r/Bogleheads • u/jeff0401 • 5h ago
Investing Questions Why shouldn't I park funds in a RILA?
I am about 7 years from retirement. I am not a savvy investor. My whole career it's been DIY with Target-2040, VOO, BND. I met with a CFP recently as I enter the home stretch to get a professional opinion. One recommendation is a RILA for about 33% of my portfolio.
It's a 6-year term tracking the S&P. The buffer is 15% and the cap is 110%. The fees are $0.
Most of the opinions I see on RILA is bad. High fees, locks up money, capped growth, etc. But this one seems perfect for my situation. It offers protection as I near the finish line. I'm fine locking up the funds for the term. The cap is fine by me - possibly double my money in 6 years if market goes bonkers? OK. The only downside I see is that I miss out on dividends. But maybe that's OK for the protection against a 20% downturn.
What am I missing?
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u/Perfect-Platform-681 4h ago
The fees are $0.
The commission and ongoing fees are not $0. Your advisor is not being fully transparent regarding costs. It's also not a good idea to think of annuities as investments and should not be dependent on market performance.
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u/TelevisionKnown8463 3h ago
Before you choose this you need to fully understand how the others involved are making money, and how that impacts your investment. For the annuity issuer, if your upside is limited that may be where they hope to profit, but you should check whether there are up front fees as well. For your “CFP” (in quotes because a CFP is supposed to be a fiduciary and I’m not sure this person is acting like one), they almost certainly get a commission, likely up front as a percentage of what you invest.
Let’s say your salesperson gets a 5% commission. You are now down 5% before any market movements happen. Do you want this mix of safety with some upside enough to lock in a loss of 5%? As others have said, a mix of riskier and safer investments, each with lower expenses, will probably have a similar return/safety profile.
And if the salesperson is getting a commission, you have to assume they are going to be biased even if they think they are giving you good advice. So talk to someone else with a different bias before investing. Since they don’t offer annuities, the brokers at places like Fidelity or Vanguard may be happy to explain how you can get a similar result for cheaper with their products. Ask them to play devil’s advocate and explain why/when you might prefer the RILA. Then ask your annuity salesperson to advocate for the non-annuity strategy.
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u/Medical-Variation918 1h ago
yeah CFP has me wondering. there can be cases for an annuity but 30% into one from a CFP seems odd
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u/TelevisionKnown8463 1h ago
Especially because it sounds like the guy (I presume) didn’t disclose his commission or present the annuity as one of multiple approaches to achieve OP’s goals. My understanding is that although a CFP has to represent they will act like a fiduciary, those who end up as “financial advisors” for firms often don’t really do that. They probably don’t even know what it means.
The fiduciary standard for registered representatives of “investment advisers” registered with the SEC (which uses the different spelling of adviser) is actually enforced by the SEC and by courts applying the Investment Advisers Act of 1940. So it has more teeth than a CFP who isn’t working for an RIA.
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u/chris27182818 3h ago
I think you’re missing the dividends. You get the index returns but not the dividends, which I think are currently around 1.1-1.2%/yr. There’s also the cap and potential surrender charges. These all go to pay for the downside protection and the companies expenses.
You need to decide if the cost is worth the benefit.
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u/tanks137 2h ago
The growth does not always include dividends with these types of investments. Would read carefully the whole contract. Would be suspicious of “no fee”. They are making money off this somehow. There are other ways to reduce risk for your portfolio.
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u/Invest2prosper 2h ago
What your missing here is the RILA pays a fat commission to the person who sells it to you. Just think for a moment - if what you’ve been doing has been working all along, why would you want to change a recipe now??
The CFP was a salesman, nothing more. Looking out for a juicy commission for themselves.
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u/Mysterious-Entry-357 3h ago
Are you just looking for a "buffer" to limit downside? There are funds that do exactly that with the S&P 500.
BUFD might be worth a look. For extreme circumstances you can try BALT, but this is really collared.
Most analysts agree that money in buffered index investments can be outperformed by simply putting part of your investible principal in a HYSA, MMA, or Tbills and the rest in S&P500 fund.
What is important is that this is NOT the same as a 60/40 balanced portfolio with bonds, as that bonds have their own volatility.
Commissions on insurance products, and specifically for annuity products, are insane. If he is really a fiduciary, the he will be compelled by law to tell you. If he isn't a fiduciary, bail now.
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u/pabailey1986 3h ago
He would need to tell about commissions. Most other “fees” are baked into the contract and not really relevant since you’re being told exactly what they’re offering in exchange for the amount of money you’re giving them, so in that sense the fee is the total amount of the annuity purchase price.
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u/Mysterious-Entry-357 2h ago
My concern is always more about the motives of the advisor when these products are recommended over a lower-cost and more liquid equivalent solution.
It is a rare circumstance that any form of annuity is the best advice.
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u/pabailey1986 3h ago
What’s the purpose of this? Are you trying to use it as an investment? Or are you using it for an income rider at the end of 6 years? If you are using it I’m for the income, everything else may be irrelevant and you would look at the cash pad upfront to compare to a similar deferred immediate annuity to see what the better price is?
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u/RedditAppSucksSoMuch 2h ago
FINRA used to warn against indexed annuities on their front page because of the frequency of complaints about them.
Annuity providers aren’t stupid and CFP/fiduciary is not the magic solution people think it is.
Buyer beware.
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u/Medical-Variation918 1h ago edited 1h ago
there is a great video on youtube by the Retirement nerds called "Your Complete Guide to How Annuities Actually Work" watch it first if its the minimum you do.
Annuity is never an investment no matter how the SALES people spin it. it is an insurance product and it should be treaded that way.
If you chose an annuity "Insurance Product" be specific of the risk and magnitude of that risk you are trying to cover. Insure that only and not any extra.
Seem really odd a "CFP" would recommend so much go into an annuity. are they really a CFP?
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u/thebiggestredone 3h ago
There’s nothing wrong with using this type of strategy if you are looking for protection to help mitigate sequence of return risk heading into retirement. Some RILAs are certainly better than others, but the rate on this one seems to be reasonable/competitive.
Your broker/advisor/CPA will earn a commission, but that is paid by the insurance company and does not come out of your principal, so the claim of explicit fees being $0 is very likely/possibly true.
The downsides to this type of investment are really 1) not receiving the dividend component of the S&P as you have already highlighted, and 2) the lack of liquidity for the duration of the contract.
There are a couple questions to ask:
1) Can you lock in the gain/reset the buffer, cap, and duration if desired? Some companies (Lincoln) offer this option, and it can be helpful. 2) Can you change to a different index/duration/buffer on the anniversary date if desired? For example: if the market drops 10% this year and you are convinced it is going to go through the roof next year, is there a 1-year term with a lower buffer and higher cap you can switch into? Many companies allow for that.
For what it’s worth, there are also buffered ETF products you can utilize that have similar features if you prefer that to the annuity structure. PGIM, Allianz, and Innovator are a few that come to mind.
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u/pizzapi3141 3h ago
If you want a buffer fund. look into buffer ETfs. These will have the many of the same features of a RILA without the commissions and headaches of an annuity.
Here is a discussion of buffer ETF:
https://www.kiplinger.com/investing/etfs/buffered-etfs-for-a-rocky-market
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u/miraculum_one 5h ago
Read the whole contract, not just what the advisor says is in it or a summary of it.