Debunking Annuity Myths

While irrational, the fear of annuities isn’t totally unfounded as some cases of complex, high-fee variable annuities in the past have made people wary. Unfortunately, this fear always comes at the expense of the fearful; due to outdated and misleading myths about annuities, many retirees are missing out on strategies that could increase their retirement income between 20-60%.

This blog lists and busts the four biggest annuity myths, clearing up the confusion around how these powerful financial tools actually work.

Myth 1: "Annuities Tie Up My Money Forever"

The idea that annuities tie up your money is entirely outdated. While they are designed for long-term income, modern annuities are surprisingly flexible. Many contracts allow for penalty-free partial withdrawals, typically up to 10% of your principal each year. You retain full control of your money, and you are never locked in.

Myth 2: "The Insurance Company Keeps My Money After I am Deceased"

A common fear is that you must live to 100-years old for an annuity to be "worth it." In reality, lifetime income annuities are not only designed to pay you for life, but also protect your family after you pass on. Modern annuities frequently offer death benefits or refund provisions, so if your life ends earlier than expected, the remaining balance can be passed on directly to your heirs.

Myth 3: "Annuities Don't Keep Up With Inflation"

Many retirees worry that a fixed payout will lose its purchasing power over a 20- or 30-year retirement. The good news is, many annuities offer optional riders and Cost-of-Living Adjustments (COLAs) that automatically increase your payouts over time, helping you maintain your lifestyle even when inflation rises.

Myth 4: “Advisors Push Annuities Just for the Commissions”

Perhaps the biggest fear of annuities comes from a misunderstanding that requires more explanation: hidden fees and agent commissions. Many retirees assume that if an advisor makes a 5% commission on an annuity sale, that 5% is being deducted directly from their nest egg. This is entirely false.

Unlike real estate where the agent’s commission is deducted from the seller's proceeds, annuity commissions are paid directly by the insurance company.

• Your Principal is untouched: If you put in $100,000, your contract value is $100,000.

• Your Growth is untouched: Commissions do not eat into your interest rate.

• Your Income is untouched: The guaranteed monthly payout you are promised is exactly what you will receive.

The commission is simply a built-in marketing cost for the insurance company, much like a TV commercial or corporate overhead. It ensures that you receive professional guidance without having to pay upfront, out-of-pocket fees.

Of course, not all advisors are created equal. When shopping for an annuity, look out for "captive agents" who are forced to sell products from only one company. Instead, look for independent professionals with high integrity who are focused on providing a comprehensive financial solution, rather than just selling you a product.

The Cost of Annuity Myths

Conventional retirement wisdom tells you to build a massive stock portfolio and withdraw 4% a year, but the stock market is volatile, and sequence-of-returns risk can entirely deplete your life savings. 

Fixed and lifetime income annuities remove this anxiety by offering a contractual guarantee that you will never outlive your money, regardless of what happens in the stock market.

Understanding the safety, flexibility, and cost-effectiveness of modern fixed annuities is the ultimate antidote to the irrational fears that come from the myths above. 

For an education that will get you up to speed on how modern annuities work and how they can help you secure your retirement, reach out to National Annuity Educators for a free consultation.