Here are 6 Annuity Misconceptions You Should Know About When it comes to Your Money and Retirement Savings
Misconception #1: Annuities are very expensive to own.
Not all annuities are created equal. There is one particular type of annuity that is more expensive than others. Variable annuities have the most expenses when compared to other types of annuities. The types of fees inside a variable annuity are; insurance charges, management fees, mortality fees, administration fees, and additional cost riders. Variable annuity fees are generally in the 3% to 5% range on an annual basis. Over time, fees can eat away and reduce gains on your investment. Other types of annuities can grow your money with little to no fees. Don’t pay for a feature that you don’t need.
If guaranteed income is a benefit that you need, then you can easily get an income rider on a fixed indexed annuity for as little as 1%, and in some cases, you can even get a no-cost income rider depending on how much income you need for life.
Check with your financial professional to show you the difference.
Misconception #2: I can lose money if I put it in an Annuity.
This misconception is one of the biggest reasons why many people don’t believe that an annuity can protect their retirement savings. This misconception lumps all annuities together, and that couldn’t be the furthest thing from the truth. The only annuity that puts your money at market risk is the variable annuity. The variable annuity is classified as a security, whereas fixed, fixed indexed and immediate annuities are not securities. So when you invest in a variable, remember, variable is the keyword. When the market goes up or down, so can your money because it is is in the market.
We all know that when it comes to the market, there are no guarantees. If you want guarantees, then a fixed, fixed indexed or an immediate annuity will give you those guarantees.
Misconception #3: I can never touch my money again, once I put it in an annuity.
This misunderstanding comes from the old school type of annuity that people like Babe Ruth once owned. Back then, all annuities were annuitized contracts. This is no longer true today. To annuitize an annuity, you would give a lump sum of money to an insurance company, and in return, they would give you a stream of income for a period of time. For example, you put $300,000 into an annuity that is annuitized in exchange for a guaranteed paycheck of $1,325 a month for 20 years. Now, if you needed to take money out to buy a home, you can’t. The most that you can get is $1,325 per month for 20 years.
Now, there is still one type of an annuity that works this way today. A Single Premium Immediate Annuity is also known as an SPIA, will take your lump sum and convert it to an immediate income payment that will continue for a set period. Nowadays, insurance companies know they need to stay competitive so over the years they’ve come out with several options that now give you the ability to guaranty your income and still have access to your money, along with other benefits that might fit your goals.
Misconception #4: If I put my money in an Annuity, I can’t access my money for emergencies.
One important benefit with many annuities today is that you actually can access your money for emergencies. Annuities are designed to be long-term investments. This allows the insurance companies a longer time horizon for them to invest in the kind of things that will provide more stable returns. This is why they assess surrender charges for withdrawing money too early.
Insurance companies also know that unexpected things can come up. So, many of them have a safety net built inside. Most fixed and fixed indexed annuities allow access of up to 10% of your funds with no penalties per year. So, let’s say that you had $400,000 in your annuity and needed to take out $40,000. You’d be able to, with no penalties. Some annuities even offer more access to your money in the event of a long-term care situation. Immediate annuities do not provide this 10% penalty free access.
Misconception #5: If I die tomorrow, the insurance company will keep my money, and my beneficiaries get nothing.
Much like the previous misconception, this is an example of how an immediate annuity is set up. They work like social security or traditional pension plans, the income is connected to one person’s life and in some cases even a spouse. Once that person dies, the income payment stops.
This type of annuity is still available today. Although this may not be a good fit for most people because the contract cannot be converted to a different type of annuity. Many people want to make sure that whatever value is left in their plan, passes on to their beneficiaries and loved ones when they die.
Misconception #6: Annuities are very complicated.
At first glance, annuities can seem a bit overwhelming and very complicated, right? If your goal is to protect your money from market risk while locking in gains automatically, create guaranteed income for life, have the ability to cover a long-term care situation and leave behind a legacy should you die too soon, then isn’t it pretty simple? Remember, although the inner workings of an annuity can seem complicated, the bottom line is that they come with guarantees and market investments do not.
To use an analogy, annuities are like the automobile – you don’t have to know all the inner workings of the car you drive, to get from point a to point b. Granted, you never want to get into an annuity you don’t understand. Be sure to ask questions and understand the basics of how an annuity can benefit you in your specific situation.
This is what I do for all my clients. If you want peace of mind in your financial future by protecting and growing what you have worked so hard for and/or create guaranteed lifetime income for you and your family, consider an annuity.