While annuities can provide some compelling benefits for retirement income planning, they are sometimes misunderstood or overlooked by investors and financial professionals alike.
Why? For one, annuities have evolved significantly over the years. Many products today offer more flexibility, liquidity options, institutional pricing benefits, and ways to address longevity risk than previously thought.
Here we’ve debunked a few common myths about annuities so you can understand how annuities operate today and whether to consider them in your plans for retirement.
Myth: All annuities are complicated/the same
Reality: Annuity products can vary significantly in terms of structure, fees, growth potential, and benefits. Some are much simpler than others. The key is selecting one suited to your specific goals and risk tolerance.
Myth: You can lose money to the market a fixed index annuity
Reality: With fixed indexed annuities (FIAs), the insurance company invests your premium into bonds, then credits interest based on the return of an index you select, like the S&P 500. Therefore, your principal is protected from market declines.
Myth: Annuities are very expensive and have hidden fees
Reality: Fee structures can vary widely across annuity types. Many fixed index annuities have no annual fees unless you add certain riders. Costs are also disclosed up front and your financial advisor can inform you what to expect.
Myth: You lose access to your money in an annuity
Reality: Most annuities allow annual penalty-free withdrawals up to a certain amount. There are also exceptions for things like nursing home care where you can access funds without surrender charges.
Myth: The insurance company keeps all your money when you die
Reality: Annuities today generally allow you to pass any remaining account value to beneficiaries through death benefit payouts, avoiding probate.
Advantages and Disadvantages
Some key advantages of annuities include:
- Lifetime income stream
- Tax-deferred growth potential
- Principal protection from market volatility
- Access to institutional pricing/crediting methods
- Potential long-term care benefits
Drawbacks can include lack of liquidity, rising interest rate risk for fixed products, estate taxes on remaining value, and complexity depending on the annuity type.
Find Out How an Annuity May Fit into Your Holistic Financial Plan
The role annuities play, if any, depends on your specific retirement goals, income needs, risk tolerance, and overall financial situation.
Working with a qualified financial planner can help you properly evaluate annuity options, understand tradeoffs, and determine if they are a fit for your circumstances.
At Prosperity Capital Advisors, we provide comprehensive retirement planning guidance tailored to each individual client’s objectives. Find a holistic advisor near you to use your new knowledge and start planning for your financial future.