At Women, Money, & Power, we specialize in helping women understand various retirement income planning options that can help them create a more secure feature. One great option is the Fixed Index Annuity, a high quality fixed income product that provides you income for life –– income you can’t outlive. A fixed index annuity also offers 100% principal protection, tax deferral, and the ability to lock in gains based on the positive performance of the stock market.
The reality is that fixed index annuities can offer many advantages. Unfortunately, there are lots of myths out there that cloud the message. We’ve put together the following to help clear up the misconceptions.
Once you get more comfortable with the reality of annuities, we’d love to show you how one can work in your retirement portfolio. Order your custom ‘Income for Life’ Illustration and take the guesswork out of retirement income planning.
MYTH: Annuities are very complicated to understand and own.
REALITY: The concept of a fixed index annuity is very simple. In return for a lump sum purchase of an annuity contract, an insurance company promises to pay you (at some specified point in time) an income stream…for as long as you live. Or, you can use a fixed index annuity just as a wealth accumulation vehicle where your money can grow tax-deferred. While you own your contract, you enjoy 100% principal protection plus the opportunity to participate in stock market gains. But, as they say, the devil is in the details. The annuity contract itself can be very complex. There’s a wealth of information available that can help you better understand your annuity purchase. To get you started, here’s a link to our sister site www.annuitywatchusa.com with questions to ask when reviewing an annuity opportunity. And, we’re only a phone call away to discuss any questions you may have.
MYTH: When you die, the insurance company keeps all of your money.
REALITY: Most of today’s annuities, including fixed index annuities, provide death benefits. For annuities that offer an immediate income stream, if you pass on before the full contract value is paid out, your beneficiary will receive any remaining principal in your account. On deferred annuities, the death benefit includes any money left in the contract, plus any interest that has accrued prior to death. You have the option of purchasing contract riders that increase the death benefit of your annuity.
MYTH: Fixed index annuities don’t provide any advantages over other financial products.
REALITY: It’s true that you can accomplish a wide variety of retirement planning objectives using other financial products. However, fixed index annuities provide a distinct combination of advantages including principal protection, tax-deferred compounding, and death benefits. Some features of annuities — such as providing predictable guaranteed lifetime income — are non-existent in other investment products.
MYTH: Annuities are for much older people or exceptionally conservative investors.
REALITY: Fixed index annuities may be appropriate for individuals facing a wide variety of retirement planning scenarios. The lifetime income component is especially important to individuals in or near retirement. But, they can also answer some concerns of younger investors. Fixed index annuities have proven to be an excellent alternative to the stock market by providing exposure to market-based gains while eliminating losses.
MYTH: Annuities have a lot of hidden fees and charges.
REALITY: In most standard fixed index annuities, no direct fees are involved. The only fees that might be incurred are those that cover optional value-added riders, such guaranteeing a specific amount of income or providing an enhanced death benefit. A surrender charge may apply for cashing out an annuity early.
MYTH: Surrender charges only benefit insurance companies.
REALITY: Including penalties for closing your annuity early allow annuity providers to take a longer-term approach to making your money work for you. A surrender charge discourages you from withdrawing before a specified term. It’s important to understand what restrictions your contract stipulates for surrendering early. In some cases, contracts will allow you to withdraw up to 10% of your balance after the initial year of purchase without penalty. In addition, you may be able to take a loan against your annuity without suffering any surrender penalties.
MYTH: The returns on a fixed index annuity are low.
Reality: With a fixed index annuity, the returns are directly tied into an external index’ performance, such as the S&P500. If the market does well, your annuity has the opportunity to do well. If the market is down, your principal is protected against any loss. The amount of interest credited to your annuity account is determined by the crediting method or methods you chose when you first purchase your annuity. You may change crediting methods each year on the anniversary of your contract. You may learn more about the most common types of crediting methods by clicking here.
MYTH: Crediting methods are designed solely to increase insurers’ profits.
Reality: Insurance companies don’t experience a windfall effect if the market or interest rate outperforms expectations. They purchase hedges to fund the index credits (interest) paid to you in the event of stock market gains. The cost of those hedges determines the limits that are set for each annuity. The costs incurred by the insurance company are also behind the reason why you do not receive all of the market’s upside. In exchange for promising to protect your principal and provide you a guaranteed stream of income for as long as you live, the insurance company keeps a portion of any stock market gain.
MYTH: Fixed index annuities can’t keep up with inflation.
REALITY: Whether you’re retiring tomorrow or ten years from now, inflation can erode the purchasing power of a dollar…regardless of where that dollar is invested. Inflation fears may force people into risky investments that can gain value even faster than the inflation rate. Or, people may look to putting their money into low-risk, low-reward investments that at least hold their own. Fixed index annuities are low-risk retirement income solutions that pay a fixed rate of interest over a specified period of time. However, they also provide an added bonus of allowing investors to benefit from stock market gains while shielding them from market losses.
If you’re still concerned with inflation, you may consider an inflation-indexed annuity. An inflation-indexed annuity is a single premium annuity that removes inflation risk from your retirement planning and provides you with income for life. You can receive the income on a monthly payment, and its great benefit is that it adjusts the monthly payment upward based on the annual inflation rate. Most fixed index annuities are tied into an inflation indicator, such as the Consumer Price Index. An inflation-indexed annuity will increase your monthly payment each year based on a CPI increase during the prior year…but not decrease the payment if the CPI declines. A decrease in CPI will be used to offset any future annual increases.
MYTH: I don’t need an annuity because I have a 401(k) or IRA.
Reality: 401(k)s and IRAs are wonderful retirement savings tools. However, they don’t provide the opportunity to protect your principal while still achieving market linked returns with the ability to convert your savings into a guaranteed lifetime income stream. In addition, 401(k)s and IRAs have annual contribution limits. While some annuities may set internal limits for how much you can invest, the IRS does not limit the amount you can contribute to an annuity. This allows you to enjoy more tax-deferred savings power to help build your retirement nest egg.
MYTH: An annuity is “risk free” and guaranteed safe.
Reality: An annuity is backed by the full faith and credit of the insurance company that issues it. Most insurance companies also purchase “reinsurance” to provide further safety. In addition, each state offers additional protection up to a specified limit. When choosing an annuity, it’s important to go with top rated carriers and deal with experienced annuity professionals.
Cathy DeWitt Dunn, President of DeWitt & Dunn, LLC, is the driving force behind Women Money & Power. With decades of experience in the financial services industry, Cathy specializes in helping individuals and families strengthen their retirement outlook with lifetime income solutions not available at traditional brokerage houses. She has helped countless investors start their personal journeys towards a stronger retirement with strategies designed to protect principal, generate retirement income that can’t be outlived, and eliminate market loss.