Can you earn 7% on a fixed annuity, guaranteed? Online ads often make this promise.
Unfortunately, those ads are misleading. They’re not completely false, but they set unrealistic expectations. We have to talk clients back down to reality.
The truth is complex. Some annuities do indeed offer a 7% rate guarantee. But there’s a catch. That doesn’t guarantee the annuity’s actual return. Instead, it guarantees the growth of an income account value created by an optional rider. It’s not money you can withdraw.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It sounds too good to be true, and it is.
Buying a lifetime income rider creates the income account value, which grows at a guaranteed annual rate of 4% to 7%. The income account value is used to calculate the amount of future guaranteed lifetime income payments. Most insurers charge an annual fee of about 1% of the annuity value for this option, typically available with indexed annuities.
That’s why some annuity marketers get away with claiming a misleading 7% return. Those ads are usually placed by marketing firms that sell the leads to annuity agents.
What can you really earn?
The top rate for a five-year fixed-rate annuity, as of December 2019, is 3.71%, according to AnnuityAdvantage’s online rate database. For a 10-year annuity, it’s 4.00%, and for a three-year guarantee, it’s 2.70%.
These are good rates that build savings safely. You don’t need to exaggerate.
Like bank CDs, multi-year annuities offer a guaranteed rate for a set period of time. But they usually pay substantially more interest than bank CDs of the same duration. Another key advantage: Interest is tax-deferred as long as it’s left to compound in the annuity.
An income rider is a good deal for some people
It’s unfortunate that some marketers muddy the waters with hype. The income rider can be a worthwhile purchase for some people.
Unlike the multi-year deferred annuities mentioned above, fixed indexed annuities provide an interest rate that varies from year-to-year. They offer a chance to get a good portion of the stock market’s gains while offering complete protection from loss. Principal is guaranteed.
A saver can add another layer of protection with a lifetime income guarantee rider. But it makes sense only if it meets your needs and your strategy. You should feel sure that you’ll use the feature eventually.
But if you do use it eventually, the income rider can be a wise purchase. It can produce more guaranteed lifetime income at a future date while giving you complete control over your money. Since you don’t set the date for income payments to start when you buy the annuity, you retain planning flexibility.
Normally, when you convert an annuity into an income stream through annuitization, its cash surrender value becomes zero. That’s not the case here. You still own the full value of your annuity.
You can choose any time to start receiving lifetime income. The amount is determined by the income account value along with your gender and age at the time you start receiving payments. Prior to activating lifetime income, the income account value typically grows at a guaranteed annual compounded rate of 4% to 7%.
After income activation, annual payments are deducted from the contract value. If that value ever reaches zero, annual income payments are still guaranteed for the remainder of your lifetime, but the annuity would no longer have any cash surrender value.
Lifetime income riders vary dramatically from one annuity company to the next. Shop around and compare.
An income rider is just one way among several to guarantee your future income. Other ways include buying a deferred income annuity or annuitizing a fixed annuity when you retire.
Annuities come in many types and variants that meet a wide variety of needs. It’s smart to shop around. Don’t be put off by misleading advertisements that can cast a negative light on a unique set of retirement-planning tools.
More information, including updated interest rates from dozens of insurers, is available at https://www.annuityadvantage.com or 800-239-0356.
-
Why Vanguard Was Ordered to Pay a $106 Million Fine Related to Target-Date FundsVanguard's fine centers on December 2020 actions related to the asset manager's target-date funds and capital gains taxes. Here's what you need to know.
-
Nvidia Stock Up After President Trump Revokes Biden AI OrderNvidia stock is higher Tuesday after President Trump revoked a 2023 executive order targeting AI developers. Here's what we know.
-
Getting Divorced? Beware of Hidden Tax Traps as You Divide AssetsDividing assets fairly in a divorce means looking beyond their current values and asking whether they'll create tax liabilities — or tax breaks — in the future.
-
All-You-Can-Eat Buffets: Can You Get Kicked Out for Eating Too Much?Don't plan on practicing your competitive-eating skills at an all-you-can-eat buffet. You can definitely get kicked out. Plus, don't be a jerk.
-
A Social Security Storm Is Gathering: Here's Your Safety PlanIf Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
-
What a Second Trump Term Means for Investing in Water SafetyA new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
-
How to Avoid These 10 Retirement Planning MistakesMany retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
-
Before the Next Time Markets Sink, Do Your Lifeboat DrillsAn eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
-
This Late-in-Life Roth Conversion Opportunity Spares Your HeirsExpensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
-
Women, What Is Your Net Worth?Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
