Wayne Adult Community Center
Feature article from the February 2007 Newsletter


Yet Another Way to Take Your Money

This article is based in part on the newspaper article cited below.  Some information and advice has been added by your newsletter editor.

 There are increasingly frequent reports of people in the 70s and 80s being convinced to put most or all of their savings into annuities that sound wonderful as presented by the “financial advisor” but in fact are very, very bad investments.  The real benefit goes to the seller, who receives a commission typically in the range 9 to 15 percent of the amount invested.

 An article by Kathy Kristof (Personal Finance, “A warning for seniors”, Star Ledger, Sunday, December 10, 2006) tells of people sold “equity indexed” annuities, which promise a guaranteed income.  The buyers find out the worst only after the purchase.  Typically, payments begin only after a period ranging from 5 to as much as 15 years.  The Kristof article recounts the experience of one elderly lady who bought such an annuity and learned months later that she would receive no payments until after her 92nd birthday.

 And if the buyer wants or needs their money back before a specified “surrender period”, there is usually a “surrender fee” that can amount to one quarter of the investment.

 Many if not most of the people who claim the title “Financial Advisor” are actually selling investments that will give them and not you, a handsome return.

 Some policies do allow partial withdrawals with no surrender fee, but in that case any income earned by the amount withdrawn during that year is typically forfeited, even if the money is withdrawn very late in the year.

 Some states, including California and Florida, have passed laws against selling “inappropriate products” to seniors, but ultimately the responsibility for guarding your money is yours.

 The most common, financially deadly mistakes:

 Signing anything that you have not read in its entirety.

 Signing something you have not understood in its entirety.  Unfortunately, most annuities, which are a form of insurance policy, are written in highly legalistic language that few lay people understand.  Some years ago a relative of your newsletter editor, who is highly intelligent but who overestimated his financial sophistication, bought an annuity that turned out to be a financial disaster.  Which brings us to the next mistake:

 Assuming that you can divine the meanings of unfamiliar terms from the context.  For one thing, some words mean one thing in ordinary English and another in legalese.

 Taking the word of the “advisor” who is touting a particular investment, that you misunderstand some aspect of the documentation, and that you should accept his explanation over what you see in black and white.

 Some Additional Ways to Be Cautious:

 Beware of free “seminars” and of radio or television programs that are made to seem like independent advice from a financial expert, but are pushing a particular product line.  They are nothing more than sales talks.

 Buy nothing on impulse.  If the offer is good “only today” or “only for the next hour”, it’s almost undoubtedly something that you would not buy if you have time to think about it.

 Describe a potential major purchase with a trusted friend.  The friend can provide an unemotional second opinion.

 If you are confronted with a legalistic document, take it to a lawyer for review and interpretation.

 And of course, anything that is offering abnormally high returns or is in some other way “too good to be true” probably has “gotcha’s”.

Thanks to Charles McNally for bringing the cited article to our attention.

W. A. Shapiro