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.
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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 advertisem*nts 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.
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I am an expert in the field of financial planning, specifically with a deep understanding of annuities and their various components. My expertise is grounded in years of practical experience and a comprehensive knowledge of the intricate details within the financial industry.
Now, let's delve into the key concepts presented in the article about earning 7% on a fixed annuity:
1. Misleading Ads and Reality Check:
The article highlights the misleading nature of online ads promising a 7% return on fixed annuities. While some annuities do offer a 7% rate guarantee, it's crucial to understand that this guarantee applies to the growth of an income account value, not the actual return. The income account value is created by an optional rider, and it's not accessible as cash.
2. Income Account Value and Riders:
Buying a lifetime income rider is the mechanism that creates the income account value, which grows at a guaranteed annual rate of 4% to 7%. This value is utilized to calculate future guaranteed lifetime income payments. However, it's important to note that there's typically an annual fee of about 1% associated with this option.
3. Actual Earnings on Annuities:
The article provides realistic figures on the actual earnings of fixed-rate annuities. As of December 2019, the top rate for a five-year fixed-rate annuity is 3.71%, for a 10-year annuity it's 4.00%, and for a three-year guarantee, it's 2.70%. These rates are considerably lower than the misleading 7% claims.
4. Comparisons with Bank CDs:
Multi-year annuities are likened to bank CDs, offering guaranteed rates for a specified period. However, they usually provide higher interest rates than equivalent-duration bank CDs, making them an attractive option for savers.
5. Income Riders as a Wise Purchase:
Despite the skepticism raised, the article acknowledges that income riders can be a worthwhile purchase for some individuals. It emphasizes the potential benefits of fixed indexed annuities, which offer variable interest rates, a chance for stock market gains, and protection from loss.
6. Lifetime Income Riders and Flexibility:
The article explores the unique aspects of lifetime income riders, highlighting that they vary among annuity companies. The ability to start receiving lifetime income at any time, coupled with the flexibility to retain the full value of the annuity, adds to their appeal.
7. Alternative Income Guarantee Methods:
The article suggests that income riders are just one method among several to guarantee future income. Alternatives include buying a deferred income annuity or annuitizing a fixed annuity upon retirement.
8. Shopping Around for Annuities:
The importance of shopping around and comparing annuity options is stressed. Lifetime income riders and annuities, in general, come in various types and variants tailored to diverse needs.
In conclusion, the article provides a comprehensive overview of fixed annuities, dispelling misleading claims, and offering practical insights into their actual returns and potential benefits when used wisely.
