As I talk to people daily who are considering an annuity, I tend to hear the same concerns over and over.
I definitely do not have any issue with addressing these concerns, but what that tells me is there is a lot of skewed information out there in cyberspace. And sometimes that information comes directly from other annuity advisors.
So, what are the Top 3 Myths When Buying an Annuity? Well, maybe there are 4…
The term “buying” an annuity has some problems itself. When I think of “buying” something, I think of something that I may have remorse for purchasing because I may not get a returned value. I believe if you start using the term “funding” an annuity, it will paint a different picture in your mind of an asset that will provide value to you and your family in one way or another.
When you fund an annuity, at least one that I would recommend, you should see a return “on” your money (if we’re going for growth), but more importantly, you will see the return “of” your money. Whether that’s in guaranteed income, withdrawals, or death benefit depends on your specific situation.
Let’s move on to the Top 3 Myths When “Funding” an Annuity.
Myth #1 – Annuities Are All or Nothing:
I have found that this one is more fear-mongering by annuity haters than it is a logical argument. A lot of people are under the assumption that you can (or must) put ALL of your money into an annuity.
First, common sense dictates that you would never put ALL your money into any one asset. Diversification is still a solid strategy. You are going to want to have other assets such as cash, real estate, stocks, and maybe even a few bonds. That’s just smart investing.
Second, the annuity company will not allow you to put ALL your money into an annuity. A good rule of thumb in the industry is the maximum amount should not exceed 65% of someone’s investable assets. That doesn’t mean everyone should put 65% of their money into an annuity. But sometimes when we have a specific income goal, it will take that much.
Recommended amounts will be based on each individual strategy.
Myth #2 – You Can Only Fund 1 Type of Annuity:
This myth kind of falls under the “all or nothing” mindset. There are several major categories of annuities available, and for some people, that means maybe using multiple types of annuities to achieve the purpose of their money.
It doesn’t have to be just an annuity designed just for income or just for growth. Different annuities serve different purposes for different times in your life and your retirement. Here are some ideas of what a specific annuity may be used for:
- Fixed Indexed Annuity:
An FIA could be used for long-term growth and protection for money that you may not need for income above a 10% withdrawal.
Maybe you are wanting to leave this money behind to your beneficiaries, or just want it to be kept safe while RMD’s take place. Or you want to make sure it will not be lost because you have future plans for it.
I will throw this out there while I’m writing this – I personally have not seen the need for an FIA with a surrender period longer than 10 years. They come in all different terms and most goals can be accomplished within 5-10 years. The 10-year FIA will give you more opportunity for growth than a 5-year FIA, but a 14 or 20-year FIA will not provide that drastic of a difference. So, personally, I see no point in entering a term longer than 10 years.
Beware the advisor that is trying to get you to fund a straight FIA for longer than 10 years. That really should be the max.
- Immediate Income Annuity or FIA with an Income Rider:
Either one of these annuities will provide you with a guaranteed lifetime income. They come in all shapes and sizes with different options for how income is received.
The one thing to keep in mind is that Immediate Annuities will provide a higher income upfront, but they are not designed to have any type of growth factor. You will always get your money back either in income, or your beneficiaries will get the remaining balance if you pass away early.
The FIA with an Income Rider will also provide you with a guaranteed lifetime income, but it will also participate in an indexing strategy. That means there is a potential to leave more behind to your beneficiaries besides the premium, minus any income that has been paid out.
Is it possible to leave the same amount behind that you put into the annuity after receiving income for many years?
It is possible if that is your goal and the index performs well. But remember what one of my early mentors told me – “There are no deals in the insurance industry. Everything is based on math.” You can shoot for a higher death benefit than other income annuities, but you may have to accept a lower guaranteed income than what the Immediate Annuity or a different FIA Income Rider would provide.
- MYGA:
MYGA stands for, “Multi-Year Guaranteed Annuity”, sometimes called a “Fixed Interest Annuity.” These operate just like a bank CD. It’s a guaranteed amount of interest, for a guaranteed amount of time.
A MYGA is normally a good fit for someone that has plenty of guaranteed income and wants to know exactly what they are going to get in return. You have the option to defer all the interest, pull the interest, or take up to 10% of the account value, depending on which annuity company you decide to work with.
MYGA terms range from 2-20 years, but it is rarely beneficial to agree to more than a 5-year term. Meaning, you will not earn twice as much interest for agreeing to twice the term length.
Therefore, it is vital to have a strategy when you are funding annuities. They can work really well in conjunction with each other if you have a competent advisor.
Myth #3 – There Is a “Best” Annuity:
I hear this one constantly. “What is the best annuity?”, or “I heard ABC annuity was the best.”
Well, the best for whom???
That is 100% relative to what you are trying to accomplish, i.e., the purpose of the money. As you just read in Myth #2, there are many options to choose from, and endless strategies that can be formed using those options. But there is no one “best” annuity.
There is only a “best” annuity for you.
Depending on the needs, age, and timeframes of your personal situation.
When you work with Atlas, I will always use 3rd party software to show you which annuity is the “best” for you. But that is after we figure out what your needs are so we can narrow down the category of annuity, and then the specific company and product. What may be the “best” for your neighbor could, and most likely will be, totally different than what is the “best” for you and your family.
Beware the agent who recommends the “best” annuity without doing an analysis of your personal financial situation.
So, there you have it! The Top 3 Myths When Funding an Annuity. At the end of the day, annuities are fantastic products with fantastic benefits that can serve you very well. But I say that with the caveat that they may only serve your best purpose with the appropriate strategy. To get your feet wet on how some of my strategies work, I highly recommend watching my video series “20% More Income in Retirement” by heading to the Video section of the website. Then take the time to click the “Schedule A Call” button on the top right corner of the screen so we can have a short conversation and figure out if the Atlas Annuity Strategy is right for you.
Keep educating yourselves and, as always, I wish you the very best!
Marty