MONEY financial advice

How Listening Better Will Make You Richer

Ruslan Dashinsky—iStock

A financial adviser explains that when you hear only what you want to hear, you can end up making some bad money choices.

Allison sat in my office, singing the praises of an annuity she had recently purchased. She was 64 years old, and she had come in for a free initial consultation after listening to my radio show.

“The investment guy at the bank,” she crowed, “told me this annuity would pay me a guaranteed income of 7% when I turn 70.”

I asked her to tell me more.

Allison had invested $300,000 as a rollover from her old 401(k) plan. She was told that at age 70, her annuity would be worth $450,000. Beginning at age 70, she could take $31,500 (7% of $450,000) and lock in that income stream forever.

“And when you die, what will be left to the kids?” I asked.

“The $300,000 plus all my earnings!” she said.

Suddenly my stomach began to sour.

Allison, I was sure, had heard only part of what the salesperson had told her.

I followed up with another question: “Besides the guaranteed $31,500 annual income, will you have access to any other money?”

“Oh yes,” she answered. “I can take up to 10% of the account value at any time without paying a surrender charge. In fact, next year I plan to take $30,000 so I can buy a new car!”

This story was getting worse, not better.

It was time to break the news to Allison.

I asked her to tell me the name of the product and the insurance company that issued it. Sure enough, I knew exactly the one she bought, since I had it available to my clients as well.

That’s when the conversation got a little tense.

I explained that if she withdrew any money from her annuity prior to beginning her guaranteed income payment, there was a strong likelihood she wouldn’t be able to collect $31,500 per year at age 70. Given the terms of the annuity, any such withdrawals now would reduce the guaranteed payment later.

She disagreed.

I explained that, with this and most other annuities, if she started the income stream as promised at $31,500, she would not likely have any money to pass on to the children.

She told me I was wrong — and defended the agent who sold her the annuity. She said that she bought a guaranteed death benefit rider so that she could protect her children upon her death.

I encouraged her to read the fine print. As expected, she reread the paragraph that stated that the “guaranteed death benefit” was equal to the initial investment plus earnings, less any withdrawals. When I told her that her death benefit in all likelihood would be worth nothing by age 80, she quickly said, “I need to call my agent back and check on this.”

I have conversations like this a lot, and not just with annuities. When it comes to investments, whether they’re annuities, commodity funds, or hot stocks, people often hear only what they want to hear. At various points in his sales pitch, the annuity salesman had probably said things like “guaranteed growth on the value of the contract,” “guaranteed income stream,” “can’t lose your money,” and “heirs get everything you put in.” What she had done was merge the different parts of the sales pitch together and ignore all the relevant conditions and exceptions.

When people hear about a product, there’s an emotional impact. “I want to buy that,” they think. They focus only on the benefits of the product; they assume the challenging parts of the product — the risks — won’t apply to them.

This story has a happy ending. Before Allison left my office, I asked when she received her annuity in the mail. “Three days ago,” she said.

I reminded her of the ten-day “free look” period that’s given to annuity buyers as a one-time “do-over” if they feel that the product they purchased isn’t right for them.

She called me back within two days. “The agent doesn’t like me very much,” she said. She had returned the annuity under the “free look” period and expected to get a full refund. The annuity salesman had just lost an $18,000 commission.

And I once again saw the wisdom of something I tell my clients every day: Prior to ever making a financial decision, it is absolutely critical you evaluate how this decision integrates into your overall financial life. That’s what’s important — not falling in love with a product.


Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring with Confidence for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY 401(k)s

The New 401(k) Income Option That Kicks In When You’re Old

The U.S. Treasury allows savers to buy deferred annuities in their retirement plans. But no need to rush in now.

The U.S. Treasury Department has just given a tax break and its blessings to retirement savers who want to buy long-term deferred annuities in their 401(k) and individual retirement accounts.

The new rule focuses on a particular kind of annuity. These so-called deferred “longevity” plans kick in with guaranteed income when the buyer turns, say, 80 or 85 years old. For example, a 60-year-old man who spent $50,000 on a longevity annuity from New York Life could lock in $17,614 in annual benefits when he turned 80, the company said.

Like most insurance policies and traditional pension plans, these “longevity” plans take advantage of the pooling of many lives. Not everyone will live beyond 80 or 85, so those who do so can collect more income than they would have been able to produce on their own.

That takes the worry of outliving your money off the table. It also lets you take bigger retirement withdrawals in the years between 60 and 80. A saver who put 10% of her nest egg into one of these policies could withdraw as much as 6% of her retirement account in the first year instead of the safer and more traditional amount of 4 percent, estimates Christopher Van Slyke, an Austin, Texas, financial adviser.

