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Annuities Decoded: 5 Myths You Need Dispelled As You Plan For Retirement

July 22, 2020

Myths about annuities
Don’t let myths prevent you from considering these vehicles as part of your retirement plan.

Note: This story is sponsored by The Alliance for Lifetime Income.

Saving for retirement can be a daunting prospect – no one can be certain exactly how a lot of money they’ll need, and store risk looms larger the closer you obtain to leaving the workforce. Diversifying your stocks by having multiple income streams is one way to ensure a successful retirement, which is why some people turn to annuities – tax-deferred investments offered by insurance companies – that can serve as a "private retirement " of sorts, offering guaranteed monthly income when you need it. But the marketplace for annuities is a complex one, which has led to more than a few myths and misunderstandings around these products. We checked in with experts to obtain a breakdown on fact vs. fiction – their answers might surprise you.

Myth No. 1: Annuities all have high fees

The truth: Not all fees are high, but you’ll pay more based on the amount of insurance you want.

All annuities have some fees baked in, because they are insurance contracts, explains Brian Karimzad, co-founder of MagnifyMoney. For example, if you want to ensure that you’ll have a guaranteed income for life (no matter how long you live) and that the initial amount you invest (your principal) will never decrease, those guarantees will come at a cost.

But, "in case you’re concerned about what might occur in the future concerning store ups and downs, a mortgage may reduce these issues," says John Thomas, Chief Investment Officer at Global Wealth Management. "Yes, there are penalties involved, but a lot of men and women believe the trade-off is well worthwhile. "

Some variable annuities can have fees as low as 0.50% of the value each year. Fixed annuities charge an upfront fee, often around 2% of your invested premium, Karimzad explains.

Myth No. 2: If you purchase an annuity, you’re stuck with it forever, with no way to obtain your money back

The truth:Most annuities do allow you to withdraw some money during what’s called the "surrender period" before you make the decision to convert your account balance into an income stream.

Many people want to know that if their retirement goals change or a life emergency happens, that they can access their cash early.During the surrender period, most annuities allow you to withdraw up to 10% of your account balance (or your earnings growth, whichever is greater) free of charge.But pulling out of an annuity isn’t anything you need to plan on moving in. "Just like 401(k)s and IRAs, annuities are really designed for money that won’t be relieved before your retirement interval," he says. In all cases, you should read the fine print on your annuity – in some cases, if you surrender early (before a period of five to 10 years is up) you’ll pay a fee. Also, note that if you surrender your annuity, you’ll obtain whatever the current store value is of the investment when you surrender, even if that’s less than what you initially invested.

"If you’re concerned about what might occur in the future concerning store ups and downs, an annuity may reduce these issues," says John Thomas, Chief Investment Officer at Global Wealth Management.

If and when you purchase an annuity, keep in mind that it’s a long-term investment, Thomas cautions. "Don’t put money into an annuity that you’re going to need to purchase a house in a couple of years. It’s something that you shouldn’t dash till you’re 59 and a half. " That’s becauseif you make withdrawals before that age, you might have to pay a 10% early withdrawal penalty plus regular income tax on your investment earnings.

Myth No. 3: Annuities don’t work well or earn a lot of money for you on the long haul

The fact: Today’s mortgage businesses have come to be quite aggressive, and fixed index annuities offer you decent levels of return considering there’s not any danger to your principal.

With profits, "you may not obtain all the store upside, but you don’t obtain any one of this store disadvantage," Thomas explains. Do the math and you may find out that, absent the down years, you don’t should achieve or take on further risk – to attain overly high yearly yields. This is very true whenever you’re utilizing a mortgage for a particular function, such as covering your fixed expenses .

Many of these investment options in variable annuities are extremely like those located in mutual funds, using comparable yield profiles, Karimzad states. "For example, some funds offer annuity options that invest in growth asset, for aggressive investors, while others only invest in short-term bonds for more conservative investors. "

And since annuities offer you a guaranteed income, then they generally loose investors up to take larger risks with different investments, clarifies David Littell, retirement income plan co-director in The American College of Financial Services. "When you’ve got the promise of payments for life, you’re going to feel more comfortable being more aggressive with other parts of your portfolio," he states. "So indirectly, annuities can lead to great returns. "

Myth No. 4: Annuities are just for anglers

The reality: While annuities are vehicles for retirement, they both ‘re not even something which you merely purchase in retirement – you may begin to supplement your retirement strategy using annuities into your 40s and 50s.

If you’re unsure if to create annuities part of your portfolio, then speak with your tax advisor, Karimzad advocates. "There can be profits to being able to defer income from investments in an annuity. For example, you might be able to compound bond income over time without taking a tax hit each year, and this could be helpful if you’ve already reached the limits for tax-deferred accounts like 401(k)s."

Similarly, you might locate a longevity mortgage – that you purchase about age 60 but overlook ‘t tap for income until you’re in your 80s – helpful at the end of a lengthy retirement. This is the time when health care expenses start to escalate, but also when many people fear that they’ll start running short of money. Converting, say, 20% of your nest egg into a longevity annuity policy can be a good hedge against outliving your cash, experts explain.

Myth No. 5: You need several hundred thousand dollars to take out an annuity

The truth: You can open one for less than $25,000 – though some providers may charge a maintenance fee for smaller accounts.

"No one could indicate that you annuitize a massive part of your portfolio – it ought to be a percent," Littell says. "You may also make use of an annuity to cover a particular bill. " For example, if you bought long term care insurance, but you’re worried about paying those premiums through retirement, you can purchase an annuity that will just cover that every month. Many people take out modest annuities to have peace of mind that certain expenses are paid.

Bottom line: Annuities should not tie all of your money down. "Rather, they ought to be a little bit of your portfolio which may balance out your entire financial picture," Thomas explains.

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