You can find unlimited information about pretty much anything these days. When my 4-year old son, Christian, has some outlandish question that only a 4-year old would ask, and I have no clue what the answer is, we will normally “ask” Google.
Have you ever Googled the word, annuity? I just did it. There are over 1 billion results! No one has the time to decipher all that information. So, how do you find out what is true and what is bogus?
If you’re going to research annuities, first talk with someone who is an expert in the subject. That means annuities are the only thing they deal with. If you go to a “One-Stop-Shop” for your financial education, their knowledge is spread very thin over an array of financial products, and you will get only surface information.
This is a specialized industry. Just like the medical profession, you wouldn’t see your Primary Physician if you have a torn rotator cuff. You would see an Orthopedist. A specialist.
That’s what I am — an annuity specialist. And that’s why I started Atlas Financial Strategies. I wanted to specialize in protecting people’s hard-earned money. And the best way to do that is with life insurance products, such as annuities.
I do not blindly guess what the best fit is for you. I use 3rd party software to verify everything I do. That is the only way to determine fact from fiction. So, in this week’s newsletter, we will address The Top 6 Annuity Myths that I’ve heard over the years when someone has Googled the subject of annuities or has talked with someone who is not an expert.
Here are the Top 6 Annuity Myths:
- The Annuity Agent is Just Trying to Make a Commission
Not to say this doesn’t happen. There are crappy people in every profession. But this is a lazy argument, mainly made by the advisor who is about to lose your business.
I could just as easily say, “your advisor doesn’t want you to protect your money in an annuity because he wants to keep charging you his fee.” See how easily that argument is turned around.
To prevent yourself from getting pushed into the wrong product, do your research. Talk to as many people as you need to until you feel confident that you understand what you are looking at. And make sure whatever recommendations you receive are backed up by 3rd party software and common sense based on your needs.
- Annuities “Cap” Your Growth Potential
Well, yeah. If they have a “cap”. There are two other ways to get interest credited to your principal. Spreads & Participation Rates. I wrote an entire newsletter explaining the difference between all 3 methods. You can find that article here, Caps, Spreads, & Participation Rates
If you’re going for growth, then you will want to stay away from an annuity that only offers a cap on the index. You would want to look for something that has a Spread or a Participation Rate to get the most growth.
- Annuities “Lock Up” Your Money
Annuities can be used for several different reasons. However, the two most common are growth and income.
When you are using them for income, then the point is not to have that portion of your assets available for large lump-sum distributions. The point is to have a steady stream of income.
If you’re going for growth, then your annuity advisor should always verify that you will have plenty of emergency funds that are accessible above the 10% Free Withdrawal. A true Professional Annuity Advisor will show you how to use the Free Withdrawal Provision in conjunction with your other assets to provide additional income as needed.
- Annuities Have High Fees
The only annuities that have high fees are Variable Annuities. With an average fee of 3.75%, along with the fact that you can lose money in a variable annuity, these cannot even compare to a standard Fixed Indexed Annuity.
If you are looking for an annuity that has a guaranteed income rider, you will have an expense associated with that option. In my experience, the average is about 1.1%. But like I tell my clients who are looking for a guaranteed lifetime income, “it’s not so much the expense you should be worried about, but what you are getting in return for paying that expense.”
A small expense that ensures you will never run out of income seems like a very fair trade-off. Especially when you compare it to a typical advisor that will take 1.5% per year whether they make you money or lose your money. Not to mention that they cannot guarantee that you will not run out of money before you run out of life.
If you’re looking for an annuity designed specifically for growth, then there are literally hundreds, if not thousands, of options that have zero fees with them and perform very well.
- Annuities Are Too Complicated
Seriously? Have you ever tried to read a 300-page mutual fund prospectus?
The main area I see people get confused with annuities is with the indexing strategy. They are very easy to understand. There are 3 different ways for your money to grow in a Fixed Indexed Annuity. Cap Rates, Spreads, and Participation Rates.
Here’s an example of how they work:
Caps: You have a Cap Rate of 5%. The index goes up 10%. You are credited 5%.
You are “capped” at 5% no matter how much the index increases. (I’m not a fan of these)
Spreads: You have a Spread of 5%. The index goes up 10%. You are credited 5%.
You will be credited any growth above the spread. So, with this method, if the index goes up 20% then you are credited 15%.
Think of the Spread as a short wall that must be scaled before you start earning interest growth.
Participation Rates: You have a Participation Rate of 50%. The index goes up 10%. You are credited 5%.
Participation Rates are all over the place. Some are up to 200%, and some as low as 20%.
A good rule of thumb with crediting methods is the more volatile the index (think S&P 500), the lower the Participation Rate and the Cap will be, and the higher the Spread will be.
The more stable an index is (think any index that has “RC” in the name), the higher the Participation Rates and Caps will be, and the lower the Spreads will be.
- The Annuity Company Will Keep My Money
Nothing could be further from the truth. Most people confuse the word “annuity” and “annuitize”. The only annuity that “annuitizes” your money is what is called a Single Premium Income Annuity (SPIA for short). Basically, you are trading a lump sum of money for a guaranteed lifetime income.
SPIA’s still serve a purpose, but rarely. It used to be one of few options when it came to annuities. Then it was they had a much higher payout rate than standard FIA’s with income riders. Now, we’re in an environment where most FIA income riders will match the payout rates and they have significantly more growth opportunities than your standard Deferred SPIA’s.
The other part of this myth is with the crediting strategies that we addressed above. A lot of people believe that if the annuity has a Cap Rate of 5%, and the index goes up 30%, the annuity company is keeping a 25% profit.
That is absolutely, 100%, not true! And it’s the same with Spreads and Participation Rates. The annuity company is not keeping the difference.
The annuity company’s profit is made on the difference between the return from their long-term bond portfolio, minus operating expenses, minus the options budget they use in the open market to help you get the bigger gains. That profit is normally between 0.5%-2%. That may not seem like a lot of profit. But remember, they are doing it with hundreds of millions, if not billions of dollars. A little bit of profit adds up to a lot with that amount of money. The annuity company does not need to keep your money.
Hopefully, addressing some of these myths has helped you separate fact from fiction.
But you want to know what isn’t a myth? Me being able to help you maximize your retirement spending from an income annuity, or potentially save you tens of thousands of dollars in management fees with one of my annuities designed for growth!
If you want to learn how to maximize annuities to their full potential for income or for growth, then you should check out my video series, How To Get 20% More Income In Retirement. Then take 30 minutes to have a brief phone conversation with me and see if the Atlas Annuity Strategy is right for you. Call me directly at 636.926.6500, or book a time directly at www.atlasannuity.com.
All the best,