Annuity misconceptions often lead some people to miss out on their benefits, others to purchase the wrong kind of annuity.
The fact of the matter is, today’s low rate environment and high market volatility makes this an ideal time to really understand the benefits provided by certain annuities:
Returns that beat traditional conservative products like CD’s and money market accounts; the potential for returns competitive with alternative stock and bond portfolios; protection of principal from market losses; higher income payouts.
Annuity Misconceptions #1:
All Annuities have high fees
One of the biggest annuity misconceptions is promoted by “Wall Street”, and that is that annuity fees are too high. They don’t distinguish one type of annuity from another.
Now if talking about variable annuities, then I would be the first to agree.
On average, variable annuity fees range from 3 to 3.5%. Personally, I find these fees to be exorbitant and unnecessary when compared to the benefits they provide. Variable annuity fees include mortality and expense fees, the base contract fee, the sub-account fees and the optional income or death benefit rider.
Fixed annuities on the other hand usually have no fees, meaning that
100% of your money can to work for you on day one.
Many Fixed Indexed Annuities offer an optional guaranteed lifetime income rider which usually has a fee of about 1%. If you are like most people I talk to who are concerned about outliving their savings, you probably agree that 1% is a small price to pay for the sense of security you will have knowing that you will never run out of money.
So, before dismissing all annuities as being too expensive, take the time to understand what type of annuity you are thinking about purchasing.
Better yet, I’ll run it through my Custom Annuity Review software so you can be sure that the annuity you are thinking about purchasing will likely perform as you think it will or if another annuity might be a better option for your particular needs.
Annuity Misconceptions #2:
This is a bad economic climate to purchase an annuity
Today’s low interest rate environment coupled with extreme volatility make this an ideal time to consider a fixed indexed annuity. The fact is that if you have retirement assets earning less interest than the current rate of inflation, you may be taking on more risk than you realize.
Most fixed indexed annuities provide guaranteed rates above those of other safe money vehicles like CD’s and money market accounts, with the potential for higher market indexed growth potential and protection of principal.
Annuity Misconceptions #3:
Owning an annuity means I can’t access my money if I need it
Most annuity contracts allow for 10% penalty free withdrawals during the contract’s surrender period. Proper planning means that you should never over-fund an annuity and that you should have an emergency fund as well as other liquid assets so that you never have to take out more than 10% from your annuity contract.
But, even if you did have to take out more than 10%, your actual “loss” would be somewhere between one and 10% but never more than 10%. The only time it would be 10% is if you were to surrender the full contract value in the first few years after purchase.
For a detailed example of what I mean, simply download my e-book “Annuities: The Good, The Bad and The Ugly.”
I would go as far as saying that losses incurred in an annuity due to withdrawals in excess of 10% are often less and more predictable than losses incurred when you need to withdraw money in down markets.
Annuity Misconceptions #3:
Annuities cannot protect what’s in my 401(k) from the market’s ups & downs
Up to 90% of defined contribution/qualified plans today offer what is called an age-based in-service withdrawal provision that allows those approaching retirement but still working to transfer a portion of their savings via direct rollover to a Fixed Indexed Annuity within an IRA.
It is important to note that each plan may have its own set of restrictions and limitations and you should first speak to your plan administrator before making any decisions.
Annuity Misconceptions #4:
I’m to old to own an annuity
There are several factors that you need to consider when deciding if an annuity is right for you.
One factor is whether the money you are thinking of placing in an annuity is in an IRA (Qualified) or outside of an IRA (Non-Qualified).
If the money is outside of an IRA, (in a high yield savings account for example), it is liquid money with little or no restrictions which you can use however you want. Now, if you were to purchase an annuity with this money, you would be placing restrictions on it, namely your ability to access 10% a year without incurring penalty charges for the duration of the contract.
If the money is inside of an IRA, this no longer is a concern because you are not likely to withdraw all of your money at once and pay the taxes that would be due on the full amount.