A fee-only planner who tends to view many insurance products with some skepticism, Van Slyke likes these longevity plans for those reasons and because they convey a tax break, too: IRA and 401(k) money spent on these policies—up to 25% of the account’s value or $125,000, whichever is less—is exempt from the required minimum distribution rules that force savers over 70 1/2 to make withdrawals that count as taxable income.

The insurance industry loves this new rule, too, so consumers can be excused for taking some time to consider all the costs and angles. Treasury official J. Mark Iwry announced the new rule—declared effective immediately— at an annuities industry conference on Tuesday, and it was a crowd pleaser.

Related: Where are you on the Road to Wealth?

For retirement savers, the math just got harder. Should you buy such a plan? If so, when and how? What should you look for? Here are some considerations.

* You don’t have to rush. The younger you are, the cheaper these annuities are. A 40-year-old male putting down that same $50,000 with New York Life would get $31,414 in monthly benefits—almost twice the payout of the 60-year-old. But there’s a downside to that: Most do not have built-in inflation protection, points out David Hultstrom, a Woodstock, Georgia, financial adviser. So if you’re buying a $1,200-a-month benefit now but not collecting it for 20 years, you’ll be disappointed with its buying power. At a moderate 3% annual inflation rate, in 20 years that $1,200 would cover what $664 buys now.

* There are other reasons to wait. These policies are relatively new, and the Treasury’s rule “will open the floodgates,” Van Slyke says. Expect heightened competition to improve the policies. Furthermore, annuity payouts are always calculated on the basis of current interest rates, which remain near historic lows. A policy bought in a few years, in a (presumably) higher interest-rate environment probably would provide higher levels of income.

* Age 70 might be a good time to jump for those with lots of assets. Those required taxable distributions start the year you turn 70 1/2, so if you’re worried about the tax hit of taking big mandatory distributions, you could pull some money out of the taxable equation by buying one of these policies with it. Your benefits would be taxable as income in the year you receive them.

* Social Security is the best annuity. Before you spend money to buy an annuity, use money you have to defer starting your Social Security benefits as long as possible. Your monthly benefit check will go up by roughly 8% a year for every year after 62 that you defer starting your benefits. Social Security benefits are inflation protected, unlike these annuities.

* Think of your heirs. Money spent to buy an annuity is gone, baby, gone, so you can’t leave it to your kids. Some of these annuities will offer “return of premium” provisions. That means that if you die before you’ve received your purchase price back in monthly checks, your heirs can get the rest back. But that will probably cost you something in the first place. New York Life, for example, shaves almost $4,000 a year of annual payout for the 60-year-old who wants to add that protection to his policy. The heirs would get only cash that has been falling in value for all the years you’ve held the policy, not any income on that cash.

* This won’t solve your long-term care problems. The more money you have tied up in an annuity when you need round-the-clock nursing care, the less you have available to pay for that care. So if you want to use a longevity annuity to give yourself some income in those later years, you should also assure you have the big bad expenses covered. That means setting aside enough other money to pay the $7,000 to $10,000 a month it can cost for full-time nursing care, or buying a long-term care insurance policy you have faith in and can afford.

MONEY Ask the Expert

Should I Buy a Deferred Income Annuity—and When?

Robert A. Di Ieso, Jr.

Q: I’m interested in buying a deferred income annuity to supplement my income in my later retirement years. What is the best age to buy one? – Jeremy, Austin, Texas

A: As worries about running out of money in retirement grow, so has interest in deferred income annuities. Also known as longevity insurance, sales of these products hit $2.2 billion last year, double the amount in 2012, which was the first year of significant sales, according to Beacon Research and the Insured Retirement Institute.

Deferred income annuities are popular because they give you a hedge against outliving your money. They work like this: You give a lump-sum payment to an insurance company and in return, you get a guaranteed stream of income for life. In that way, deferred annuities are similar to immediate annuities. But with immediate annuities, the income kicks in right away. With deferred annuities, as the name suggests, the benefit payments don’t start until much later, perhaps 10 or 20 years down the road. Because the payments take place so far in the future, you can buy a bigger benefit with a deferred annuity compared to an immediate annuity.

