Layin’ It on the Line: Busting many myths about annuities
Annuities often come with a myriad of misconceptions that might deter potential investors. But it’s essential to sift through the misconceptions and understand annuities’ true nature and benefits. Let’s debunk some of these myths.
Annuities are only for the elderly. While it’s true that many retirees use annuities to ensure a steady stream of income during their golden years, they aren’t exclusive to this demographic. Younger individuals can also benefit from annuities, especially deferred annuities, which allow your money to grow tax-deferred for several years before you start receiving payments.
Annuities have high fees. Not all annuities have high fees. While variable annuities may have higher charges due to their investment options and potential returns, fixed annuities typically have lower fees. Furthermore, some annuities come without any annual fees. Shopping around and comparing different products is crucial to finding one that fits your financial needs and budget.
You lose all your money if you die early. A common misconception is that if an annuitant dies before receiving the total value of the annuity, the insurance company keeps the remainder. This isn’t necessarily true. Many annuities offer a death benefit option where a named beneficiary will receive the remaining funds or payments. It’s essential to understand the terms of your contract and potentially opt for a death benefit feature if this is a concern.
Annuities are only for wealthy individuals. Annuities are for anyone wanting a steady income stream, irrespective of their wealth status. Many annuities may be started with a modest initial investment. Over time, even a small annuity can grow and provide valuable income, especially when combined with other retirement savings.
Annuities have no real investment value. A commonly held misconception is that annuities don’t offer investment growth, which is inaccurate. For instance, fixed-indexed annuities provide investment growth opportunities tied to a market index like the S&P 500. While they offer a fixed minimum interest rate, they also allow you to benefit from favorable market gains. Your investment has the potential to grow tax-deferred, thereby increasing the future income you can draw from the annuity. This flexibility provides income stability and investment growth potential, thus debunking the myth that annuities have no real investment value. It’s essential, as always, to understand the terms and ensure they align with your financial goals.
Annuities will tie up my money forever. Most annuities have a surrender period, during which you might incur a fee for withdrawing funds. However, many annuity contracts allow for a certain percentage of withdrawals annually without penalties. Plus, after the surrender period ends, you may access your funds without any withdrawal charges.
Taxes will eat up my annuity earnings. While it’s true that annuity withdrawals may be subject to income taxes, it’s essential to note that annuities provide tax-deferred growth. This means you only pay taxes on your earnings once you make withdrawals, allowing your investment to compound and potentially grow faster. Also, if you opt for a Roth IRA annuity, your withdrawals could be tax free.
All annuities are the same. Annuities come in various types, each with specific features, benefits and considerations. The annuity landscape is vast, from fixed to variable, immediate to deferred. Doing thorough research or consulting with a trusted financial advisor is essential to find the right fit for your financial situation and goals.
Annuities, like any financial product, come with pros and cons. However, many of the negatives associated with annuities are based on misconceptions.
Don’t let myths and misconceptions deter you from considering an annuity in your financial planning. Take the time to understand the facts and consult a trusted financial advisor to find an annuity that aligns with your financial goals.
Lyle Boss, a native Utahn, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.