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Debunking common annuity myths: Real talk about retirement savings

Often misunderstood and underused, annuities may offer benefits for nearly every life stage and type of saver.
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When it comes to annuities, there’s a wide gap between perceived benefits and the number of actual annuity investors. Take a recent brief looking at individuals who have over $100,000 in investable assets: Over half want to invest in an annuity, but just 12% of those same people actually do. Why the disconnect?

There are lots of reasons—and plenty of misconceptions about annuities. Let’s take a deep dive at some of the most common annuity myths.

Myth: Annuities are only for retirees.

You don’t have to be near or in retirement to include an annuity in your retirement savings plan. Annuities exist for every life stage; in fact, those purchased by someone early in their working and saving years have a longer time to potentially grow. (Talk to your financial professional about the best option for you.)

Myth: Annuity gains won’t match market gains.

The performance of variable annuities is tied to the market performance of the underlying investment options. Registered index-linked annuities, or RILAs, are also based on the value of indices tied to the market, while offering some protection from market volatility. Even income annuities, which typically feature a fixed rate of return, may include step-up or bonus features that help to build future guaranteed income. However, the growth potential and benefits of an annuity depend on the type and on product details such as fees and/or caps rates. Product fees and cap rates may limit performance, but are tradeoffs for an annuity’s benefits.

Myth: Annuities don’t pay benefits after I die.

Annuities very often offer legacy planning options, enabling you to include them in your estate planning. In addition, annuity death benefits don't require underwriting (as opposed to life insurance) and benefits are paid outside of probate. Some annuities can also be set up as a trust for multi-generational estate planning. Check with your financial professional for options, including joint income for a surviving spouse.

Myth: Annuities have high fees and are expensive.

All retirement savings products have fees, and the costs vary based on the type of account. The same is true of annuities. The more features (or riders) you add, the more you may increase costs. Your financial professional can help you sort out the options.

Myth: Annuities are inflexible.

Again: Depending on the type of annuity, you may have more flexibility than you realize. Some have penalty-free withdrawal options, enabling you to take out a certain portion (typically about 10%) each year without a fee (called a surrender charge). Or, you may have an annuity that allows for withdrawal due to certain life events such as a hospital stay.

Annuities are not the only retirement savings account that triggers a charge based on early withdrawal—401(k)s, for example, do that too.

Myth: Annuities don’t have as many investment options as other retirement savings.

Annuities are often customizable to your goals and life stage, and that includes the variety of investment options.

Myth: There’s no tax benefit to purchasing an annuity.

When funded with after-tax (sometimes called nonqualified) dollars, annuities have no contribution limits. And the growth or earnings in annuities are also tax deferred until the owner makes withdrawals.

Myth: I already have a retirement savings account, so I don’t need an annuity.

Financial professionals generally counsel diversity when it comes to saving for retirement. For example, an annuity and Social Security may provide a guaranteed income stream, while withdrawals from an individual retirement account and 401(k) can give you some flexibility in withdrawing the amount you need.

What’s next?

Which annuity fits into your retirement savings plan? Get started with information on both variable annuities and RILAs.

Retirement planning
Financial planning
Investing
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Annuities: Types, payments, taxes, and more

Diversity and balance in your retirement savings—from guaranteed sources of income to those with growth potential—is key. Annuities may offer a tax-advantaged source for your post-work years.

Before investing in annuities, investors should carefully consider the investment objectives, risks, charges and expenses of the contract and underlying investment options. This and other information is contained in the free prospectus which can be obtained from your local representative or online at principal.com. Please read the prospectus and, if available, the summary prospectus carefully before investing.

Registered Index Linked Annuities (RILAs) do not directly participate in any stock, equity investments or index. It is not possible to invest directly in an index.

Investing involves risk, including the possible loss of principal.

Important Considerations

Index-linked deferred annuity contracts are complex insurance and investment vehicles. This contract is a security and there is a risk of substantial loss of principal and earnings. The risk of loss may be greater when early withdrawals are taken due to any charges and adjustments applied to such withdrawals. These charges and adjustments may result in loss even when the value of a segment option has increased. Clients should consult with a financial professional about the appropriateness of this product based on their financial situation and objectives.

There is risk that this segment interim value could be less than the original premium payment even if the applicable index has been performing positively. The buffer or floor rate provides limited protection. There is a possibility of a significant amount of loss of the total premium payment, credited interest and prior earnings. In the index-linked segment options it is possible that the total loss could be 100%. If clients choose to allocate amounts to an index-linked segment option subject to a cap rate, that rate limits the positive index change, if any, that may be credited to a the annuity for a given segment term. The participation rate limits the positive index change, if any, that may be credited to the annuity for a given segment term. It is possible to receive less than the full protection of the buffer rate or floor rate. Once a segment lock-in is executed, it is irrevocable for that segment term. A lock-in will not be applied retroactively and can only be exercised for the entire segment option. A segment lock-in may only be exercised once per segment term for each index-linked segment option. There is no guarantee that any particular segment option or index will be available during the entire period.

Withdrawals will reduce the contract value and death benefit. Some withdrawals may be subject to additional charges and adjustments. Withdrawals before age 591/2 may be subject a 10% early withdrawal federal tax penalty in addition to ordinary income taxes.

Contract rider descriptions are not intended to cover all restrictions, conditions or limitations. Refer to rider for full details.

All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not obligations of, nor backed by, the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.​

Annuities have limitations. They are long-term vehicles designed for retirement purposes. Annuities are not intended to fund short-term savings goals.