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

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
Can AI Beat the Market? 10 Stocks to Watch
stocks

Can AI Beat the Market? 10 Stocks to Watch

An artificial intelligence (AI) system identifying high-potential equities has been sharp in the past. Here are its 10 top stocks to watch over the ne…
January 14, 2022

Recommended

Schwab Intelligent Income vs. an Annuity: Which Is Better?
annuities

Schwab Intelligent Income vs. an Annuity: Which Is Better?

True, Charles Schwab’s program offers flexible income options for retirees, but when you run the numbers, a good old-fashioned immediate annuity produ…
January 7, 2022
How to Turn Your Retirement Account Into a 'Personal Pension Plus'
annuities

How to Turn Your Retirement Account Into a 'Personal Pension Plus'

Just as you insure your home against the risk of fire and flood, so too can you insure another of your most valuable investments from risk: your retir…
December 15, 2021
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.
December 13, 2021
How 10 Types of Retirement Income Get Taxed
retirement

How 10 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don't forget about taxes.
December 3, 2021