annuities

7% on a Fixed Annuity? Don't Believe It.

Ads touting 7% guarantees are misleading, though not quite false. Real rates around the 4% range are attractive enough.

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.

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.

About the Author

Ken Nuss

CEO / Founder, AnnuityAdvantage

Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. Interest rates from dozens of insurers are constantly updated on its website. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at https://www.annuityadvantage.com or (800) 239-0356.

Most Popular

An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
8 Money Tips for Seniors Suffering from Inflation
Inflation

8 Money Tips for Seniors Suffering from Inflation

This year has been an especially tough one for seniors on fixed incomes. To stay on track, try these eight financial survival tips.
June 26, 2022

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
Best Banks for Higher-Net-Worth Clients
wealth management

Best Banks for Higher-Net-Worth Clients

Those who can meet high minimum-balance requirements at these banks get abundant account freebies and extras ranging from financial advice to event ac…
June 23, 2022
Beneficiary Designations: 5 Critical Mistakes to Avoid
retirement

Beneficiary Designations: 5 Critical Mistakes to Avoid

You may be surprised at how easy it is to make an expensive mistake with your beneficiary designations. Here's how to help avoid the five most common …
June 6, 2022
This Couple Tackles Love and Money as a Team
Getting Married

This Couple Tackles Love and Money as a Team

Fyooz Financial, the husband and wife team of Dan and Natalie Slagle, have carved out a niche advising other couples with the money questions that com…
May 24, 2022