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fee, but in that case any income earned by the amount withdrawn during that
year is typically forfeited, even if the money is withdrawn very late in the
Some states, including California
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
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
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.