Say you are a 65-year-old man today, and you deposit $50,000 into a longevity annuity that doesn’t start making payments for 15 years. You would get payments of about $1,300 a month starting at age 80. That’s another $15,000 a year in income. The longer you wait for the payments to kick in, the more you’ll get. In that same example, if you wait till age 85 for the payment to start, your monthly income jumps to $2,475. By contrast, a 65-year-old man who invests $50,000 in an immediate annuity today would get monthly payments of about $280 a month.

Of course, the downside is that if you don’t make it to 85 or whatever age you select for payments to start, you get nothing. You also need to consider that the benefits are not inflation-adjusted, so their purchasing power will have declined.

As for when to purchase the annuity, the younger you are, the better the deal. If you make the $50,000 purchase at age 55, instead of 65, with benefits that kick in at age 85, you will get 50% more income—$3,800 a month.

But first, you need to decide whether this move makes sense for you. That depends on your other sources of guaranteed income. If you already have a pension that covers most of your essential costs, you probably don’t need one. And the longer you can delay taking Social Security, which increases each year until age 70 and is adjusted annually for inflation, the less attractive it is to lock up money in an annuity. “Social Security is the best annuity income you can buy today,” says David Blanchett, director of retirement research at Morningstar Investment Management.

Beyond protection against outliving your money, however, deferred income annuities can give you peace of mind by reducing the stress of making your money last till you’re 100. “Longevity annuities remove a lot of uncertainty and that’s very valuable to retirees,” says Blanchett.

MONEY retirement income

Need Retirement Income? Here’s the Hottest Thing Out There

gold nest eggs
Joe Belanger / Alamy—Alamy

Sales of fixed annuities are surging as income-strapped retirees seek ways to rescue their retirement plans.

Annuity sales are exploding higher as retirees look to lock up guaranteed lifetime income in an environment where fewer folks leaving the workplace have a traditional pension. In a sign of wise planning, easy-to-understand basic income annuities are among the fastest growing of these insurance products.

In all, net annuity sales reached $56.1 billion in the first quarter—up 13% from a year earlier, based on data reported by Beacon Research and Morningstar. Variable annuities, often seen more as a tax-smart investing supplement for the wealthy than a vehicle for lifetime income, account for most of the market. These annuities, which essentially let you invest in mutual funds with some insurance guarantees, saw first-quarter net sales of $33.5 billion—down slightly from a year ago. (For more on the cost and potential risks of variable annuities, click here and here.)

Meanwhile, net sales of fixed annuities, which offer more certain returns, surged to levels last seen in the rush to safety at the height of the Great Recession—totaling $22.6 billion for the quarter. Fixed annuities come in simple and complex varieties—those indexed to the stock market can be confusing and laden with fees. But the subset known as income annuities—the most basic and straightforward of the lot—grew at a 50% clip versus 44% for the index variety.

Basic income annuities, also known as immediate annuities, remain a tiny portion of the overall $2.6 trillion annuity market. Yet they are what most investors think of when they ponder buying an income stream. With an immediate annuity you plunk down cash and begin receiving pre-set guaranteed income over a period of, say, 10 or 20 years, or life. Rates have been relatively low, as they are for most fixed-income investments. Recently a 65-year-old man investing $100,000 could get a lifetime payout of 6.6%, according to

Another type of fixed annuity, called a deferred income annuity or longevity annuity, lets you put down a lump sum in return for income that starts years later —think of it as a form of insurance for old age. Though less well known, longevity annuities are increasingly popular, with sales reaching $620 million in the first quarter, up 57%, according to LIMRA, an insurance marketing research group. You can find other types of annuities designed lock up income, but the amount of the payout is often a moving figure and the fee structure can be difficult to understand.

Lifetime income has emerged as perhaps the biggest retirement challenge of our age. The gradual shift from defined benefit plans to defined contribution plans over the past 30 years has begun to leave each new class of retirees without the predictable, monthly stream of cash needed to cover basic expenses. The push is on to help these retirees convert their 401(k) and IRA savings to a guaranteed income stream. But innovation is not coming fast, and traditionally many investors have been reluctant to tie up their money in fixed annuities. So the quarterly sales trends are heartening. They suggest that individuals are acting to shore up a critical aspect of their retirement plan.

MONEY Social Security

Surprise! Even Wealthy Retirees Live On Social Security and Pensions

Older Americans with six-figure portfolios rely on old-fashioned programs for half their income.

Where do affluent retirees get their income? Portfolios invested in stocks and bonds, you might think—but you’d be wrong. Turns out many are living mainly on Social Security and good old pensions.

