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5 FIA Myths Busted

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Education plays a key role in building a sustainable retirement income plan, but myths and misconceptions can get in the way, particularly when considering an annuity as a retirement savings vehicle. A recent Secure Retirement Institute study revealed that Americans are largely confused about how to turn workplace savings into a guaranteed income stream. Only 1 in 4 consumers understood that money saved in workplace retirement plans could be used to purchase annuities.

The confusion around annuities shows there is ample opportunity to educate clients looking to effectively and creatively save for their retirement. Here are five common myths about fixed index annuities (FIAs) you can bust for your clients. Once armed with the facts and your guidance, they will be ready to make a more confident decision in adding FIAs to their financial plans.

Myth 1: Fixed indexed annuities are not tax efficient.

FIAs may be a valuable solution for those looking to grow their retirement savings because they are a long-term, tax-deferred product. When discussing taxes with your client, make sure they understand that annuities allow retirement savings to grow without being reduced by tax payments – another appealing reason to consider an annuity. In fact, annuity earnings grow on a tax-deferred basis until a client begins taking withdrawals or surrenders the annuity.

Over time, clients will have the potential to build more retirement savings than they would have been able to if their earnings been taxed as income. Keep in mind that there is no additional tax benefit associated with funding an annuity from a tax-qualified source like a 401(k) plan.

Myth 2: Fixed indexed annuities can’t keep up with inflation.

Income riders frequently offer payout options that are indexed to inflation, which may help clients keep pace with the rising cost of goods and services. However, when clients are considering annuities in retirement planning, they should factor in the inflation risk associated with a fixed annuity payout. Like any risk in retirement planning, there are ways to insure, hedge, offset or otherwise lessen the impact of a known risk.

Myth 3: Fixed indexed annuities are not liquid.

It’s important that your clients understand that annuities are a long-term retirement savings strategy. Except for some immediate annuities, most contracts begin payments on a fixed date many years in the future. So, if a client withdraws money from an annuity before that date and during the withdrawal charge period, the withdrawal will incur a charge called a “surrender payment”. While the client may withdraw funds, it can come with a cost.

In most cases, deferred annuities allow withdrawals up to a specified percentage of the contract’s accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges. FIAs are designed to meet the need for long-term retirement savings and income, so clients should have sufficient liquid assets to let the annuity funds sit.

Myth 4: Fixed indexed annuities are investments.

Fixed indexed annuities do not directly invest a client’s money in any stock or equity investments. Instead, the annuity company credtis a set, guaranteed return each year, with the potential for additional interest credits based in part on the performance of an external index. Clients should understand that FIAs are insurance products that are designed to help them manage certain financial risks associated with retirement such as volatile markets, interest rates and longevity.

Myth 5: Fixed indexed annuities are full of hidden charges.

Many types of annuities are available in today’s retirement marketplace. Some, like variable annuities, require that clients pay explicit annual fees similar to mutual funds or managed money solutions. Unlike variable annuities, fixed indexed annuities do not directly participate in any stock or equity investments and do not charge the fees commonly associated with those investments.

With fixed indexed annuities, charges are typically imposed for discretionary actions like excess withdrawals or early surrender of the annuity contract; for optional features like supplemental guaranteed lifetime withdrawal and legacy benefits, or to support higher indexed interest crediting rates.These charges enable the insurance company to provide the guaranteed value promised to customers. FIAs have levers such as participation rates and caps that can limit interest crediting in return for providing guarantees, such as the protection of principal from market loss. Fees are not “hidden,” and must be fully disclosed prior to purchase.

As financial professionals seek to help clients understand the products that will best help them reach long-term goals, it’s essential to break down the myths that can keep them on the sidelines – and fixed indexed annuities are a great place to start.

Chris GradyChris Grady is executive vice president, head of U.S. distribution, at Athene USA.

(Image: kan_chana/Shutterstock)