There is a lot of interest in annuities and how they can be part of a solid retirement plan, which shouldn’t be a surprise, given the volatility we can experience from the stock market at any given time. Many people are earning low interest rates from their savings and CDs, there are more questions than ever about the future of Social Security, and many employers no longer offer pensions.
It’s no wonder annuities are a growing financial product for many.
While annuities are a good choice for those nearing retirement, there are several misconceptions that people come across. Let’s take a look at some common annuity myths and see how they compare to reality.
Myth #1 – All annuities are the same.
Nothing could be further from the truth.
Some annuities can be structured for growth without market risk, while others can pay a lifetime income that can start as soon or as late as you desire. Some even offer an income for a certain period of time, if you prefer. This is only the beginning of the list of the many differences among annuities.
Myth #2 – Annuities have high fees.
Variable annuities do have higher fees of 2-5%, which is one reason fewer investors are choosing this option.
However, fixed annuities and indexed annuities can have fees of less than 1%, and sometimes no fees. Just like purchasing a CD with no fees at the bank, some annuities can be similar — no fees are charged, and your money is working for you.
Myth #3 – The insurance company will keep my money after I die.
This used to be the way many annuities operated, but not anymore.
There are a few annuity options that still operate this way, but a majority will pay to your beneficiaries the remaining money in your account upon your death. Some even offer your beneficiaries the option to receive a higher payout if they take it over an extended period, which could be beneficial for tax planning purposes.
Myth #4 – Annuities pay high commissions.
Commissions have decreased for many annuities over the years.
The commission now depends on the company and several other factors. Fixed and indexed annuities are paid from the insurance companies’ profits and future profits, resulting in no reduction in your account balance. For example, if you invest $100,000 in an annuity, the entire amount is in your account working for you.
Myth #5 – Annuities have not changed.
The financial industry has evolved over the years due to new technology and innovations — annuities are no different.
Insurance companies are competing for your business and constantly looking for ways to make annuities more attractive. A few improvements include a death benefit for your beneficiaries, multiple options for potential growth, lifetime income you can defer into the future, and annuities with no fees.
There are a number of additional changes that you should discuss with a knowledgeable and experienced financial professional.
Myth #6 – I am too young or too old to buy an annuity.
No matter the stage of life, an annuity can be a solid part of a person’s retirement plan of not placing all their financial eggs in one basket.
People still working can experience safer growth of their money and/or a future lifetime income with an annuity. Retirees can help protect some of their hard-earned money and/or have an optional lifetime income to help make up for possibly not having a pension. Regardless of your age and situation, you have options.
The Reality About Annuities
There are several reasons why people purchase annuities and include them in their retirement plans. What’s not to like about the potential to earn more than you would from savings, without market risk? Some years can see returns that rival some market investments.
I’ve met retirees who like “locking in” market gains with added downside protection and working individuals helping to secure part of their portfolio while adding to it. There’s even the potential of optional lifetime income benefits that can be added to help your income match your needs during your lifetime.
Needless to say, there are annuity options out there for seemingly everyone.
Since there are many potential options with an annuity, it can be beneficial to work with a financial professional who can help guide you through this process. Working with a fiduciary financial advisor who is committed to your best interests is important.
With proper research, a seasoned financial advisor with access to annuities from different companies can do a comprehensive search based your needs to help you separate the myths from the realities.
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