The “7% Guaranteed” Annuity Myth
January 15, 2020 by Ryan Shumaker
One of the most common things I hear from people who own or have been pitched an annuity is the belief that the annuity will “earn 7% guaranteed.” Usually this is due to either a salesperson misrepresenting how the annuity works or the consumer misunderstanding.
The fact of the matter is, to my knowledge, there have been exactly zero annuities in the last 25 years that actually guarantee 7% growth of your account value. What is actually guaranteed in most of these cases is that for every year you wait to take income from the annuity, the amount of income that is guaranteed to be paid to you goes up by 7% per year, which is entirely different.
With these kinds of products, there are typically two different buckets. One is your actual account value, which is what you can cash out and which typically goes up and down with the performance of chosen stocks and/or bonds. The other is what I sometimes refer to as “funny money.” Many companies call this “income account value” or “protected value.” Basically, it is just a bucket that is used for only one purpose: to calculate what your guaranteed income stream will be. It is not something you can cash out and take the money. It is this bucket that is commonly touted as having “7% guaranteed growth.”
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