Don’t Be Deceived by These 7 Annuity Myths

Before you commit to an annuity as part of your retirement plan, it’s good to know the basics of this retirement tool. Every year, Americans put hundreds of millions of dollars into new annuity policies. Yet there still seems to be a measure of annuity misconceptions and confusion among consumers.  

You may have seen that a quick internet search of the word “annuity” delivers a wildly diverse set of opinions! And every financial pundit has their own take on annuities. Some of the loudest voices on the internet even claim to be against them, all the while offering annuity or annuity-like solutions to their following.

To help you sort through the noise, we break down common annuity myths and supplement the conversation with some facts.

Watch Out for These Annuity Myths

Here are some common annuity misconceptions of which to be mindful:

MYTH #1: All annuities have extremely high fees. 

FACTS: Many investments, such as stocks, have fees. Annuities are no different. Every annuity is an insurance contract between a consumer and an insurance company. Just as every annuity varies from company to company and contract to contract, so do the associated fees.

That being said, many annuity contracts are available at low cost. You will want to weigh the costs of an annuity against the benefits you will receive. Do you want the annuity for the benefit of receiving guaranteed lifetime income? For the build-up of retirement money? For tax-deferred money growth?

Make sure you include the ‘extras’ in your evalaution. Any additional benefits, features, or guarantees should be weighed against what they might cost.

Annuity fees are calculated based on the contract’s features—and whether or not those features are part of a base contract or are add-ons. This gives you the flexibility to pay for only those features you want. Because of your specific needs, the cost of one of these benefits may be worthwhile for you.

Variable annuities generally come with upfront fees and charges. On the other hand, many fixed-type annuities have fees or other costs already built into their contract designs. Those can be seen in the interest rate for your contract or the income payments you receive.

You may find many costs in the fee and charge schedule of a variable annuity, such as:

• Mortality and expense risk charges
• Administrative fees
• Rider fees

In the case of fixed index annuities, in exchange for principal protection and some growth potential, there may be caps or limits on the portion of growth you receive in your credited interest rate.

Because these fees may be built into your contract, they aren’t necessarily add-on expenses for which you have to comb out of pocket.

MYTH #2: When I die, the insurance company keeps all my money. 

FACTS: In most cases, the remaining balance within an annuity contract will go to your designated beneficiaries. That assurance may come as part of your base contract or as a feature of a death benefit rider.

These riders often come at an additional charge, so be sure to check with your financial advisor or insurance agent about the details of any annuities you are considering.

By contrast, in the case of a life-only payout, you receive larger income payments than other payout options. The catch?

When you pass away any remaining sum will stay with the insurance company. In other words, the carrier keeps the remaining balance. You will want to think about this, if it matters to you, when considering a life-only payout option (or weighing against other annuity payout options) for your income strategy.

MYTH #3: Fixed annuities grow at an abysmal rate.

FACTS: With rising interest rates, fixed annuities may well see a bump up in their interest rates. Not only that, new research suggests that fixed index annuities may have more growth potential than many experts have previously thought.

In one of his latest research endeavors, famed economist Roger Ibbotson writes: Index annuities “may have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio, given their downside protection.”

In the study, Fixed Indexed Annuities: Consider the Alternative, Ibbotson shared this finding:

“My colleagues and I will show that a generic FIA [fixed index annuity] using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation. For these reasons, an FIA may be an attractive alternative to consider.”

You may recall that fixed index annuities offer interest crediting based on an index.

As such, they can offer interest crediting that may be higher than others offered in the current interest rate environment. That can include interest rates for CDs, money market accounts, and other such low-risk instruments.

MYTH #4: I can generate the lifetime income I need from my portfolios. 

FACTS: Here’s something to keep in mind. Social Security and pensions may provide streams of ‘permanent’ or guaranteed income, that is true. Apart from them, however, annuities are the only instrument that can generate a guaranteed lifetime income.

The markets in which your portfolio might be invested are unpredictable. No one can be 100% sure of how they might perform. Sequence of returns risk is a real threat, especially for those who have just retired or are near there.

Add the prospect of a long retirement into the mix, and it means we can’t be certain that our portfolios will last as long as we live. 

Many research studies suggest a 4% withdrawal rate for retirement accounts, with the rate being adjusted for inflation each year. However, retirement researchers such as Dr. Wade Pfau have found that this rule may have varying levels of success in different economic conditions. 

Your income certainty may rest on many factors:

• Market valuations of when you retire,
• Future market effects on your portfolio values,
• Current as well as future interest rate levels, and
• Inflation, to name a few.

With an annuity, an insurance company pledges to pay you a certain sum of money for the rest of your life. Those income payments can start immediately or further down the road, depending on when you might need them.

The question of whether you would have more peace of mind from having income you can’t outlive, no matter how markets perform, may be worth thinking over. However, be mindful that once you have bought an annuity, you lose some of the access to that money that you had beforehand.

Most annuities do offer some liquidity, though. The majority of contracts allow up to 10% withdrawals after you have held a contract for some time.

MYTH #5: Annuities are only for income.

FACTS: Actually, annuities can fit other needs than income. Each type of annuity is designed for specific retirement purposes: conservative growth, asset conservation, long-term-care funding, or legacy planning, to name a few.

In the study mentioned above, Roger Ibbotson encourages retirees and people nearing retirement age to take steps to “de-risk” their portfolios—or move their portfolio into more of a wealth-preserving position. In addition, his research shows how money in indexed contracts may grow at a slighter faster pace than in the fixed-income bond portion of a retirement portfolio.

Some annuities are designed for special needs. For instance, one type of annuity can allow for tax-free funding of qualifying long-term-care needs. Certain provisions of the Pension Protection Act of 2006 make it possible for this contract to provide tax-free proceeds for long-term care needs. This is called an asset based long-term care policy. 

There are those who may not pass underwriting for a long-term care insurance policy. Or they might worry about long-term care insurance premiums eventually becoming unaffordable. For those individuals, it may be worth evaluating an annuity with an LTC benefit instead.

MYTH #6: All annuities are the same.

FACTS: Insurance carriers are continually developing new solutions to help consumers address their current and future needs. The foundation of annuity products can be broken into five types:

• Immediate annuities (SPIAs)
• Multi-year guarantee annuities (MYGAs)
• Fixed annuities
• Fixed indexed annuities
• Variable annuities

As you can see, there is no one-size-fits-all annuity. Every person has a unique profile, unique goals, and a unique set of assets. Thankfully, there is great diversity among available annuity solutions, so you are likely to have several options to choose from to meet your needs.

MYTH #7: Annuities are just for retirees.

FACTS: Yes, annuities have primarily attracted people seeking to generate income in retirement, with bond rates at their current low levels and, for many, falling short of providing enough safe income, annuities are gaining popularity as a new asset class that can offer a bond-style return, safe from volatility.

Annuities can be useful to savers who have maxed out their contributions to 401(k), 403(b), other employer-sponsored retirement savings plan, or an IRA. And many look to deferred annuities as an additional tax-deferred vehicle to help them build wealth.

The best way to find out the truth about annuities — and what they might be able to, and can’t do for you — is to consult your financial professional. They can help you explore what benefits you need and what solution can provide those to you.

Need Guidance with Finding the Right Annuity Solution?

The annuity marketplace changes everyday, and it has tens of thousands of contracts. Many people can find it to be quite overwhelming. If you would like personal guidance with exploring your annuity options, financial professionals at SafeMoney.com can help you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.