res=9E0CE7D8163EF931A15752C0A964958260
The guarantees are made by the insurance company, so are only as good as the
company.
Variable annuities are kept in segregated accounts, just as mutual funds are
segregated from the distributor (fund family). So creditors of the
insurance company cannot raid them in case of default or bankruptcy.
> With today's rocky financial climate how safe are these investment
> vehicles? BTW, I think my wife would have to pay $6600 in commissions
> on this deal.
This is the first clue that you're talking about a variable annuity. Fixed
annuities are generally offered "without commission" (because the rate
offered is reduced to provide the insurance company the profit necessary to
pay the salesman).
You can get good, noload, low cost variable annuities from Vanguard and
Fidelity. No back end fees, low annuity costs (around 30 basis points plus
the usual fund expenses). You might have your wife ask her acquaintance
what advantage the Pacific Life variable annuity offers over these noload
ones.
Doubling in 10 years requires an annual return of about 7.2% (rule of 72).
With total annuity costs (fund expenses plus annuity expenses) around 2%,
that means a return, before expenses, pushing 10%. That's a pure stock
portfolio, which over 10 years may return more, may return less, than its
historical average. No way should one say that a portfolio _should_ return
10%/year over a mere 10 years. The best one can say is that more likely
than not, it will.
Mark Freeland
BnetOnewsX@sbcglobal.net
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