The only way you can decide whether annuities are right for you is by looking at the facts. Unfortunately, there are plenty of annuities myths floating around that can get in the way of making an informed decision. To help straighten everything out, we’re looking at the most common myths and why they are wrong.
Annuities Always Lose You Money After You Die
The length of an annuity payment depends on how you set up your annuity. When you start receiving payments from an annuity, you can ask that it guarantees payments for the rest of your life so you never outlive your savings. But if you die early, did you just waste all your money? Not necessarily.
Most lifetime income annuities let you set up a provision where the contract will always pay out a minimum amount of money. For example, if you spent $100,000 you can ask that the annuity pay out at least $100,000. If you die before receiving the full amount, the remaining payments will go to your heirs.
Annuities Unfairly Lock Up Your Money
An annuity is a contract with an insurance company and for the guarantees provided, a contract holder agrees to a certain time period. These time periods, called a surrender schedule, typically last between 5 – 12 years. During this time period for most deferred annuities, your original deposit and interest are completely liquid, but withdrawals in excess of the penalty free amount will be charged a fee. Most annuities allow for withdrawals of 10% of the account value each year without penalty or fee. In exchange for your deposit the insurance company may offer you several guarantees which can include principal protection, interest growth, and even income for life.
It’s a trade-off. Yes, you might have more flexibility investing on your own, but then you don’t get the insurance guarantees. The 10% no fee withdrawal provision on most annuities allows you to take advantage of the guarantees annuities provide while still having access to your money.
All Annuities Are: Bad/Good/Based on the Stock Market, etc.
There are so many types of annuities that you cannot broadly categorize them the same way. But that’s what critics often do. For example, Ken Fisher is a famous annuity critic who runs ads that say “I Hate Annuities… And So Should You!”
He says the fees on these products are too high and investors are better off on their own. In most cases he is referring to high-fee variable annuities that invest in the stock market and comparing them to a regular stock market portfolio.
His critique might have some valid points in regards to variable annuities, a specific type of annuity, but it’s totally inappropriate to write off the whole annuity industry. There are many low-fee or no-fee annuities, and the investment guarantees on them can make their costs worthwhile. We find that fixed annuities or fixed index annuities can offer attractive rates with very low or no fees. Fisher even admits that fixed annuities can be appropriate in some situations, so even he does not apply a broad generalization.
I Can Do Everything an Annuity Does on My Own
Sure, you could build a retirement income portfolio on your own and try to budget your annual withdrawals each year through market ups and downs, but you simply cannot match the guarantees that annuities can provide. Fixed annuities can guarantee your principal from stock market losses, provide a fixed interest return for years and also provide you a set payment for your entire life. Insurance companies can do this effectively because they are able to pool the money of thousands of people and have the massive reserves to survive market downswings.
If you are on your own and run into a bad market stretch, there is a real risk you’ll run out of money. You cannot guarantee that you will never outlive your money but an annuity can.
Whether or not an annuity is right for your plan depends on your personal situation. But make a decision based on real facts, not annuities myths.
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Annuities are generally considered long-term investments. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed indexed annuity is not a registered security or stock market investment and does not participate directly in any stock or equity investment or index. Annuities are not deposits of or guaranteed by any bank and are not insured by the FDIC or any other agency of the US. All guarantees are solely backed by the financial strength and claims paying ability of the issuing insurance company. With the purchase of any additional-cost riders, the contract’s values will be reduced by the cost of the rider. This may result in a loss of principal and interest in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. This illustration does not take into surrender charges which may apply to early withdrawals.
Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit.An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.Insurance products, including annuities, are offered through David Nicholas, a licensed insurance agent in the state of Georgia.