That’s the surprising finding of new research from a surprising source: Vanguard, a leading provider of retirement saving products like individual retirement accounts and 401(k)s. Vanguard studied the income sources and wealth holdings of more than 2,600 older households (ages 60-79) with at least $100,000 in retirement savings. The respondents’ median income was $69,500, with median financial assets of $395,000. (The value of housing was excluded.)

The researchers were looking for answers to a mysterious question about the behavior of wealthier retirement account owners: Why do few of them draw down their savings? They found that nearly half the aggregate wealth of these households comes from the two mothers of all guaranteed income programs, Social Security (28%) and traditional defined-benefit pensions (20%).

The median annual income for these households is $22,000 from Social Security, with an additional $20,000 from pensions. Tax-deferred retirement accounts came in third among those who have them, at $13,000 (11%).

“Only a small number of the people who have 401(k)s and IRAs are really relying on them as a regular source of income,” said Steve Utkus, director of the Vanguard Center for Retirement Research. “There’s a lot more income from pensions than we expected,” he adds.

That last finding may seem surprising, given all the publicity about shrinkage of defined-benefit pensions. Although most state and local government workers still have pensions, only a third of private-sector workers hold a traditional pension, down from 88% in 1975, according to the National Institute on Retirement Security. And NIRS data points to a continued slide in the years ahead.

“Will this look different 10 years from now—will we have less pension income and more from retirement savings accounts? I think so,” Utkus says.

Another interesting finding: 29% of affluent retirees get some income from work, with a median income of $24,600. And the rate of labor force participation was even higher—40%— among households more reliant on retirement accounts.

“That’s only going to jump dramatically over the next few years,” Utkus says. “All the surveys show there’s a real demand for work as a structure to life. People say they can use the money, or they want to work to get social interaction.”

The findings are all the more striking because the big buzz in the retirement industry these days is about how to generate income from nest eggs. That includes creation of income-oriented portfolios, systematic drawdown plans and annuity products that act as do-it-yourself pensions.

Yet few retirement account holders actually are tapping them for income. The Investment Company Institute reports that just 3.5% of all participants in 401(k) plans took withdrawals in 2013. That figure includes current workers as well as retirees; the numbers are higher when IRAs are included, since those accounts include many rollovers from workplace plans by retired workers. With that wider lens, 20% of younger retired households (ages 60-69) take withdrawals, according to a study for the National Bureau of Economic Research and the Social Security Administration’s Retirement Research Consortium.

The income annuity market has been especially slow to take off. One option is an immediate annuity, where you make a single payment at the point of retirement or later to an insurance company and start getting a monthly check; the other is a deferred annuity, which lets you pay premiums over time entitling them to future regular income in retirement.

Deferred annuity sales doubled in 2013, to about $2 billion, according to LIMRA, the insurance industry research and consulting group. But that’s still a drop in the bucket of the broader retirement products market. And the Vanguard survey found that just 5% of investors surveyed held annuity contracts.

“The theme of translating retirement balances into income streams is emerging very slowly,” Utkus says.

The Vanguard study also underscores the importance of smart Social Security claiming decisions, especially delayed filing. “There’s been a sea change over the past year,” Utkus says, with more people recognizing that delayed filing is one of the best ways to boost guaranteed income in retirement. Vanguard is “actively discussing” adding Social Security advice to the services it offers investors, he says.



MONEY Macroeconomic trends

Momentum Strategy: Skip Stocks, Go for Sectors

A momentum strategy can boost returns without too much risk. Just don't be too greedy. Illustration: Taylor Callery

You’ve no doubt been warned more than once that chasing last year’s winners is a fool’s game that increases your trading costs, tax liability, and investment risk.

That’s especially true if you are constantly moving in and out of individual securities, which is the classic momentum strategy. Yet a decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.

“Momentum is persistent, pervasive, and well documented in virtually every investment and in every country,” says Gregg Fisher, chief investment officer with the asset-management firm Gerstein Fisher.

So how do you take advantage of momentum wisely? As with many things in life, moderation is key.

Lessen the bounce

Sam Stovall, chief equity strategist with S&P Capital IQ, points out that any added gains from buying what’s been going up “don’t come free.” History shows that momentum investors have to assume greater fluctuations in their returns.

But there’s a neat twist to the numbers. Researchers at the asset-management firm Leuthold Group divvied up the investment universe into seven major asset classes: blue-chip U.S. stocks, small-company shares, foreign equities, government bonds, commodities, gold, and real estate investment trusts.

Over the past four decades, a portfolio entirely made up of the prior year’s absolute top asset class beat the S&P 500 by more than three percentage points a year, but it was also two-thirds choppier.

