The Truth About Annuities – Part 2

Cathy DeWitt Dunn

Part 2 in a series where Safe Money Talk Radio annuity experts Cathy DeWitt Dunn and Matt Redding separate fact from fiction and tell you the truth about annuities.

Continued from “The Truth About Annuities – Part 1”

Myth. The returns on a fixed index annuity are low.

Reality.  With a fixed index annuity, the returns are directly tied into an external index’ performance, such as the S&P500. If the market does well, your annuity has the opportunity to do well. If the market is down, your principal is protected against any loss. The amount of interest credited to your annuity account is determined by the crediting method or methods you chose when you first purchase your annuity. You may change crediting methods each year on the anniversary of your contract. Additional details regarding crediting methods are available on our website.

Myth. Crediting methods are designed solely to increase insurers’ profits.

Reality.  Insurance companies don’t experience a windfall effect if the market or interest rate outperforms expectations. They purchase hedges to fund the index credits (interest) paid to you in the event of stock market gains. The cost of those hedges determines the limits that are set for each annuity. The costs incurred by the insurance company are also behind the reason why you do not receive all of the market’s upside.

Myth. I don’t need an annuity because I have a 401(k) or IRA.

Reality.  401(k)s and IRAs are wonderful retirement savings tools. However, they don’t provide the opportunity to protect your principal while still achieving market linked returns with the ability to convert your savings into a guaranteed lifetime income stream. In addition, 401(k)s and IRAs have annual contribution limits. While some annuities may set internal limits for how much you can invest, the IRS does not limit the amount you can contribute to an annuity. This allows you to enjoy more tax-deferred savings power to help build your retirement nest egg.

Myth. Fixed index annuities can’t keep up with inflation.

Reality. Whether you’re retiring tomorrow or ten years from now, inflation can erode the purchasing power of a dollar…regardless of where that dollar is invested. Inflation fears may force people into risky investments that can gain value even faster than the inflation rate. Or, people may look to putting their money into low-risk, low-reward investments that at least hold their own. Fixed index annuities are low-risk retirement income solutions that pay a fixed rate of interest over a specified period of time. However, they also provide an opportunity for allowing investors to benefit from stock market gains while shielding them from market losses.

If you’re still concerned with inflation, you may consider an inflation-indexed annuity. An inflation-indexed annuity reduces inflation risk from your retirement planning and provides you with income for life.  You can receive the income on a monthly payment, and its great benefit is that it adjusts the monthly payment upward based on the annual inflation rate.  Most fixed index annuities are tied into an inflation indicator, such as the Consumer Price Index.  An inflation-indexed annuity will increase your monthly payment each year based on a CPI increase during the prior year…but not decrease the payment if the CPI declines.  A decrease in CPI will be used to offset any future annual increases.

Myth. An annuity is “risk free” and guaranteed safe.

Reality. An annuity is backed by the full faith and credit of the insurance company that issues it. Most insurance companies also purchase “reinsurance” to provide further safety. In addition, each state offers additional protection up to a specified limit. When choosing an annuity, it’s important to go with top rated carriers and deal with the experienced annuity professionals at Annuity Watch USA. You may find helpful links to Insurance Carrier Ratings Agencies in the “Resources” section of our website.

Continued from “The Truth About Annuities Part 1”

Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.