Is a financial planner trying to swindle my mom?

NEW YORK ( Money) -- Question: My 63-year-old mother earns about $1,200 a month, has $90,000 in savings and, as a result of a recent refinancing, has a $90,000 30-year mortgage. In three years she will begin collecting an estimated $1,300 a month from Social Security. A financial adviser suggests she put $60,000 into a variable annuity that is guaranteed to double in value in 10 years. Is this a good idea? --David, Denver, Colorado

Answer: Whenever someone tells me they're considering an investment that purports to deliver lofty guaranteed returns, my antennae automatically go up. Doubling your money in 10 years amounts to an annualized 7.2% gain, a guarantee that borders on too-good-to-be-true in almost any market, especially today's.

When this investment involves an annuity, I become even more suspicious because annuities are notorious for hitches and complications that can make them far less appealing than they seem.

And when I see that this annuity is being pitched to an older person, alarm bells really begin to go off for me because regulators have long warned about sales people earning big commissions by convincing seniors, often at "free lunch" seminars, to put their money into annuities and other investments that are often inappropriate.

I don't say all this because I am "anti-annuity." On the contrary, I think in many cases it can make sense for retirees to devote a portion of their savings to a certain type of annuity - an immediate annuity, a.k.a an income or payout annuity - while leaving the rest in conventional investments like stock and bond mutual funds. The idea is that the annuity can offer a guaranteed lifetime income, while the funds can provide liquidity as well as long-term growth. (For more on how this strategy might work, click here.)

But variable annuities are a different breed. They're often sold more as tax-advantaged investments than income vehicles. With a variable annuity you get to invest in "subaccounts," essentially mutual fund portfolios, whose gains are sheltered from taxes as long as your money remains in the annuity.

That sounds just peachy, but there are downsides too. When you pull those gains out of an annuity, they're taxed at ordinary income rates, even if they're long-term capital gains that are normally taxed at more attractive long-term capital gains rates. And most annuities also carry high fees that can dramatically reduce their returns and, in my opinion, undercut their effectiveness.

Over the past few years, many advisers have begun selling a type of variable annuity that's designed to provide retirement income. It's called a variable annuity with a guaranteed minimum withdrawal benefit. But as I've noted before, I believe the combination of this annuity's mind-boggling complexity and generally blimpish fees make it an inferior choice to a combination of a plain-old immediate annuity and mutual funds.

I don't know which type of variable annuity your mom is being pitched. But I do know that she needs to understand what it costs and how it actually works.

Just getting a handle on costs can be daunting because the disclosure of fees is, how should I put it, so non-consumer friendly that you can't help but wonder if annuity sellers are purposely making it difficult for people to understand what they're paying. I've proposed an E-Z Annuity Fee Disclosure form and, who knows, maybe one day annuity companies and regulators will come up with something similar (or better) on their own to help people like your mom.

As for understanding how the annuity works, that's an even bigger challenge. Let's start with that guarantee you mentioned. What exactly is guaranteed to double in 10 years? You might assume that it's the value of your account - that your mom invests $60,000 and in 10 years is guaranteed to have $120,000 no matter what happens in the financial markets.

But there may be any number of strings attached to that sum. For example, your mom might not actually be able to withdraw $120,000. To collect on the guarantee, she might have to take that amount in payments over the rest of her life. And the annuity company could pay a subpar return during that time, in effect taking away at the back end the alluring gain the annuity appeared to deliver the first 10 years.

Your mom also needs to know what happens if she has to get to her money for unexpected expenses or an emergency. Most variable annuities come with surrender charges that can start at 10% or more and take years to disappear. Many annuities allow you to withdraw up to 10% of your account value with no withdrawal charge, but withdrawals can also affect the guarantee. (Withdrawals from an annuity before age 59 1/2 can also trigger a separate 10% IRS penalty tax. That's not a concern for your 63-yer-old mom, but other readers should keep this tax in mind.)

My advice is that you and your mom sit down with an adviser and figure out how much income she'll need in retirement and how she should get it given her resources. She may not need an annuity. After all, Social Security provides lifetime income that's adjusted for inflation. If an annuity does make sense, the adviser can help her decide which type is right for her.

A fee-only planner willing to work on an hourly or flat-fee basis would be most likely to provide the most independent advice. You can find such planners in your area by clicking here.

One final note: I couldn't help but wonder whether your mom's $90,000 in savings came from the proceeds of her $90,000 refinancing. That led me to wonder whether the adviser recommending the annuity also recommended the refi.

If so, I'm not saying there's anything necessarily sinister going on. But it would raise additional suspicions in my mind about the adviser's motives, especially given all I hear about seniors being steered into reverse mortgages by people looking to sell them annuities or other products. If you come to the conclusion that the annuity salesman was behind the refi and that the goal was to sell your mom an annuity she didn't really need, I'd recommend reporting the incident to the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), your state securities regulator and your state insurance department.

I think it's worthwhile keeping regulators informed about what's going on given all the inappropriate investments, scams and other ploys being directed at seniors these days. Who knows? The information might prove helpful later on for someone else's mom.