A “bridesmaid” portfolio composed of the previous year’s second-highest performer, however, was only slightly more volatile than the index, and it returned five percentage points more. (For the record, last year’s runner-up asset class was blue-chip U.S. stocks. Small U.S. stocks were the absolute winner.)

Be only a little greedy

Of course, no sane investor would keep such an undiversified portfolio; there are years it would kill you.

In 1997, for instance, you would have lost more than 14% holding a basket of commodities while the S&P 500 returned more than 33%. And turning over sizable chunks of your holdings would indeed cost you in fees and taxes, eating into your gains. So momentum strategies should be applied with a good bit of caution.

Fisher suggests that you think about leaning slightly toward what’s hot — say, by moving up to 10% of your portfolio to a momentum-driven approach — rather than committing huge chunks of your capital.

“Our view is that investors are well served by tilting toward momentum,” Fisher says. “But they’re even better served by doing so in the context of a well-diversified portfolio.”

MONEY annuities

Buying an Annuity for Retirement Income? Think Twice

Eyeing a variable annuity to help bring in more retirement income? Or already have one? The terms are changing to make payouts less generous, so you'll have to decide whether to fish or cut bait.

Get a minimum income for life, no matter what. That compelling sales pitch has propelled investors to pour $1.5 trillion into variable annuities in the past decade.

Driving most of those sales was not the annuity itself, essentially a tax-deferred investment account; rather, buyers have been attracted by the “living benefit” rider, an optional feature ensuring that you can draw a base income from your investments regardless of how the markets perform or whether you drain your account.

Before the financial crisis, riders commonly guaranteed impressive returns of 8%-plus and annual withdrawals around 7%. So it was no wonder that over a period that included two bear markets Americans eagerly rushed into these insurance products, seeing them as the antidote to investment risk.

These days, however, the variable annuity and rider combination isn’t looking like the panacea it once seemed to be.

Over the past 18 months, most of the insurers that sell these products have seriously scaled back guarantees offered on new contracts while hiking fees and restricting investment allocations on both new and existing policies.

Seven major firms, including AXA, John Hancock, and Prudential, have limited or prohibited additional investments in some of their older, more generous contracts. A few companies have even offered buyouts to customers willing to cancel the rider.

Meanwhile, the Securities and Exchange Commission is now looking into whether buyers were ever made fully aware of the potential for such changes.

What’s going on? First, the financial crisis tanked customers’ portfolios, putting insurers on the hook for billions in guarantees on pre-2008 contracts. Since then, years of low interest rates have left firms uncertain that they will be able to satisfy future payouts.

“A lot of companies got burned,” says Moshe Milevsky, a finance professor at Toronto’s York University. Besides rejiggering the terms on their contracts, many insurers have reduced the number of policies they sell; last year two big names — Hartford and Sun Life — dropped out of the business altogether.

Related: The Social Security mistake that could cost you thousands

If you have a VA or were thinking of buying one, you’re probably wondering where all this leaves you. For owners, the answer depends on your contract, your account value, and the changes to your terms.

For income shoppers, it ultimately comes down to what risks you can accept — though there are cheaper, simpler, and more profitable ways to ensure that you won’t outlive your money.

The sections that follow will help you make the right decision for you.

What the changes mean

While each insurer is tweaking its terms differently, there are a few common threads: limited investment freedom, tightened minimum-return and income guarantees, and higher fees.

The most common — and arguably most impactful — shift has been to cap owners’ stock allocation. Through the VA itself, investors used to be able to choose from a large menu of mutual funds. You could go whole hog into stocks, if you so desired, knowing you had the rider’s guarantees as a backstop.

Related: Annuity payment calculator

Today most buyers who opt for a rider — 88% do, says research firm LIMRA — will see their stock stake capped at around 60%. You may also be required to use model portfolios or “managed-volatility” funds, which automatically shift assets from stocks to more conservative choices if your account value falls a certain percentage within a short time.

Such restrictions can have a huge impact on the value of the rider because of how the vehicle is structured.

First thing to know: While the actual money you’ve stashed in a VA-with-rider fluctuates with the value of your investments, a hypothetical account called a benefit base grows at a minimum “roll-up” rate each year — say, 5% — even if your real-life investments lose money. If your actual investments do better than this guaranteed return, the benefit base is increased, or “stepped up,” to match them.

The rider also has a set schedule of guaranteed withdrawal rates based on the age you start collecting. Whenever you decide to start taking income, the percentage is applied to your benefit base to determine the amount. Then the money is drawn from your actual account.

