Debunking Annuity Myths
August 15, 2017 by Ben Mattlin
Many clients—and no doubt a few advisors—are confused about annuities. Not surprising, perhaps, since there’s been such widespread product development in recent years, not to mention a degree of alleged misrepresentation by unscrupulous sales reps.
To set the record straight, TIAA’s Timothy Walsh, a senior managing director based in Waltham, Mass., lays out some simple truths.
“When people think about planning for retirement,” he says, “it’s important for them to not only set savings goals but also look at what their expenses will be, and have a plan to generate reliable monthly income to cover expenses.” This is especially important as the average life expectancy, and therefore the number of retirement years, grows. “It is essential that they have a source of lifetime income,” Walsh adds. “Annuities are the only financial instruments available, other than Social Security, that provide a guaranteed stream of retirement income that lasts the participant’s lifetime.”
Nevertheless, he cautions, myths persist. “Annuities are not a one-size-fits-all or an all-or-nothing solution,” he says. “There are many options available in the market today, and people need to be educated about the different types of annuities and their associated costs.”
For instance, in-plan annuities are typically more affordable than those purchased outside a retirement plan. In addition, says Walsh, “Many people think they don’t need an annuity because they can just withdraw money from their retirement accounts as they need it.” But the fact is, there’s always a danger of outliving your savings. “A lifetime annuity, on the other hand, provides guaranteed income for your entire life,” and your surviving spouse’s life as well, he says.
Other common myths:
- Annuities have high and hidden fees. “Annuity fees vary based on company and type,” says Walsh. One way to save on costs is to be careful about which features you purchase. There are many options. “While fixed annuities preserve the value of your money and allow it to grow at a guaranteed interest rate, variable annuities give you the opportunity to select from a variety of investment strategies whose value may change based on performance,” he points out. Naturally, it’s important to read the prospectus before purchasing.
- Annuities don’t offer flexibility. “Annuities can provide a wide range of flexible options for growth potential and receiving income,” he says. “When used with other retirement savings options, annuities can help you create a diverse retirement income strategy.”
- To reap benefits, annuities require all your savings. “By annuitizing a portion of your savings and combining those payments with Social Security benefits and other sources of retirement income, you can create a customized income strategy,” says Walsh. “This approach helps you not only make sure you have the income you need to cover essential expenses during retirement, but it also gives you the flexibility to leave money to your heirs, support charitable efforts and establish pockets of saving for other uses.”
- Annuities don’t offer income flexibility. “Virtually all annuities offer an option for a guaranteed period of payment, which means you or your heirs will receive payments for a predetermined number of years no matter what. … The term you choose will impact the amount of your payments,” he says.
- Once you start receiving annuity income, you can’t transfer money among the different investment accounts. “While you can’t transfer money out of an annuity and into another investment vehicle, you generally can modify the investments within the annuity if your financial needs change,” he says.
Overall, Walsh stresses that annuities primarily help generate a steady income stream during retirement. They are not aimed at wealth accumulation. So they are best understood as part of a well-rounded retirement strategy. Advisors can help clients grasp that message.
“Financial advice and guidance are essential in helping people set their goals for retirement savings and [understand] how they can turn those savings into income for life,” he says. “A financial advisor can help individuals evaluate the types of annuities available and select the solution tailored to their needs, risk tolerance and preferences.”
The right annuity, he says, can make the difference between outliving one’s savings and successfully covering living expenses throughout retirement.
