Because annuities are somewhat complex financial products that require time and concentration to unpack, there are some myths that you need to dispel if you are thinking about buying one. Annuities can play a valuable role in your retirement plan and they get a negative reputation from some as being expensive and shifty. However, no matter where you are in your retirement plan, it’s never too early to start considering annuities.
There are many types of annuities and each has their own specifics. These financial products can be targeted for anyone looking to strengthen their overall retirement portfolio and they can open the door to unique investment solutions. You can choose an immediate annuity if you want your income to start right away and you can choose a deferred annuity if you want to benefit from tax-deferral options. You can also use a fixed annuity if you want a firm understanding of how much you will make from your annuity or you can choose a variable annuity if you want to maximize your earnings potential.
In this article, we’re disproving some of the negative notions that arise about annuities and giving you a better understanding of how to implement them into your portfolio so you don’t feel uneasy about them.
Myth: Annuities Are Only for Retirees
In reality, annuities can help savers just as they can help retirees. If you have mazxied out your contributions on your IRA, deferred annuities offer additional tax benefits that help you build wealth faster. Annuities let you grow tax-deferred money that turns intio an income stream in the future.
You can choose from two different types of annuities. Deferred annuities operate similarly to mutual funds. You can make unlimited contributions to these annuities and control how you allocate them during your investment. To benefit from deferred variable annuities, you should use a low-cost annuity. Some products also offer fewer than 50 basis points of your investment annuity.
Deferred fixed annuities can be single-premium deferred annuities (SPDAs). These annuities are similar to bank certificates of deposit (CDs). With these annuities, you are guaranteed an interest over a specific amount of time. This time period is usually between 3-10 years. They are also backed by the insurance company who issues them rather than the FDIC.
While Investing in any annuity, you should ensure you choose a highly-rated company. An excellent way to tell whether your prospective company is reputable is checking a rating agency. These independent companies conduct reviews regularly to determine the issuing company’s financial stability. They serve as valuable resources to everyone looking for a company that can reliably pay its contractual obligations. .
Myth: Annuities Cost Too Much
There are plenty of annuities out there that offer low-cost options. Others have additional offerings for higher costs. You should only consider these if you need to address a specific risk. If you are considering choosing an annuity, you should first consider what you want the annuity for. Ask yourself whether you want to build savings or create an income. You should also be sure to compare the cost against the value of each feature.
If you want to maximize your tax-deferred savings, you should choose a low-cost deferred variable annuity. However, these annuities feature high-risk profiles, so you should be sure you can tolerate the uncertainty before committing. Variable annuity fees also vary disparately and you will pay more if you need to address specific risks with guarantees. They also typically charge exorbitant fees while fixed annuities offer more favorable terms.
Myth: There Is No Point In Buying an Annuity for Income Before Retirement
Some annuities help protect your future income from market volatility, while others protect it against inflation. This means that people who aren’t retired yet can use annuities for other purposes. If your retirement is more than ten years away, you will likely have other investment and financial concerns. However, if it is less than ten years away, you will be concerned about the effects of a market crash. The last thing you want is to have your hard earned money go down the drain.
There are two types of annuities that stand out for their ability to give you some peace of mind: deferred income annuities and fixed deferred annuities with a guaranteed lifetime benefit rider. Purchasing a deferred income annuity allows you to select the future date you want your payments to begin, which provides guaranteed income for the rest of your life no matter what happens to the market. DIAs greatest advantage is that if you can afford to prolong payments, you can accumulate more interest on your lump sum or premium payments.
You should also consider the ability deferred income annuities give you to incrementally invest over time by adding payments. This process is similar to dollar-cost averaging with investments and it can build your income over time by staggering investments with a range of interest rates.
Fixed deferred annuities with GLWBs give you some flexibility with your investment but they typically come with lower income streams. When you purchase these annuities, they will lock you in with a guaranteed lifetime income that starts whenever you are ready to rteceive payments. You will start receiving payouts from these annuities whenever you begin withdrawing. Typically, the longer you wait to take your lifetime withdrawal benefit amount, the higher it will be.
You should work closely with your financial consultant as you build your retirement income plan so you can determine whether these annuities fit your personal retirement plan.
Conclusion- Annuities Myths and Facts
Annuities are complex financial products but they don’t have to be so complex that you forget how to take advantage of their benefits. Choosing your annuity and avoiding some of the myths discussed in this article comes down to analyzing your reasons for purchasing an annuity and choosing which one best fits your financial situation. Consulting a trusted annuity advisor is the easiest way to ensure you get the most out of whatever annuity is most attractive to you.