Interested in fixed annuities? Beware of common misconceptions

Brian Schrock is an Edward Jones financial adviser from Fallbrook.

FALLBROOK –Between their 401(k) or pension, an individual retirement account and Social Security, many hope to have enough to enjoy a comfortable retirement lifestyle. Yet, those planning their retirements may want or need to find other financial resources – one of which might be a fixed annuity, which offers a guaranteed interest rate and can be structured to provide a lifetime income stream.

Some may be nervous about investing in annuities because of some negative things they have heard about them. How concerned should an investor be?

To help answer that question, let’s consider some common misconceptions about fixed annuities:

“I won’t be able to touch any of my money if I need some of it before I retire.”

A fixed annuity is designed to provide income during those retirement years. But if they want to withdraw a significant amount of their money before they retire – when the annuity is in what’s called the “accumulation phase” – the investor will likely face a surrender charge, as well as a 10% federal tax penalty.

Withdrawals may also be subject to a market value adjustment; however, to access a small percentage of the allocated funds, an investor might not encounter any fees. And some annuity contracts allow a 10% withdrawal with no penalty.

“Annuities cost too much.”

Many annuities are actually low in cost. Be sure to compare the cost against the value of each additional guarantee, feature and benefit – and only pay for what is needed.

“A deferred annuity isn’t worth the wait.”

If an investor sets up a deferred annuity, it’s true that they won’t immediately start receiving income. They will, however, be able to factor future expected payments into a retirement plan.

“When I die, the insurance company keeps my money.”

If the payout plan includes a beneficiary agreement, the beneficiaries will receive the remaining amount of money in the contract. Read the terms and conditions listed with an annuity, as they will spell out where the remaining money will go after death.

Of course, even if the above concerns are simply misconceptions, it doesn’t mean there are no issues about which investors must be aware when considering fixed annuities.

For one thing, the safety of a lifetime income stream and guarantees will depend on the claims-paying ability of the insurer that issued the annuity, so choose a company that has demonstrated financial strength and stability.

One other concern about fixed annuities: They typically don’t carry a cost of living adjustment, such as that found in Social Security. Investors can find annuities that do offer some inflation protection, but this feature can reduce early payments significantly.

If it’s appropriate for an investor’s situation, a fixed annuity can be a valuable addition to retirement income. Before purchasing one, though, potential investors need to weigh all the potential benefits and issues. But don’t be swayed by misconceptions – base the decision on facts, rather than fears.

Edward Jones financial adviser Brian Schrock is located at 1434 S. Mission Road, Suite B, in Fallbrook. For more information, call (760) 731-3234.

Submitted by Edward Jones.