Misconceptions About Annuities

It’s a bad idea to buy a fixed immediate annuity when interest rates are low. 

This can be a complicated issue for some investors, but as with all things in retirement planning, your choices should primarily be dictated by your needs and goals. In an ideal world, you would purchase a fixed immediate annuity when interest rates are at their peak to ensure maximum principal growth.

However, interest rates aren’t the only factor to consider. Ultimately, your total payments over the life of an annuity may have far more to do with your longevity than the interest rate you were able to get when you first opened the annuity.

Many soon-to-be-retirees also don’t have the luxury of waiting for interest rates to increase. You may be better served by doing what’s in your best interest today than waiting for a specific target rate. Speaking with a retirement planning professional may help you decide which course of action is ideal for your situation.

You don’t need to think about annuities until you reach retirement age.

Although many annuities are designed for retirees and people nearing retirement age, there are many different types of annuities. Some annuities are specifically designed to function as long-term savings vehicles. Deferred variable and fixed annuities are both types of annuities that are great for younger people saving for retirement since their tax-deferred benefits are similar to those of an IRA or 401(k).

Deferred variable annuities are similar to 401(k)s in that the money can be placed in various mutual fund or investment options, while deferred fixed annuities are more akin to a CD or bond.

Not all annuities are made equal, and your choice of insurance company may have an impact on your variable investment options and fees or the fixed annuity interest rates available to you. 

Annuities are too expensive.

The fees associated with your annuity will vary significantly depending on several factors, including your contract options, whether you’re seeking a guaranteed living benefit annuity (in which case your age and health will matter), the amount you’ll be investing and more.

If you’re worried about the cost of an annuity, you should discuss their fees and how they compare to alternative investments with a skilled investment manager.

My family could lose a lot of money if I die before the annuity pays out.

Many modern annuity products have different types of death benefits available to prevent beneficiaries from losing out on all the funds left in the annuity. For example, a guaranteed minimum death benefit may even result in your spouse or other beneficiaries receiving the full annuity value (if you pass away prior to annuitization).

Some annuities also offer spousal benefits that will allow your spouse to continue receiving the lifetime payments, although there are certain fees you should be aware of prior to choosing those contract options.

The type of annuity you receive and the options in the contract will have a significant impact on what happens to remaining funds after your passing. It is important not to go blindly into an annuity without understanding the ramifications it may have on your estate.

I can replicate an annuity with my existing retirement savings accounts.

There are some retirement investors who have built up large nest eggs and have air-tight estate plans in place to shield themselves and their families from long-term care costs and other potential hurdles of retirement. Not every retiree or working senior is that fortunate.

Annuities fill an important niche in retirement savings in that they can provide a guaranteed stream of income for life or a fixed period. Some types of annuities also won’t be impacted by changes in the market, which could drastically impact the value of your 401(k) or IRA savings.

Annuities may not be necessary for every retiree, but they offer some unique benefits for many.

Index annuities and variable annuities may result in much higher taxes.

Annuity funds that are invested in the market are tax-deferred until the money is paid out. It’s not dissimilar from a 401(k) or IRA where you’ll eventually need to pay income tax on the money you’re paid from the account. You shouldn’t need to pay tax on withdrawal of the principal of an annuity if you are investing post-tax dollars into it.

Annuities offer more tax flexibility than other retirement savings accounts because you can decide when you begin accepting payments. This may also offer estate planning benefits, like being able to pass on annuity funds to a beneficiary who is in a much lower tax bracket.

Learn the Facts About Annuities From Trusted Phoenix Retirement Advisors

The team at Fullerton Financial Planning is here to help you learn about retirement investment products, including annuities. Speak with our retirement and financial planners by calling (623) 974-0300.