With the current high inflationary environment combined with quickly rising interest rates and increased market volatility, some experts say now is the time for investors to consider adding annuities to their financial plans. But there are still several misconceptions around them, which might trigger hesitation.
Annuities are financial products that pay out a fixed amount in a series of payments. According to a Nationwide Advisor Authority study, 58% of investors are likely to choose an annuity to protect against outliving their savings. Rona Guymon, senior vice president of Nationwide Annuity Distribution, told GOBankingRates that “many times when you ask a client ‘how much of your retirement income would you like guaranteed?’ they will often say 100%. However, Social Security only covers a portion of their retirement income needs, and more and more customers do not have a pension.”
In turn, Guymon explained that these Americans might be faced with a large portion of retirement income stemming from their investment portfolio. “Showing how a customer can reposition a portion of their retirement assets into an annuity can lessen the portfolio reliance burden and provide increased guaranteed income to supplement Social Security and pensions,” she said, adding that there are still several misconceptions about them.
Myth #1: Annuities Are Too Costly
Guymon stated that while annuities function as an insurance product, some may have underlying investment options tied to the markets, which can offer guaranteed income and have features that offer protection during market fluctuations.
“Advisors can help clients understand various annuity options and the fees associated with each one, including the level of downside protection and income guarantee they get in exchange for these expenses,” she added.
Myth #2: Annuities Are for Older, High and Ultra-High Net Worth Individuals
While Americans owning annuities tend to be more affluent and closer to retirement age, recent data indicates an appetite among a larger portion of the population, Guymon said.
In fact, more millennials are likely to choose an annuity to protect against market risk, with 85% in 2021 compared to 72% in 2020, according to Nationwide.
In terms of income, according to Alliance for Lifetime Income, 62% of annuity owners have less than $500,000 in investable assets and 46% are middle class, earning between $75,000 and $150,000 annually.
Myth #3: There Is a Right (or Wrong) Time To Purchase an Annuity
Guymon explained that contrary to that belief, annuities can provide protection and guaranteed income in any economy, at any age.
“Having the opportunity to participate in a portion of equity market gains while having limits on market losses can be appealing to investors today,” she noted. “This is particularly appealing as we deal with rising inflation. An annuity with a built-in income guarantee allows for growth while providing investors the consistent income they need, as an example.”
Myth #4: Retirement Income Isn’t Truly Guaranteed
Guymon clarified that retirement income in annuities is indeed guaranteed.
“Annuities are contracts between the insured and the insurance company, so the guarantee of future payments is based on the financial strength of the insurer. Insurance companies are highly regulated, with independent agencies routinely assessing and rating the financial strength of providers,” she said.
Guymon emphasized, however, the importance of reviewing the financial ratings and strength of the insurance company prior to investing.
Myth #5: Once You Invest in an Annuity, You Are Stuck With That Option
While previously, some annuity providers locked in products and beneficiaries upon purchase, annuity products have evolved — and the industry is focused on more flexible customer benefits, Guymon said. For example, most annuities include free withdrawal provisions, which allow contract owners the ability to withdraw a designated portion of their funds — often 10% each year — without incurring penalties.
In addition, Guymon explained, some annuities include waivers enabling access to account values without penalties if “triggering events” occur, such as hospital stays, nursing home admissions or terminal illnesses.
There is also the option of additional flexibility when using Lifetime Income Riders (Living Benefits Riders) in terms of when your income begins and the ability to turn the income on or off if needed, she added.
Keeping Pace with Inflation
In the end, Guymon said that it’s not surprising that people close to retirement age are feeling anxious and would rather be more conservative after having lived through both the pandemic and the 2008 financial crisis.
“After living through 2008, and more recently 2020, solutions like annuities that provide investors with a measure of downside protection, but still provide an opportunity to grow their assets, are helping investors rest easier in volatile times,” Guymon said. “In previous crises, those who protected a portion of their assets using annuities during the market decline were glad they did when they saw their account values and guaranteed benefits increase as markets bounced back. The impact of inflation today on purchasing power also highlights the importance of generating guaranteed income that can help keep pace with inflation.”
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