Addressing Annuity Myths: Part 2
Eight More Lies People Will Tell You About Fixed Index Annuities with Income Riders
The following educational content is excerpted from our book, Momma’s Secret Recipe for Retirement Success,” by Dan Ahmad, Jim Files, and Jack Canfield, with valuable contributions from other leading professionals from around the world. This excerpt was contributed by John Kirker, fiduciary financial advisor, and reviews eight more annuity myths – specifically, annuity lies people believe about fixed index annuities with income riders.
This is Part Two of our two-part Annuity Myths series. If you missed Part One, read it here.
Today we’re back with more facts about annuities. Specifically, we’re sharing content to bust common annuity myths that can damage your long-term finances if you believe them. Remember, it’s always important to educate yourself, do your own research, and speak with a financial professional you trust when you’re trying to determine whether a specific financial product is right for you. Many people find more peace of mind and financial security with a fixed index annuity with an income rider, so learn more about their benefits below.
(1). Myth/Lie: The stock market will always beat annuity returns.
Truth: In a fixed index annuity with an income rider, in the years the stock market has positive returns, the stock market will almost always have higher returns. But when the stock market loses money, the fixed index annuity with an income rider will always have a higher return because you will never lose any money. If you look at the time period between 2000 through 2018, the S&P 500 Index increased by an annual compounded rate of 2.85% without considering fees. This rate is so low because of the huge losses the stock market suffered in 2000 through 2002, and 2007 through 2009.
(2). Myth/Lie: My income isn’t really guaranteed for life, it will end if I live too long, if the stock market crashes, or if my account goes down to $0.
Truth: In a fixed index annuity with an income rider, your income is guaranteed for as long as you live, and, if you are married and choose a joint payout, for as long as your spouse lives. You receive a legally-binding enforceable written contract that guarantees you will continue to be paid income for as long as you live, similar to a pension, even if you live past age 100, even if the stock market crashes multiple times, and even if your account value goes to $0, your income will continue to be paid for as long as you live.
(3). Myth/Lie: You don’t need an annuity: Other assets, like traditional Wall Street-type investments, “will protect my principal from stock market losses, guarantee my income for life, and provide an opportunity for a competitive return.”
Truth: A fixed index annuity with an income rider, it is one of the only options that will guarantee your principal against all stock market losses, provide you guaranteed income for as long as you live, and offer the opportunity for an acceptable return. Stocks won’t do this. Mutual funds won’t do this. Bonds won’t do this. Real estate won’t do this. Oil and natural gas won’t do this. Gold won’t do this. CD’s won’t do this.
SEE ALSO: Annuities 101
(4). Myth/Lie: It’s just simply too good to be true.
Truth: In a fixed index annuity with an income rider, you will have advantages and disadvantages. You will receive the benefits of protection against all stock market losses, income guaranteed for as long as you live, and the opportunity to make money when the market goes up without even having to put your gains at risk in the future. However, you will have to accept the negative aspects of surrender charges for a specific period of time (like a CD), not earning full stock market rates of return, and you will pay a fee, a relatively low fee, but still a fee. It’s not too good to be true, it’s a balanced and well-thought-out concept when explained and disclosed properly.
(5). Myth/Lie: Never buy an annuity in an IRA because an IRA already enjoys tax-deferral benefits.
Truth: Most retirees want to protect their IRA from stock market losses and guarantee they won’t run out of income before they pass away, exactly what a fixed index annuity with an income rider is designed to do.
(6). Myth/Lie: Insurance companies aren’t safe, they fail all the time and people lose money.
Truth: In a fixed index annuity with an income rider issued by a life insurance and annuity company, you have a very conservative plan that requires your funds to be backed up and secured by capital and surplus, and, even if the insurance company fails, no one has ever lost their guaranteed principal, guaranteed income, or guaranteed death benefit from a fixed type of annuity since they were first created in the 1700s.
(7). Myth/Lie: All annuities are bad and they are the worst thing you could ever buy.
Truth: In a fixed index annuity with an income rider, you are protected against all stock market losses, receive income guaranteed for as long as you live, and have the opportunity for a competitive rate of return without ever having to put your gains at risk in the future. This is not bad, this is good.
(8). Myth/Lie: Everything about a fixed index annuity with an income rider is awesome, it is perfect.
Truth: There are many potential benefits to fixed index annuities with income riders, but like all financial instruments, there are also disadvantages including but not limited to:
- They are not liquid and shouldn’t be used as a short-term asset alternative.
- You can’t put all of your money in this type of plan, you need to keep some assets liquid and use some assets for growth.
- The income rider can’t be taken out in a lump sum, it can only be used to provide you income guaranteed for as long as you live.
- There are surrender charges for early withdrawals.
- Typical penalty-free withdrawals are limited to 10% per year and, in many cases, can’t be taken out until after 12 months.
- Some plans will allow you to receive guaranteed lifetime income to start within 30 days, but the majority will require you to wait for one (1) year, with some requiring deferral periods up to 10 years. Make sure to pick a plan that matches your income needs.
- Annual fees for the income rider range from 0% to 2%, with an average being approximately 1%.
- There are caps (maximum amounts), spreads (everything above a certain level), and participation rates (percentages of the index) that will limit your returns.
- You will not earn stock market rates of return, you will earn less.
- Your funds will not be invested directly in the stock market.
- Most plans pay a set guaranteed lifetime income amount once the income stream starts, while a few offer the potential for increasing income options.
- Gains are tax-deferred until distributed. Any gains distributed will be taxed as ordinary income.
- When the stock market goes down, you will not lose any money, but you will only receive a 0% return.
- With an income rider, during the guaranteed lifetime payout phase, your account value can go to $0, but your guaranteed lifetime income would continue for life.
Final Thoughts on Fixed Index Annuities with Income Riders
Annuities are not exciting. You are not going to have an asset that screams to new highs with the stock market and then screams louder to new lows. They are built boring, protecting your principal and guaranteeing your income.
You may be made fun of by friends, co-workers, family members, and other Advisors, because as the stock market has a +20% annual return every so often, you may have only received a hypothetical +10% annual return. So, you may be laughed at. At this time, it is important to remember why you bought the annuity in the first place: It’s because when the stock market crashes -39.5% every seven years on average, as it has since 1929, you won’t lose anything, you’ll receive a 0% annual return. When this happens, no one will make fun of you, they may very well wish they had what you had.
And when you are sleeping well at night, not worrying about ever running out of money, who is laughing now? You, all the way to the bank where you will deposit the monthly income check from your fixed index annuity with an income rider month after month after month… for as long as you live.
If you’d like more information on annuities or any other retirement income planning topics, reach out to us today. At Peak Financial Freedom Group, we design customized retirement income plans to help bring you the financial freedom you’re seeking. We look forward to hearing from you!