You can generally tap the account for more, if needed, as well, though it will affect your future income. In the most popular kind of rider, known as the guaranteed minimum withdrawal benefit, the insurance kicks in once withdrawals drain the account, allowing you to continue receiving the same amount for as long as you live. (If you die before depleting the account, your heirs get what’s left.)

Investment restrictions decrease the chances that your portfolio will suffer a major downturn, thus decreasing the chances the insurance will come into play at all. Also, the smaller your stock allocation, the less potential for step-ups. “If you’re forced to have a balanced allocation, what’s the point of buying protection?” asks Milevsky.

Changes in guaranteed income further diminish the rider’s value. Two years ago 70% of riders offered a 5% withdrawal rate. Now less than 50% do, says Morningstar.

A lower withdrawal rate means it takes longer for your account to run out and longer for the insurer to have to shell out its own money. Roll-up rates have drifted down too, from a typical 8% to around 5%, and some companies have found ways to further limit them (such as capping the number of years).

More: Rising fees

Then there are the fees.The average toll for the popular minimum withdrawal benefit rose from just under 1% in 2009 to about 1.25% as of December, says Morningstar. Add to that the hefty costs of the base VA itself and expenses end up biting off 3.7%, on average, of the account value per year, according to the latest figures.

Over time that severely crimps your portfolio’s ability to grow. Even after a bear market like the one in the 2000s, $100,000 in a mutual fund portfolio of 60% large-cap stocks and 40% intermediate-term bonds (assuming 0.75% in fees) would have grown to around $131,600 in 10 years. The same investment in today’s average VA rider would be worth only $95,500.

Bottom line: These changes greatly reduce the payouts possible compared with past contracts. In a bull market, you’re looking at thousands less in annual income.

The cutbacks give ammunition to the product’s detractors, who have long argued that high fees eroded VAs’ supposed benefits. “The upside potential on these is just a marketing fantasy,” says Scott Witt, a Milwaukee-area actuary and fee-only insurance adviser.

Proponents counter that the products allow investors who remain scared stiff by the markets to feel comfortable with a bigger stash of stocks. VA riders “deliver peace of mind through guarantees of lifetime income, which can be especially valuable in an uncertain economic environment,” says Whit Cornman, a spokesman for the American Council of Life Insurers.

Related: How much will you need for retirement?

But even some fans say that skimpier riders have made them less likely to recommend the products. “Today’s benefits are so inferior,” says Scott Stolz, president of the insurance group at financial advisory firm Raymond James.

What to do if you already have a VA-rider combo

Know what you’re in for: Owners with contracts written before 2011 have been most vulnerable to term revisions. Thus far the most common changes have been to restrict stock allocation or force customers into more conservative options, to raise fees on the riders, and to limit additional contributions (guarantees haven’t been touched for existing policyholders).

The fine print in the contracts generally allows your insurer to make these types of revisions, though the company will be required to inform you when terms are amended.

Haven’t heard anything yet? You are not necessarily in the clear, says Stolz of Raymond James: “The longer interest rates stay low, or if there is a significant drop in the stock market, the more companies will feel a need to make changes.”

Evaluate your guarantee. If you’re being hit with a change, you have two choices: Accept the new terms and keep the contract, or cancel and find an alternative investment.

One way to make this decision is to look at the difference between your benefit base and the account value: If the former is at least 15% higher, you should probably keep the rider, says Wheaton, Ill., financial planner Robert O’Dell.

Calculating how much income you could take right now can also help you benchmark, says Stolz.

Start by multiplying your withdrawal rate by your benefit base; for example, 5.5% of a $500,000 benefit base is $27,500 a year. Next, compute what percentage of your actual account balance that income represents. On a balance of $435,000, $27,500 represents 6.3% — much more than the 4% initial maximum that financial planners would recommend drawing from a portfolio to sustain a long retirement.

“It’s an indicator of value,” Stolz says, one that would probably outweigh the effect of any higher fee or investment change.

What if you’re offered cash to drop the rider? Offers can be tempting (Hartford, for example, is dangling up to 20% of the benefit base for certain accounts). But as David Blanchett, Morningstar’s head of retirement research, points out, “If the insurer wants to buy your policy, taking the cash probably isn’t a very good deal for you.”

You’re likely to have a valuable guarantee that the company doesn’t want to get stuck paying.

Keeping it? Start drawing now. An analysis published in February by York University’s Milevsky concluded that most owners of older rider contracts should take income sooner rather than later. Essentially, he said, at age 65 and beyond, the income from taking payments now outweighs any increase you might achieve through step-ups in your account value down the road.

