Annuity Myths
There is a lot of information out there about annuities and it can be difficult to understand what’s true and what isn’t. Here are the 4 biggest myths about annuities and how they work.

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  • Myth #1: All annuities are loaded with expensive fees.

    There are several kinds of annuities and some of them are rightfully known to be loaded with expensive fees, like variable annuities. Annuity fees come in several shapes — some annuities have administration fees, ownership fees, and/or management fees in addition to caps and surrender charges. Typically, when you see this many fees you are looking at a variable annuity, which isn’t usually a good investment.  Many investors would do better buy just buying an S&P 500 index fund instead of putting their money into a variable annuity.

    On the other side of the spectrum are fixed indexed annuities. There are no annual fees or management fees with most fixed indexed annuities which greatly reduces their expense. Instead, indexed annuities usually offer a choice between a spread or a cap (or sometimes both play a role).  A cap is just what it sounds like – a cap on the performance of your annuity – the insurance company takes whatever performance is above your cap to offset their expenses. A spread is similar – the insurance company collects money by taking a set percent difference, or “spread” between what your annuity gets paid and what the index it is tied to does.

    It’s important to keep focused on the role an FIA plays in your retirement – it isn’t to keep up with the market or grow your estate — it’s to provide guaranteed income to secure your retirement while giving you a good chance of seeing that income increase.  Fixed annuities are really alternatives to bonds, CD’s or other low risk investments meant to protect principal while creating some income.

    Fixed index annuities do have surrender charges for taking money out of the annuity ahead of schedule. Typically this charge falls every year your investment stays in the annuity until it finally hits zero.

  • Myth #2: The person I’m working with says Fixed Index Annuities keep up with the Stock Market.

    This is not true. When an annuity is linked to an index like the S&P 500, your annuity will be credited part of that index’s annual performance, subject to whatever cap or spread your contract offers you. Your money is never invested in the stock market. Rather, your annuity will be credited whatever performance you are due according to your agreement. This is actually one of the benefits of a fixed index annuity — because it is not invested in the stock market, it doesn’t go down when the stock market falls, even if the market falls 50%. But when the market is up, depending on what index your annuity is linked to, you will participate in a portion of that upside. This gives typical fixed index annuities more potential upside than other interest pegged investments like CDs, many bonds, or money market accounts without sacrificing safety.

    Myth #3: I can’t take any annuity income for at least 10 years, so why bother?

    There are a few variations of fixed annuities — some allow you to take income immediately. These type of annuities are predictably called “immediate” annuities.

    The second type is called a “deferred” annuity, because you wait a certain period of time before you begin drawing on the income.  Deferred annuities can range from a 1 year mandatory deferral to a 10 year mandatory deferral.  There are two things to keep in mind here – usually the longer you defer a fixed index annuity, the higher your income payout is likely to be.

    The smart thing to do with annuities is to understand your income needs in retirement and how inflation will impact them.  Then you and your retirement planner can build an annuity “ladder” which is just a fancy way of saying using multiple annuities to give yourself a “raise” when you need one because inflation is catching up with your income.

Myth #4: If I die before I use my annuity, the insurance company takes all my money.

Not true. Fixed Index Annuities pay your beneficiaries the remaining benefits and some even give your beneficiaries the choice of taking the money in a lump sum or over a period of time. Best of all, these payments take place outside of probate and are usually not considered to be part of your taxable estate.>

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