Clarifying a Few Myths About Annuities
When it comes to retirement planning products and services, there can be a lot of confusion about what they are and how they work. People are living longer and spending more time in retirement. Over the past 50 years, the average life expectancy in the United States has increased. Men are living on average 9.8 years longer1 and women 6.7 years longer.2 Additionally, most Americans will spend over 20 years in retirement.3 Saving for retirement can be enough of a challenge, understanding the solutions shouldn’t be.
Below are some of the common misunderstandings and the facts about annuities.
MYTH #1: I CAN’T HAVE A FIXED INDEXED ANNUITY IF I HAVE A 401(K), 403(B) OR AN IRA.
Fact: Yes you can! Fixed Index Annuities partner well with other retirement savings plans because of their guarantee4 against losing money due to market volatility. When you purchase an annuity with after-tax dollars, you don’t have the same contribution limits as you would with a qualified retirement plan through your workplace. Your annuity can provide income payments for the rest of your life: an income you cannot outlive.
MYTH #2: IF I DIE, THE ANNUITY COMPANY KEEPS ALL MY MONEY.
Fact: The annuity is paid to your beneficiary in the following situations:
When you are accumulating funds: the beneficiary would receive the account value or the guaranteed minimum death benefit if you select that option.
When you are in the pay-out phase: There is only one option that results in the insurance company keeping all the money when you die; that is the life only option; however; there are many other options available that allow you to leave a remaining benefit.
MYTH #3: I NEED A LOT OF MONEY UPFRONT TO OWN A FIXED INDEXED ANNUITY.
Fact: There are different types of annuities. Some require as little as a $50 ongoing monthly contribution while others have a one-time large lump sum amount required.
MYTH #4: ANNUITIES ARE FOR OLD PEOPLE, PEOPLE WHO ARE CONSERVATIVE OR THOSE INEXPERIENCED WITH RETIREMENT SAVING PLANS.
Fact: Annuities are a great way to balance out and diversify your retirement plan. Annuities also grow tax-deferred. This means that the interest earned on the money you put in also earns interest without being reduced by taxes each year. This allows you to accumulate more. More accumulation equals more money in retirement. Annuities help protect you against living longer than your savings. Starting early and contributing on a regular basis helps you accumulate more funds to be used in retirement.
MYTH #5: I CAN’T ACCESS MY MONEY ONCE IT IS IN THE ANNUITY.
Fact: Most annuities allow for an annual free withdrawal amount that is not subject to any contract charges. A typical amount is 10% of the accumulation value per year after the first policy year. However, if you are under 59 ½ it may be subject to a pre-distribution IRS penalty.5
MYTH #6: I WANT AN INCOME FOR MY LIFETIME BUT I DON’T KNOW HOW LONG I WILL LIVE. AN ANNUITY ISN’T FLEXIBLE AND CAN ONLY PROVIDE AN INCOME FOR A CERTAIN PERIOD OF TIME.
Fact: An annuity is a financial product that is designed to provide a guaranteed income for life. Annuities can be set up to provide a benefit for a pre-selected period of time like 20 or 30 years, for the lifetime of the annuitant, or for the lifetime of the annuitant and a spouse.
MYTH #7: WHEN I DIE, MY ANNUITY WILL BE TIED UP IN PROBATE.
Fact: Annuities pass outside of probate court; a named beneficiary remains private and isn’t part of the public disclosure of probate.
Everyone recognizes the challenges in saving enough for retirement. Understanding the solutions you have can go a long way in making sure what you have saved lasts as long as you need it to.
- The World Bank, life expectancy at birth, male
- The World Bank, life expectancy at birth, female
- Statement of Marianna LaCanfora, Assistant Deputy Commissioner of Social Security Administration, Washington D.C. July 15, 2010.
- Guarantees are dependent upon the claims-paying ability of the issuing company.
- Because they are meant for long-term accumulation, most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. All withdrawals made from annuities with pre-tax contributions are taxed as ordinary income. All withdrawals from an annuity purchased with non-qualified monies are taxable as ordinary income only to the extent there is a gain in the policy.