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6 fixed indexed annuity myths busted!

As you plan for retirement, you will likely come across many options for building your portfolio and providing income for the future. Among these retirement solutions, you may have heard about fixed indexed annuities (FIAs). Like most annuities, FIAs can provide a guaranteed retirement 鈥減aycheck,鈥� but it鈥檚 important to understand how different annuities work and the benefits they provide. After all, there are many annuity options out there, and it can be challenging to assess which one is right for you. 

To better understand if fixed indexed annuities make sense for your retirement income strategy, it鈥檚 important to know how they work and the ways they may fit into your plans for the future. A good place to start is by setting the record straight on some common misconceptions about FIAs. 

6 fixed annuity myths that may be throwing off your retirement planning strategy  

1. Myth 鈥� Fixed indexed annuities are full of hidden charges. 

Financial professionals and the insurance company that issues the contract must disclose any and all fees associated with annuities. They must clearly explain withdrawal charges, which may be incurred if you surrender the contract during the withdrawal charge period or withdraw money beyond the penalty-free amount allowed in the contract.

But not all FIAs are the same, and understanding the difference among products can help you choose the FIA that鈥檚 right for you. When you purchase a FIA, you can allocate your premium among one or more interest crediting strategies. While your money is not invested directly in the index, you may receive interest credits based partly on how the index performs. These strategies vary from product to product and may include management fees, along with caps, participation rates, and spreads, which may limit the interest credited in exchange for protection from stock market risk or losses. There may also be a charge for optional riders. Rider features also vary by product and can offer benefits like lifetime income, increased liquidity, or an enhanced death benefit. 

2.  Myth 鈥� Fixed indexed annuities are not tax efficient.

Fixed indexed annuities are long-term, tax-deferred products and can be a valuable solution for those looking to grow their retirement savings. Annuity earnings will grow on a tax-deferred basis until you begin taking withdrawals or surrender the annuity.* Over time, you will have the potential to build more retirement savings than you would have been able to had your earnings been taxed as income. However, there is no additional tax benefit associated with funding a FIA from a tax-qualified source like a 401(k) plan.

3. Myth 鈥� Fixed indexed annuities can鈥檛 keep up with inflation.

Since inflation can decrease the purchasing power of your savings, a FIA with an income rider may offer payout rates that are indexed to inflation. This can help you keep pace with the rising cost of goods and services and offset the effects of inflation on your retirement savings. The other thing to remember about a FIA is that it can provide a guaranteed stream of income during retirement while offering growth potential and risk mitigation. Keep in mind that a FIA is just one tool in your portfolio, while you may employ other tools for long-term growth. Talking with a financial professional can help you assess how you can optimize your portfolio during your retirement years to help ensure that it can keep up with inflation, continue to grow, and help you reach your financial goals for the future. 

4. Myth 鈥� Fixed indexed annuities are not liquid.

It鈥檚 important to remember that FIAs are designed to help meet your needs for long-term retirement savings and income. In exchange for tax-deferred growth potential, protection from market loss, and the potential for guaranteed lifetime income, FIAs have limited liquidity compared to some other products. However, in most cases, FIAs allow you to withdraw up to a specified percentage of the contract鈥檚 accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges.

5.  Myth 鈥� Fixed indexed annuities are investments.

Fixed indexed annuities are insurance products that are designed to help you manage certain financial risks associated with retirement, such as volatile markets, falling interest rates, and longevity. They do not directly participate in any stock or equity investments, so your principal is protected from loss due to market downturns. That said, the interest on a portion of your premium is tied, in part, to a published stock market index, giving you the opportunity to benefit from market trends without owning stocks. This is where a FIA provides the dual benefit of growth potential and risk mitigation. 

6. Myth 鈥� You don鈥檛 need life insurance and an annuity.

While some life insurance policies can offer growth potential and annuities can include death benefits, the two vehicles serve distinctly different purposes. Life insurance policies are designed primarily to provide for your loved ones in the event you pass away. Annuities, on the other hand, can provide you and/or your partner with guaranteed income while you鈥檙e alive. In many cases, you can benefit from having both.

Using a FIA as part of your retirement strategy 

Income is an important topic to discuss with your financial professional, especially as you get closer to retirement. They can talk to you about income-generating tools and can help you assess which ones may be right for you. FIAs have gained popularity because of strong market performance and a range of FIA options that can be customizable through riders. 

It makes sense that people may be apprehensive to purchase something they may not fully understand, especially when misconceptions can cause uncertainty. If you are looking for a way to supplement your portfolio and help create a more secure retirement, consider reaching out to your financial professional to discuss FIAs in more detail. By exploring the pros and cons of each option, you will be more prepared to make a confident and informed decision that makes sense for your retirement goals. 

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*Withdrawals and surrender may be subject to federal and state income tax and, except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59陆.

Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Guaranteed lifetime income is available through annuitization or the purchase of an optional income rider for a charge.

Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market Indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an Index nor any market-indexed annuity is comparable to a direct investment in the equity markets. Clients who purchase indexed annuities are not directly investing in a stock market index.

Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.

Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.

Any information regarding taxation contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.