When most people hear the word annuity, they flinch. Maybe it’s the vague stories of high fees, limited flexibility, or mysterious terms whispered in retirement seminars. But what if those assumptions are more myth than reality?
According to the Protected Retirement Income and Planning (PRIP) study by the Alliance for Lifetime Income, many Americans express deep concern about the longevity of their retirement savings and exhibit a widespread lack of understanding and confidence regarding annuities and retirement planning (1). So, if annuities carry such a poor reputation, why do so many retirees still use them? Could it be time to reconsider their role in your financial strategy?
Let’s unpack some of the most common myths surrounding fixed indexed annuities and look at the facts behind the fiction.
Myth #1: “Annuities are tax nightmares.”
Fact: Fixed indexed annuities grow on a tax-deferred basis.
That means your earnings are not taxed until you begin withdrawing them, often in retirement, when your tax bracket may be lower. This can make a powerful difference when compounded over the years or decades.
Myth #2: “Annuities don’t protect against inflation.”
Fact: There are “inflation-adjusted” annuities that directly link payments to inflation.
Fixed Indexed Annuities (FIAs) are tied to a market index; they offer the potential for higher returns than traditional fixed annuities but do not always guarantee inflation-adjusted income. They can outpace inflation during market upswings, but if inflation outpaces index returns or if caps/participation rates are low, the annuity may lag inflation. So, while FIAs offer some protection and more upside than fixed annuities, only inflation-adjusted riders or specialized annuities offer true inflation protection. (2)
Myth #3: “You can’t touch your money without hefty penalties.”
Fact: Most annuities allow penalty-free withdrawals, typically up to 10% of your account value annually after the first year.
Early or excess withdrawals may incur surrender charges. Many contracts have riders or exceptions allowing additional withdrawals for terminal illness or long-term care. IRS penalties can still apply if you withdraw before age 59½, unless certain exemptions apply (3).
Myth #4: “Annuities are full of hidden fees.”
Fact: Today’s annuity contracts are required to disclose all fees transparently.
While some annuities may have rider charges for added benefits like guaranteed income or enhanced death benefits, these are outlined upfront—no fine print surprises. Fixed indexed annuities often have no annual fees unless you select optional add-ons (3).
Myth #5: “Annuities are risky investments.”
Fact: Annuities are insurance tools, not investments.
They’re designed to mitigate risk, not create it. Unlike stocks or mutual funds, fixed indexed annuities offer principal protection. That means even if the market crashes, your annuity won’t lose value due to market performance. This level of downside protection can provide a more stable foundation for retirement income planning (3).
Bringing It All Together
So, why do these myths persist? Maybe it’s because annuities aren’t one-size-fits-all, and they’re often misunderstood. But for those nearing or in retirement, getting the facts—not just the headlines—can make all the difference.
Could an annuity help safeguard your income, keep pace with inflation, and offer the flexibility you didn’t expect? Could it complement your other retirement accounts, creating a more balanced, protected future?
The truth is, financial tools evolve. So should our understanding of them.
Next Steps
If you’re curious about how a fixed indexed annuity could fit into your overall retirement strategy, there’s no substitute for personalized guidance. Consider scheduling a complimentary consultation with a financial professional who can walk you through the pros, cons, and suitability based on your goals. No pressure—just facts.
Sources:
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(1) Alliance for Lifetime Income. Protected Lifetime Income Study, 2023. https://www.protectedincome.org/alliance-research-prip-2023/
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(2) Annuity.org. “Inflation-Adjusted Annuities.” Annuity.org, www.annuity.org/annuities/types/inflation-adjusted/
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(3) Annuity.org. “How to Withdraw Money From an Annuity.” Annuity.org, www.annuity.org/selling-payments/withdrawing/
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Annuities are long-term insurance contracts that involve fees and charges, including possible surrender penalties, and they are not suitable for everyone. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company and for variable annuities, do not apply to the performance of the variable subaccounts which will fluctuate with market conditions Product and feature availability may vary by state. Variable annuities are subject to market risk, including the potential for losses. We do not provide tax or legal advice or services. Always consult with qualified tax and legal advisors concerning your own circumstances.