The second factor is what your plans are for the money? Do you need the income or is it money you have earmarked for your beneficiaries?
If you need the income, is it important to eliminate the risk of having to withdraw money during market downturns?
If you don’t need the money, is cash value life insurance where your money can grow tax deferred, you can have access to tax free income down the road, and your beneficiaries will benefit from a tax free payment usually significantly greater than in most other strategies?
Annuity Misconceptions #6:
I’m to young to own an annuity
Many people in their 40s and 50s think that they are too young to purchase of an annuity. However, there are several reasons why a younger person who is still 20 years away from retirement would consider purchasing an annuity.
Annuities designed for competitive growth can offer up to 80% of the markets upside while protecting principal on the downside offering a very attractive value proposition.
High earners who have maxed out their contributions to their Roth IRAs and 401(k)s could funnel additional funds earmarked for retirement into a fixed indexed annuity, as these do not have any contribution limits and will provide additional tax deferral benefits.
Annuity Misconceptions #7:
Annuities are to complicated to understand
I like to address this misconception with my car an analogy. When I’m in the market for a new car (I am not a car guy), I want to know what the car does, not how it does it. How fast can it go, how well does it corner, how smooth is the ride, how safe is it in case of an accident.
I don’t need to understand how it does what it does, just that it does it. The fact is, some annuities such as Fixed Annuities are easy to understand. Other like Fixed Indexed Annuities are a more complex;
If someone is trying to sell you an annuity by trying to explain the mechanics of the crediting methods and the indexes they are tied to, you are probably going to end up with an annuity that isn’t right for you.
I’m not saying that you shouldn’t understand them, but make sure your focus is first on the end result and then on the mechanics of how you get there.
This means that you need to be very clear about what you want and work with an adviser who will listen and help you find the annuity that will give you the results you want, no matter how it does it.
Annuity Misconceptions #8:
My family will not get my money if I die prematurely
This is true of certain annuities and on the payout option you select IF you decide to annuitize (convert your principal into a income stream; in doing so, you do lose control of your money).
The fact is that most people never annuitize. This is primarily due to the fact that:
- Annuities are often purchased as tax deferred vehicles that enable you to grow your nest egg without market risk (except Variable Annuities which do not protect your principal);
- Optional guaranteed lifetime income riders provide the security that comes with annuitizing but without losing control of your principal.
That said, if you do annuitize and elect a payout option on your life only (meaning payments end when you pass away), your income payments will likely be significantly higher than you could withdraw responsibly from a accounts exposed to market risk.
Annuity Misconceptions #9:
Annuities Must Be Bad Because They Pay High Commissions to Agents
I could have gotten more money from the sale of my house if the agent had been willing to list it for free. I could save at leat 15% when I eat out if only the server was willing to work for free. The nerve of some people who want to get paid for their services!
Some people say that annuities are sold, not purchased, and I completely agree. You see, a highly skilled financial agent’s job is to work with you determine if an annuity is right for you, then help you determine what kind of annuity is right for you, then narrow down the options even more to find the best one for you in order to sell you the one that is going to best meet your financial objectives.
The fact is, if you compare the one time commission (that doesn’t come out of your money so 100% of your premium goes to work for you on day one) that an annuity sale will pay compared to the yearly fees you are likely paying on other retirement savings vehicles and investments you currently have, they are usually significantly less over the holding period / contract term (i.e: 10 years).
Annuity Rider’s Aren’t Worth the Fee
Most of the time, when talking about annuity rider’s, we’re talking about the Guaranteed Lifetime Income Rider. These riders usually cost around 1% so the question is, is it worth it?
There is no cookie cutter answer to this question. The fact is, it depends on your income, your other retirement savings, the indexes used and the crediting option elected.
Your decision of who you work with to help you decide which annuity is right for you and should you add the optional riders is one of the keys to making sure you purchase the annuity that’s right for you.