Related: Can you afford to retire?

“The sooner you run down the VA and get the account to ruin, the quicker you start living off the insurance company’s dime and stop paying insurance fees,” his report says.

That said, if the percentage you can withdraw goes up with age and you’re close to a break point — you’re 69, say, and the percentage goes from 5% to 5.5% at 70 — wait until then.

Ditching it? Minimize your costs. Early on, variable-annuity owners are hit with a charge on the way out the door. These “surrender fees” usually decline over five to seven years — say, from 8% the first year down to 2% in the seventh. Wait to cancel until the percentage owed falls below the annual expenses you’re paying so as to avoid losing a lot of your investment value.

Also, be aware that if you own the VA outside an IRA, canceling could trigger a big tax liability: You’ll owe ordinary income taxes on investment gains.

You can avoid those by exchanging the annuity for another in what’s called a 1035 exchange, says financial planner O’Dell. See the next section for alternative products that can secure your income. Just make sure to get 1035 forms from the insurer.

More: What to do if you’re shopping for income

What to do if you’re shopping for income

Take stock of your stock anxiety. Even before the changes in rider terms, “there were cheaper ways of guaranteeing income,” says insurance adviser Witt.

Still, the product can make sense for certain people — in particular, those so fearful of another 2008 that they’re taking much less risk than they should. For such individuals, a VA-rider combo presents a shot at growth, notes Miami financial planner Bruce Cacho-Negrete.

To overcome the fees, though, you need to be mostly in stocks, he adds: “If you can’t get at least 80% exposure, it’s harder to make the case for these.” (Right now only one insurer, Jackson National, lets you go in that deep.)

Invest conservatively now, annuitize later … Got a stronger stomach? You’ll have potential for more income if you stash your money in a conservative, low-fee mutual fund portfolio until you need income, then purchase an immediate annuity at that time.

With this type of annuity, you hand over a lump sum to the insurer and start getting paid immediately. Unlike the VA, the amount you invest is the insurer’s to keep even if you die the next day. But payouts are higher, since insurers can transfer premiums of those who die early to those who live longer.

Currently, a 65-year-old man investing $100,000 could get $6,800 a year. The size of the check depends on your age and interest rates at the time of purchase, though — good reasons to wait to buy. (Find quotes at

Related: What are the different types of annuities?

Last September, Wade Pfau, a researcher at the American College of Financial Services, analyzed various income strategies for a 65-year-old couple, including immediate annuities, a VA-rider combo, stocks, and bonds.

His conclusion: A mix of stocks and immediate annuities provided the best balance of guaranteed income and flexibility to draw from savings for lifestyle needs or to cover emergencies. The exact percentages of each, he says, depend on your preference for meeting a spending goal, vs. having leftover wealth. But, Pfau adds, “50% stocks/50% annuity could be a pretty good mix.”

…Or nail down later income now. An alternative strategy would be to buy a deferred-income annuity, similar to an immediate annuity except that it allows you to lock in future income. You buy now and delay paychecks anywhere from 13 months to 45 years. A 65-year-old man with $100,000 can buy $16,520 a year starting at age 75; if he waits until 85 to start collecting, he’ll get $62,950.

The reason for the gaping difference: the increased likelihood he will die between 75 and 85 and the insurer will pocket the money. (Shop for these, too, at, but be aware that a deferred annuity is different from a deferred-income annuity.)

Related: Want $1 million? Protect your portfolio

On the upside, this method cuts out investment risk in the period before you need income. Downside: You lose the potential for market rallies that would boost your portfolio and interest rate hikes that would make the contract more productive.

The most effective way to use a deferred-income annuity is to buy one with a slim slice of your portfolio and push the income way into the future, says Pfau. The goal: to ensure you’ll have some income in your later years if your portfolio runs dry. You’ll pay much less for that security than you would for a variable annuity.

MONEY mutual funds

How Much Does Your Money Manager Cost You?

Charley Ellis, founder of Greenwich Associates, worries about the challenges aging boomers face from low bond yields to uncertain stock returns, and dubious financial come-ons. Photo: Joe Pugliese

Wall Street veteran Charley Ellis says your investments are a lot more expensive than you think.

Charley Ellis may not be a household name, but he commands the respect of many savvy investors.

He shook up Wall Street in 1975 with a landmark article in a financial trade journal that attacked the notion that professional money managers consistently beat the market.

Nonprofessionals stand even less chance of outperforming the benchmarks, argued Ellis, so individuals need to rethink their approach to building wealth. That influential piece was the basis for Ellis’s classic investing book, Winning the Loser’s Game, the sixth edition of which is due in July.

