Did you know that more than 25 million Americans, aged 60 and over, are living at or below 250% of the federal poverty line, making them economically insecure? It’s understandable why so many retirees are fearful of outliving their money. While Social Security helps, it often isn’t enough to support a full retirement, leaving millions of people in our country struggling to build-up retirement savings to survive on. There are few options for generating income in retirement, especially income that is guaranteed to last your lifetime. One of those options, Fixed Index Annuities (FIAs), provides guaranteed lifetime income, but are also heavily criticised.
Before purchasing, or writing off, these annuity products, it’s wise to learn about how FIAs work. Here’s a look at some of the most common myths about fixed indexed annuities, and why they simply aren’t true, according to the experts at Annuity Watch USA.
Myth #1: Fixed indexed annuities are risky.
This myth couldn’t be further from the truth. Actually, fixed income annuities are designed to generate retirement income without the risk. The principal of your FIA is completely protected from stock market losses, and so are any gains made over the life of your contract. They are structured to earn money in both good and bad markets, using something called minimum rate of return. This means that in years when the market is in decline, you’ll still receive a fixed guaranteed rate of return. When markets are good, you have an opportunity to earn more than your contractual minimum rate of return too. There really isn’t a lot of risk involved.
Myth #2: FIAs are only for older adults.
Retirees facing a wide array of retirement planning situations can benefit from the purchase of an FIA. While the lifetime income component is obviously crucial for individuals nearing, or already in retirement, but they can also be a great option for younger professionals. Money paid into a fixed index annuity grows tax-deferred until it’s withdrawn, which could lower your overall tax exposure. It can be a great way to protect your portfolio from the risks of the stock market while still benefiting from good market years.
Myth #3: Fixed index annuities are too complicated.
The basics are actually pretty straight forward. When you purchase an FIA, you pay a lump sum payment to an insurance company, who then promises to pay you a guaranteed income stream for as long as you live. You can choose to either receive income immediately, or defer payments until a predetermined future date. The complicated part comes with the details outlined in your contract. That’s why it’s so important to do your homework and read the small print before signing on the dotted line. And it’s always recommended that you work with a trusted financial advisor who is experienced in working with annuity products.
Myth #4: Your FIA dies when you do.
While there are products that do not provide for a beneficiary, making this myth true, luckily there are options that allow you to pass along unused benefits from your FIA. If you choose an annuity with an immediate income stream but pass on before the full contract value is paid, your beneficiary will receive any remaining principal in your account. With deferred annuities, the death benefit includes any remaining principal plus any interest that has accrued prior to death. When you purchase your annuity, you will have the option to also purchase contract riders that can increase the death benefit of your annuity.
Myth #5: A fixed index annuity is unnecessary if you already have a retirement account.
Everyone’s retirement needs are different, so this one might be true for some while false for others. However, it should be pointed out that other retirement accounts, like 401ks, are set up as “savings vehicles,” not guaranteed income generators, like annuity products. No other retirement account can provide predictable guaranteed lifetime income like an FIA. And in addition to providing lifetime income, fixed index annuities also provide other advantages, like principal protection, tax-deferred compounding, and death benefits. Whether you’re using your FIA to supplement your retirement income or to provide the bulk of it, including an FIA in your portfolio can provide an abundance of benefits.
Written by Rachel Summit