According to 2022 data from Athene, only 49% of U.S. adults say they are on track to reach their retirement savings goals. To meet the needs of all clients, financial professionals work with many retirement savings vehicles, and it’s crucial to have a strong understanding of all products. One of these products, a fixed indexed annuity, is an insurance product designed for long-term retirement savings. FIAs can create a guaranteed stream of income or a “retirement paycheck” to supplement your clients’ other income sources such as Social Security, pensions, 401(k)s, IRAs and other personal assets. FIAs are a widely misunderstood retirement savings vehicle, with one quarter of Americans (23%) not knowing what an annuity is, and only 27% and 22% understanding that annuities allow for tax deferred growth and protection in down markets, respectively.
To better understand fixed indexed annuities and if they are the right solution for your clients’ retirement savings strategy, it’s important for financial professionals to know how they work and the ways they can fit into a portfolio. A good place to start is by exploring common misconceptions about them, how they can be “debunked” and seeing how FIAs can help clients set up for a more secure financial future.
Myth 1: Annuities Are Complicated and Confusing
As with all financial products, education is key. A 2022 survey from Athene revealed that 73% of U.S. adults who work with a financial professional feel as though they are on track to reach their retirement savings goals. Of those who are currently working with a financial professional, 92% cited that they know what an annuity is, further echoing the literacy financial professionals can provide to their clients around these products.
Annuity sales hit a new record high in 2022 according to LIMRA data, with $310.6 billion in sales. In the high interest rate environment and with recession fears rising among clients, many are flocking to the protection and security from market loss that fixed indexed annuities offer.
Despite their reputation for being complicated and confusing, it’s important to remind your clients that there may be an annuity for all their retirement savings needs. They can be as simple or as robust as needed depending on their income, savings goals and other financial factors.
Myth 2: Annuities Can’t Keep Up with Inflation and Market Moves
In the current market environment, ensuring your clients’ retirement portfolio can weather the economic storm has become increasingly important. In fact, the aforementioned 2022 data from Athene revealed nearly three-quarters (71%) of those saving for retirement reported that they had adapted their retirement savings strategy to account for rising inflation rates.
Annuities are designed to help your clients achieve their retirement savings goals and provide future income. By helping to insulate them from major financial risks like stock market losses or outliving their retirement savings, annuities can be part of a comprehensive retirement portfolio that can help your clients remain in their financial comfort zone for the remainder of their lives.
Since inflation can decrease the purchasing power of your clients’ savings, a FIA with an income rider may offer payout rates that are indexed to inflation. This can help your clients keep pace with the rising cost of goods and services and offset the effects of inflation on their retirement savings.
Myth 3: Annuities Have Too Many Hidden Charges
Both financial professionals and the insurance company issuing the annuity are required to disclose fees and charges associated with the purchase of an annuity contract. It’s crucial for financial professionals to explain withdrawal charges (sometimes known as surrender charges), which can be incurred if a client surrenders the annuity contract during the withdrawal charge period or withdraws money beyond the penalty-free amount allowed in the annuity contract. Unlike some other types of annuities, FIAs do not participate in equity or stock investments and do not charge the investment and management fees associated with those investments.
In addition to the legal and regulatory obligation to reveal all fees associated with annuities, it’s also important to build a relationship with your client based on trust. As a financial professional, the guidance you provide will affect how your clients plan for life’s twists and turns, from sending kids to college to planning for and living life comfortably in retirement. A key role of a financial professional is to help your clients expand their financial know-how. Every step you take toward educating your clients on the ins and outs of their retirement savings options is a step in the right direction to a financially literate and secure future.
Retirement planning can feel complicated or confusing, and it makes sense that your clients might be unsure about purchasing something they don’t fully understand, especially when myths and misconceptions create additional uncertainty during periods of market volatility. By exploring and understanding the pros and cons of each option, you will be more prepared to help your clients make a confident and informed decision about their financial futures.
Rod Mims is Senior Vice President and National Sales Manager at Athene