Columnist
Combining a 401(k) or pension, an IRA and Social Security, retirees hope to have enough to enjoy a comfortable lifestyle. Yet, those planning for retirement may want, or need, to find other financial resources – one option might be a fixed annuity, which offers a guaranteed interest rate and can be structured to provide a lifetime income stream. But investors may be nervous about annuities because of some negative things they’ve heard about them. How valid are those concerns?
To help answer that question, consider some common misconceptions about fixed annuities.
I won’t be able to touch any of my money if I need some of it before I retire.
A fixed annuity is designed to provide income during retirement years. But to withdraw a significant amount of money before retirement – when the annuity is in what’s called the “accumulation phase” – will likely result in a surrender charge, as well as a 10% federal tax penalty. Withdrawals may also be subject to a market value adjustment. However, to access a small percentage of allocated funds, one might not encounter any fees. And some annuity contracts allow a 10% withdrawal with no penalty.
Annuities cost too much.
Many annuities are actually low in cost. Be sure to compare the cost against the value of each additional guarantee, feature and benefit — and only pay for what is needed.
The interest rate will always be too low to make an annuity worthwhile.
A fixed annuity is not designed to provide high returns – its key benefit is the guaranteed interest rate and the potential for lifetime income.
A deferred annuity isn’t worth the wait.
It’s true that setting up a deferred annuity won’t result in immediately receiving income. However, investors will be able to factor future expected payments into retirement plan.
When I die, the insurance company keeps my money.
If the payout plan includes a beneficiary agreement, beneficiaries will receive the remaining amount of money in the contract. Read the terms and conditions listed with an annuity, as they will spell out where the remaining money will go after you pass away.
Of course, even if the above concerns are simply misconceptions, it doesn’t mean there are no issues to be aware of when considering fixed annuities. For one thing, the safety of a lifetime income stream and guarantees will depend on the claims-paying ability of the insurer that issued the annuity, so choose a company that has demonstrated financial strength and stability. One other concern about fixed annuities: They typically don’t carry a cost-of-living adjustment, such as that found in Social Security. Look for annuities that offer some inflation protection, but this feature can reduce early payments significantly.
If it’s appropriate for an individual’s situation, a fixed annuity can be a valuable addition to retirement income. Before purchasing one, though, be sure to weigh all the potential benefits and issues. But don’t be swayed by misconceptions – base decision on facts, rather than fears.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