Founder of the financial consulting firm Greenwich Associates, Ellis has also served as a director of Vanguard. Today he still worries about investing costs, as well as the challenges that aging boomers face from low bond yields, uncertain stock returns, and dubious financial come-ons.

Ellis, 75, spoke recently with MONEY editor-at-large Penelope Wang. Their conversation has been edited.

Despite recent highs, bear markets and crises have made our readers nervous about stocks. What’s your advice for them?

Ben Graham said that people pay too much attention to what the market is doing currently. And he wrote his wonderful book Security Analysis in 1934. If people look backward, they will have one set of views. As they look forward, they’ll have another.

What kind of returns should people expect?

Seven percent annual average returns for stocks over the next decade is the consensus among the investing pros I talk to. Minus inflation and expenses. So you’re looking at a real return of 5% or less, which is not a lot. But over time you can still do pretty well.

So they should be buying stocks?

They should absolutely invest in a low-cost index fund. But nonprofessionals should forget about stock picking.

For an individual investor, it’s like my saying, “I’d like to play football with the NFL.” You’ve got to be kidding.

You don’t recommend giving money to pros to manage either.

Most active managers underperform because of fees. Some 80% of them would slightly beat the market, but after fees, their returns end up being below the market.

You’ve said that people should think differently about fund costs.

We’ve been describing fees in a way that really is nonsense. We ought to look at fees not in terms of assets, but as a percentage of the incremental returns of a fund — how much extra return you can expect over a comparable index fund.

Think of the 7% expected long-term returns of stocks. A 1.5% fund expense ratio is a big fraction of that 7%.

Now compare that with an index’s expected returns. How much more can you expect from an actively managed fund? Your fee wipes out any advantage — assuming you get those extra returns. Fees as a percentage of incremental returns are unbelievable.

Let’s turn to bonds. What’s your take on them, given ultra low rates?

The best piece of advice I could give long-term investors today is don’t own bonds. And if you do own them, you probably ought to move out of them.

Right now the Federal Reserve is set on keeping rates down. The yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value. People who are putting their retirement money into safe — quote, unquote safe — bonds can get hurt badly.

So someone with half of his or her money in bonds should move it into cash?

Moving entirely out of bonds into money funds or bank CDs may be too extreme for some people. But you can diversify more. You could look at foreign bonds or dividend-paying stocks, though you will be taking on more market risk than you would with CDs. Or you could perhaps stick with a short-term bond fund, which would fall less if rates were to rise. There’s no simple answer.

How and when might bond investors get hurt?

The Fed has enormous information about the economy, and two smart people heading it: vice chair Janet Yellen and chairman Ben Bernanke. They will just likely judge that the time has come to stop pushing rates down. They’ll look for signals like lower unemployment and higher inflation. I would expect to see rising rates in the next three, five, 10 years.

So what should pre-retirees do if they don’t know how to be invested for retirement?

One thing they should beware of: Bad guys are tracking who’s getting close to retirement. And they’re targeting people with pitches — mail, email, phone calls.

You get a lot of very sexy propositions: “Now is the time for you to break free” and “You’re entitled to control of your investments.” “This is, after all, your money. You should get it done your way.”

All this “you, you, you” stuff. The truth is, in all too many cases, people will get stuck with something that costs way too much and won’t deliver on promises.

How can you avoid getting stuck?

Anyone rolling over an IRA needs to be super-careful. If you hear from someone that you don’t know or someone from a firm you’ve never heard of, check them out. There are a lot of tough players out there who are selling all types of products and who don’t really worry about what happens to you.

So if you’re being offered something, ask the salesperson to put the numbers in writing and ask him, “Would it be a good idea if I run this by my accountant or my lawyer?” If he doesn’t like that idea, that tells you something.

It’s not just about a particular product, but also about how you buy it. Low-cost annuities are a good idea, but sales commissions often make them not that good a deal when you purchase them.

You should check fees rigorously. There are usually several ways to buy anything.

You also think that people should adjust their timetable for investing.

For someone around the age of 60, a 30-year time horizon for investments is perfectly sensible. If you have a younger spouse, it could be even longer than that.

You can change your behavior by thinking really long term. You can stop being flustered so much about daily market moves or even what the market does this year.

The longer your time horizon, the more you will surely invest in equities, which will help you build financial security. With a long time horizon, you will also focus more on protecting your family — your spouse and your kids — even after you’re gone. I’d like to help my grandchildren get to college.

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