Even though retirees can count on a Fixed Indexed Annuity (FIA) for guaranteed lifetime income, there are a number of persistent myths that continue to lead people astray. The big problem – far too many people believe all annuities are the same.
Maintenance & Annual Fees Are High
First of all, it’s important to not confuse FIAs with variable annuities that do charge annual fees. Since FIAs do not invest in the stock market, there are no maintenance fees. Costs are usually built into the annuity itself. Of course, monthly fees may apply if you add optional riders.
When You Die, The Insurance Company Keeps The Remaining Money
This is another myth that doesn’t acknowledge the differences between FIAs and other types of annuities. Though this may be true with a small number of “life-only” annuities, when you purchase an FIA your designated beneficiary will receive the remainder of your balance upon your death. Depending on your contract, your beneficiary can receive a lump sum or a continuation of the recurring annuity payments.
“If there’s a stock market downturn, you don’t lose money because fixed indexed annuities have no underlying investments.”
FIAs Are Invested In The Stock Market
Absolutely not true. In fact, one of the top advantages of an FIA is that your principal value is protected against stock market volatility. FIAs offer a minimum guaranteed interest rate combined with an interest rate linked to the performance of an outside index such as the S&P 500. If there’s a stock market downturn, you don’t lose money because fixed indexed annuities have no underlying investments.
FIAs Are Not Tax Efficient
Not entirely true. If you purchased your annuity with after-tax money, withdrawals from your principal balance are not taxed again and only your earnings will be subject to income taxes at your regular rate. However, if it’s a qualified FIA, it means you purchased the FIA with pre-tax money from a tax-deferred account like your traditional Thrift Savings Plan (TSP) or a 401(k). 100% of distributions from a qualified FIA are subject to federal income taxes at your regular rate.
You Don’t Need An FIA If You Have The TSP Or A 401(k)
This myth is highly misleading. Worse – far too many people have forgotten how the stock market meltdown of 2008 impacted retirement plans like the TSP and 401(k)s. In fact, the main advantage of an FIA is that it can help preserve the principal value of your investment and provide you with the peace of mind you can get from a predictable, guaranteed stream of lifetime income.
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