There are many misunderstood financial products out there, but few are subject to the myths and confusion that fixed index annuities are. Here are five common myths that might stop you from exploring the possibility of a fixed index annuity as a powerful tool to help guarantee* your retirement income security.
Myth One: My heirs won’t get any money from the fixed index annuity if I die
There is a type of payout that many people chose in the past that gave annuities this reputation. It was the life only payout option. But this is just one payout option, and it’s not a good choice for everyone. There are options that will allow your fixed index annuity to pay a benefit to your heirs. Remember that you may be able to add a death benefit into the annuity through a rider**, as well. Also, if you never trigger payments or annuitize, then your beneficiaries would likely receive your contract value after death. Finally, if you choose a payout type with a guarantee* of survivorship or a period certain, then payments will continue until that guarantee* is fulfilled.
Myth Two: Fixed index annuity payments are useless thanks to inflation
Any annuity payment is going to be adversely affected by inflation. Even an IRA distribution is going to be affected by inflation. But annuities can have a special rider** that can be added called a cost-of-living adjustment or COLA rider. This will help increase guaranteed** payments based on inflation. So annuities may offer better protection against inflation than non-annuity assets.
Myth Three: Fixed index annuities have high expenses
This is a popular myth, but it paints an incomplete picture of the annuity and investment industry. Naturally, there are fees involved with annuities. Adding features such as the guaranteed* death benefit rider can result in paying more premiums. Also, there may be withdrawal charges*** if you surrender all or a portion of your annuity contract in the early years. However, IRA accounts also have fees, and the positions traded within the accounts have commissions when bought or sold. Mutual funds have management fees (represented as expense ratios) as well as possibly having back-end or front-end loads, which are fees to either buy into or sell the mutual funds. Additionally, they may have unexpected capital gains distributions when underlying positions are sold, and this can force you to pay taxes that you weren’t anticipating. In comparison to all the various investing and account fees that retirees face, annuities can actually be even more affordable than some of the other options.
Myth Four: I don’t have the money to invest in a fixed index annuity
While there are some single premium annuities that can require a large initial deposit, there are also ways to purchase annuities through smaller, regular payments. Additionally, annuities can be purchased within an IRA account allowing you to use the funds already inside your IRA.
Myth Five: Fixed index annuities are tied to the market. That makes them risky
One of the advantages of a fixed index annuity is that you can allocate a portion of your annuity to a fixed declared interest rate and allocate a portion to an interest rate tied to an outside index, such as the S&P 500®. Essentially, should the markets decline, the fixed portion of your index annuity will continue to earn interest at the fixed declared rate. But the portion allocated to the index is tied to the performance of the, and while this portion may not gain anything, it will not lose anything either which prevents a loss of principal. In addition, a fixed index annuity locks in the gains you previously made.
Depending on your individual goals and financial position, a fixed index annuity can be a significantly powerful addition to your overall retirement strategy. An agent can help you see how one might fit into your financial future plans, and he or she can help you secure a conservative, guaranteed* retirement income throughout your golden years.
*Annuity Guarantees are backed by the financial strength and claims-paying ability of the issuing company, and may be subject to restrictions, limitations or early withdrawal fees. Annuities are not FDIC insured.
**Annuity riders may be available for an additional annual premium that may provide additional benefits and income guarantees.
***Most annuities have a surrender period for the first five to 15 years of ownership; withdrawal of amounts will lower your monthly income and the death benefit. Early withdrawal of full principal amount will deplete your principal by the amount of surrender charge still in force. Withdrawals at ages younger than 59 ½ from an IRA will be subject to an additional 10% federal income tax penalty.