It’s hard to believe, but the summer of 2021 has come to an end. I know this for a couple of reasons; first, the summer tourists are starting to head home, and the beaches are getting less crowded. And second, Maeve has her syllabus for her fall courses already . . . accompanied by a tuition bill! We were taking about it before she left last weekend, and she mentioned that she’s particularly looking forward to her upcoming psychology class. One of her first assignments involves the issue of our beliefs, and in particular, why we so often harbor false beliefs.
This seems like a very relevant topic given our current chaotic political climate, but it also highlights some common beliefs and myths that we often hear in everyday life. For example, do you believe that humans use only 10% of our brains? Or that if you swallow chewing gum, it’ll stay in your system for 7 years? What about the belief that we lose most of our body heat through our heads? These have all been shown to be falsehoods, yet they continue to show up frequently in both popular press as well as medical publications. This leads to the question, why do people so easily believe false things?
I have found that psychologists give numerous possible explanations for this. One of the most agreed-upon ideas is that people routinely use mental shortcuts to understand what happens around them. All kinds of things occur in the world around us, and we don’t always have the time or energy to sit down and carefully examine all of them. And shortcuts like this can often steer us in the wrong direction.
Take your finances, for instance. If you don’t take the time to truly understand the financial concepts that affect your retirement, you could be making a mistake that has a greater consequence than believing you have years-old gum in your system. One of the most common misconceptions I see is a misunderstanding of fixed and fixed-indexed annuities.
You see, I regularly meet with folks who express a desire for some of the key features the product offers (guarantees, growth potential, tax deferral, lifetime income), but once I mention the word “annuity”, often times they are reluctant. Either they have read or heard facts about fixed and fixed-indexed annuities that are incomplete at best, and sometimes just plain false. As I’ve mentioned many times, there are really no “good” or “bad” financial products. They are merely tools to be matched to your needs as appropriate. So, this week I want to share with you some general annuity misconceptions to help you decide if they might be a viable part of your retirement plan.
Let’s start with one of the most common untruths – an annuity is worthless if I die early because the insurance company keeps all of my money. This is almost universally untrue, except in a very small segment of the annuity space. Let’s assume you buy an annuity and start taking income. A few months down the line you pass away from a sudden illness. In most cases, the annuity will pay a death benefit to your loved ones. Depending on the option you select, this could involve a continuation of income to your spouse until they pass away, or perhaps a lump sum of unused benefits. The notion that there will be nothing left is a trait of annuities commonly sold decades ago and is rare today. You have options today to help ensure there are benefits remaining should you die unexpectedly.
Another common falsehood I hear is that they already have a company retirement plan so an annuity isn’t necessary. Many people believe that having an employer-sponsored retirement savings plan or IRA is enough to carry them through retirement, so they don’t feel the need to add any annuities to their retirement portfolio. However, this doesn’t need to be a one or the other situation — it can be a good idea to have both.
With your company-sponsored plan or IRA account, you likely have most, if not all, of your money allocated to market-based investments. These come with no guarantees so a significant market decline right before or during retirement could diminish your retirement plan and affect your retirement lifestyle. Adding a “guaranteed” component to your retirement plan with a fixed or fixed-indexed annuity can reduce market volatility in your portfolio because they guarantee you can’t lose money due to market losses. And because annuities offer guaranteed lifetime income, they can help you meet your basic expenses in retirement with confidence, knowing you won’t run out of money no matter what happens in the markets. Folks, this is significant since it addresses longevity risk, or the risk that you will outlive your money.
Another common statement I hear is that annuities tie up all of my money for years. Here again, annuities today have evolved and offer greater flexibility than annuities of the past. It’s true that annuities involve surrender penalties for excessive withdrawals in the contract’s early years. However, in most cases you can withdraw 5-10% of your money each year without a surrender penalty. When the surrender penalty period ends, usually within 5-12 years, you now have access to all of your money. Given that these funds are earmarked for your retirement, they shouldn’t be regularly accessed as if they were held in a savings account.
Folks, these are just some of the more common myths about annuities. And while we are all busy with everyday life, there are clear benefits to taking the time to research our financial options. Knowing the facts about annuities and other investment vehicles will help us make choices that set us up for the greatest chance of financial success in and through retirement.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at firstname.lastname@example.org.