Myth #1: Fixed indexed annuities are not tax efficient.
Fixed Index Annuities (FIA’s) may be a valuable solution for those looking to grow their retirement savings because they are a long-term, tax-deferred product. Annuities allow retirement savings to grow without being reduced by tax payments – another appealing reason to consider an annuity. In fact, annuity earnings grow on a tax-deferred basis until a client begins taking withdrawals or surrenders the annuity.
Over time, you will have the potential to build more retirement savings than you would have been able to, if your earnings had been taxed as income. Keep in mind that there is no additional tax benefit associated with funding an annuity from a tax-qualified source like a 401(k) plan or IRA.
Myth #2: Fixed indexed annuities can’t keep up with inflation.
Income riders frequently offer payout options that are indexed to inflation, which may help you keep pace with the rising cost of goods and services. However, when you are considering annuities in retirement planning, you should factor in the inflation risk associated with a fixed annuity payout. Like any risk in retirement planning, there are ways to insure, hedge, offset or otherwise lessen the impact of a known risk, such as Roth IRA’s.
Myth #3: Fixed indexed annuities are not liquid.
It’s important that you understand that annuities are a long-term retirement savings strategy. Except for some immediate annuities, most contracts begin payments on a fixed date many years in the future. So, if you withdraw money from an annuity before that date or during the withdrawal charge period, the withdrawal will incur a charge called a “surrender charge”.
In most cases, deferred annuities allow withdrawals up to a specified percentage, usually 5% to 10% annually, of the contract’s accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges. FIAs are designed to meet the need for long-term retirement savings and income, so clients should have sufficient liquid assets to let the annuity funds sit.
Myth #4: Fixed indexed annuities are investments.
Fixed indexed annuities do not directly invest your money in any stock or equity investments. Instead, the annuity company credits a set, guaranteed return each year, with the potential for additional interest credits based in part on the performance of an external index that you choose, such as S&P 500. Most insurance companies have multiple indexes for you to invest your money. Your FIA guarantees you will never lose one dollar from negative stock market performance. You should understand that FIA’s are insurance products that are designed to help you manage certain financial risks associated with retirement such as volatile markets, interest rates and longevity.
Myth #5: Fixed indexed annuities are full of hidden charges.
Many types of annuities are available in today’s retirement marketplace. Some, like variable annuities, require that you pay explicit annual fees similar to mutual funds or managed money solutions. These types of annuities are among the most expensive annuities. These types of annuities are sold by securities brokers, which is funny because people in the securities industry attack annuities saying that they are very expensive, this is the product they are selling you. In my opinion they are trying to confuse you, so you don’t look at Fixed Index Annuities
Unlike variable annuities, fixed indexed annuities do not directly participate in any stock or equity investments and do not charge the fees commonly associated with those investments.
With fixed indexed annuities, charges are typically imposed for discretionary actions like excess withdrawals or early surrender of the annuity contract; for optional features like supplemental guaranteed lifetime withdrawal and legacy benefits, or to support higher indexed interest crediting rates. These charges enable the insurance company to provide the guaranteed value promised to customers. FIA’s have levers such as participation rates and caps that can limit interest crediting in return for providing guarantees, such as the protection of principal from market loss. Fees are not “hidden,” and must be fully disclosed prior to purchase.
As financial professionals seek to help you understand the products that will best help you reach long-term goals, it’s essential to break down the myths that can keep you on the sidelines – and fixed indexed annuities are a great place to start.
Myths and misconceptions surrounding fixed indexed annuities (FIA’s) can often muddle a client’s judgement when it comes to choosing a plan for their retirement savings. In order to remedy the confusion, education plays a vital role in paving the way to a clear, concise retirement plan that you can understand and implement into your retirement.
A recent Secure Retirement Institute study revealed that Americans are largely confused about how to turn workplace savings into a guaranteed income stream. Only 1 in 4 consumers understood that money saved in workplace retirement plans, such as a 401-k, could be used to purchase annuities.
Once armed with the facts you will be ready to make a more confident decision in adding FIA’s to your financial plan.
Myth #6: Fixed indexed annuities are not tax efficient.
FIA’s may be a valuable solution for those looking to grow their retirement savings because they are a long-term, tax-deferred product. Annuities allow retirement savings to grow without being reduced by tax payments – another appealing reason to consider an annuity. In fact, annuity earnings grow on a tax-deferred basis until you begin taking withdrawals or surrender the annuity.
Over time, you will have the potential to build more retirement savings than you would be able to if your earnings were pre-taxed as income. Keep in mind you receive the same tax benefit using an annuity to fund a tax-qualified source like a 401(k) plan or IRA.
To learn more how guaranteed income can benefit your retirement, speak with Mel Samick at Excalibur Life Insurance and Annuity Solutions, call 888-839-3536.