While annuities have long been a viable retirement option, those new to retirement planning may discover a bit of misinformation about them. If you’re considering annuity-based products—such as fixed index annuities—as a way to boost the diversity of your retirement portfolio, it’s important to separate misconceptions from reality. Here, we’re busting 10 myths about fixed index annuities (FIAs) by providing the facts.
Myth 1: FIAs are only viable if you have a large principle
Reality: Once you decide an FIA is right for you, many contracts can be started with as little as $5,000. The key is to meet the minimum requirement and include as much nest egg as makes sense to achieve your financial goals.
Myth 2: FIAs are tax-free
Reality: FIAs are tax-deferred, meaning you won’t pay taxes until you begin making withdrawals. At that point, the money you earn from your FIA will be taxed like normal income. Ask your tax advisor about the impact of FIAs when researching your retirement options.
Myth 3: Monthly FIA payments are the same as withdrawing from your retirement accounts
Reality: FIAs offer the benefit of steady lifetime income with minimum guaranteed interest credits. It is one of the only retirement products that can help ensure you will not run out of money and will have a steady income for the length of your entire retirement. You cannot “outlive” your money with an FIA, which is different than drawing down another product.
Myth 4: FIAs are too complicated
Reality: All financial products should be reviewed by a trusted financial professional. However, FIAs offer clear benefits of continued growth, a steady income stream and assurance that Market downswings won’t affect your principal.
Myth 5: FIAs are risky
Reality: While no retirement product can guarantee zero risk, FIAs protect your principle from the uncertainty of Market volatility. Earnings never fall below zero, even if the index goes down.
Myth 6: Your premium is “locked up” and inaccessible
Reality: FIAs are appealing because they can transform retirement savings into predictable income. Your nest egg is protected from downturns, and many FIAs have riders or provisions to allow some liquidity when you need it most.
Myth 7: FIAs have little or slow growth, so there’s no benefit
Reality: It’s true you’ll be giving up some potential upside when deciding on an FIA. On the flip side, FIAs protect your principle form Market downturns, while continuing to give you interest credits.
Myth 8: FIAs will prevent me from benefitting from strong stock Market growth
Reality: FIAs are one tool among many to help you prepare for retirement, and the strongest portfolios include a diverse range of options. FIAs are designed to provide foundational savings so you can have an income source to pay for bucket list items or to cover routine lifestyle costs, should your other investments take a hit from Market swings.
Myth 9: I don’t need an FIA unless I’m already retired
Reality: FIAs are a great tool to use when planning for retirement. As a result, younger generations are considering these products as part of their overall portfolio, due to its offerings of growth and balance.
Myth 10: Companies keep the value of FIAs upon death
Reality: FIAs can allow proceeds to go directly to a beneficiary in the case of a death. You can even choose to set up your annuity as “joint life” in order to provide you and your spouse guaranteed income for life, no matter how long each of you live.
Still have questions? We’ve got answers. Check out our extensive list of resources designed to help you prepare for retirement.