Episode 114: 6 Annuity Myths Your Advisor Won’t Correct

If something sounds too good to be true, it usually is. That’s what people tell me almost every week when they bring up common annuity myths. They hear about annuities and think it must be a trick.

Guaranteed money for life? Sounds fake. No losses no matter what the market does? Sounds fake too. I get it. If I had not spent almost 10 years in this business, I would be skeptical too.

Today, we are going to look at the biggest annuity myths out there. We will find out where these annuity myths come from. Then we will show why they are wrong. By the end, you will know more about annuities than a lot of financial advisors do.

If you type the word “annuity” into Google, you get over a billion links. That is a billion with a B. Nobody has time to read through all of that. So people just look at the first few links they see, and that’s exactly how so many annuity myths get started in the first place. A lot of that information is wrong. Some of it is just missing the full story. Let’s fix that, one annuity myth at a time.

Annuity Myth #1: The Agent Just Wants a Commission

First, let’s be honest. Nobody works for free. We can all agree on that. And yes, there are some bad people in every job. That is just true.

But here is something I have noticed. This particular annuity myth almost never comes from my clients. It comes from their current advisor. That advisor is about to lose the client’s business. The client is moving their money somewhere else.

So this is really a weak argument. I could flip it around just as easily. I could say the other advisor does not want you to buy an annuity because he does not want to lose his fees. See how that works both ways?

The real answer is simple. Talk to enough advisors. Then you can tell the difference between someone giving good advice and someone just trying to keep your money.

Annuity Myth #2: Annuities Cap Your Growth

This one is only partly true. If you pick a strategy with a cap rate, then yes, your growth has a limit. But a cap rate is just one of three ways you can earn money in an annuity. You can also use a participation rate or a spread. Both of those can give you a lot more upside.

There is another problem with this myth too. People compare an annuity to stocks. That is like comparing apples to oranges. You cannot have unlimited growth and full protection at the same time. Those two things do not exist together. Anywhere.

Think of it like a Corvette and a work truck. One is built to go fast and look good. The other is built to get you through bad weather without breaking down. They are different tools for different jobs.

Annuity Myth #3: Annuities Lock Up Your Money

This annuity myth has a small piece of truth in it. But almost nobody explains it the right way.

Here is the secret: if your money is making income in a regular investment account, it is already locked up. You just do not realize it yet.

Let’s use an example. A 65-year-old couple has one million dollars. They follow the 4% withdrawal rule. That means they take out about $40,000 a year. But that million dollars has to stay invested the whole time. It has to keep making that income. So they cannot just take out $100,000 to buy a boat. If they do, it breaks their whole plan.

That means they have zero money they can freely spend. Even though it feels like their money is free to use, it is not. Not without messing up their income plan.

Here is the surprising part. If that same couple puts some of that money into an annuity, they actually get more free money to spend. Not less. That is because an annuity can pay out more safely than a withdrawal from a regular account.

Annuity Myth #4: Annuities Have High Fees

When people say this, they are usually picturing one type of annuity. It is called a variable annuity. Those can have fees over 3%. The highest one I have ever personally seen was 4.1%.

But an income annuity with a guarantee on it is usually around 1% to 1.25%. The real question is not “what is the fee?” The real question is “what am I getting for that fee?”

A guaranteed income you cannot outlive is worth a lot for just 1%. And once your account balance runs out, the fee stops. But your income keeps coming for life.

Compare that to a regular managed account. Most people pay around 2% there once you add up all the extra fees. And there is no guarantee attached to that at all. You pay that fee whether your advisor makes you money or loses you money.

And by the way, if you just want growth and protection with no income rider, there are hundreds of annuity options with no fees at all.

Annuity Myth #5: Annuities Are Too Complicated to Understand

This one always makes me laugh a little. Have you ever tried to read a mutual fund prospectus? Those are 300 to 400 pages long. Nobody understands all of that except maybe a lawyer.

Annuities are actually simple once you break them down. There are only three ways they can grow your money:

• A cap rate — This is a ceiling. If your cap is 5% and the index earns 10%, you only get 5%.
• A participation rate — You get a percentage of the index’s growth. If you have a 50% participation rate and the index earns 10%, you get 5%. But there is no ceiling. If the index earns 20%, you get 10%.
• A spread — You get everything above a certain number. If your spread is 5% and the index earns 10%, you get the remaining 5%. There is no ceiling here either. If the index earns 20%, you get 15%.

That is the whole idea. It is not complicated. It is just different than what people are used to hearing about, which is honestly how most annuity myths get started to begin with.

Annuity Myth #6: The Annuity Company Is Going to Keep My Money

This might be the most common of all the annuity myths out there. It comes from two misunderstandings.

First, some people are thinking about one specific type of annuity. It is called a “life only” annuity. With that one, if you pass away early, the company keeps what is left. I have been doing this for almost 10 years. I have sold exactly zero of those. Nobody wants to hand over their savings and risk their kids getting nothing. There are much better options now. Many of them guarantee that any money left over goes to your family.

Second, people think the insurance company keeps everything above the cap rate we talked about earlier. That is completely false. I promise you that.

Here is how it actually works. When you give your money to the annuity company, they invest it in safe, long-term bonds. Let’s say that investment earns 5%. They have operating costs, let’s say 1%. They also keep a small profit, maybe 1%. That leaves about 3% left over. That 3% is used to buy something called a call option, tied to your chosen index.

Here is a simple way to picture a call option. Imagine a big company is about to build something near your house, but nobody knows what yet. I offer you $5,000 today. In exchange, you sign a paper. It says I can come back within one year and buy your house for today’s price, no matter what happens.

If the value of your house goes up, I use my option and buy it at the lower price. That is good for me. If the value of your house goes down instead, I simply walk away. I already spent my $5,000, but I do not lose more than that.

This is exactly how annuities protect your money. If the market goes up, the company uses the option to capture some of that growth for you, based on your cap, participation rate, or spread. If the market goes down, they simply let the option expire. Your money stays protected either way. The company already made their profit before any of this happens. Everything after that point is designed to work in your favor, not theirs.

The Truth About Annuity Myths

None of this means annuities are perfect for everyone. They are not. But if someone tells you annuities sound too good to be true, and they cannot explain how any of it actually works, that is not real skepticism. That is just someone repeating something they heard at a dinner seminar.

Annuities are simply a tool. Like any tool, they work great for the right job and the wrong job at the same time. The key is understanding what job you actually need your money to do. If you want to see what this side-by-side comparison could look like using your own numbers, book a short call by clicking the button in the top right corner of this page, and let’s figure it out together.

Podcast Episode 114: 6 Annuity Myths Your Advisor Won’t Correct

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