No. of Recommendations: 3
This isn't true, unless I am misunderstanding your statement (not really in any way I can try to make it true to come close to agreeing.) Fixed rate annuities & cash value life can both credit a straight 4% without requiring you to distribute principal (let alone requiring it as part of the 4% calculation.)

Then your experience is different than the annuity contract that I had experience with. I guess it may be the 'can' vs. 'do'.

If we are referring to annuities, then for tax purposes each withdrawal or distribution must be accounted for as a pro-rated blend of interest credit and original principal. If a contract is paying a 4% guarantee, then the overall balance (including whatever portion you are distributing) will reflect the full 4% rate of growth. A 4% crediting rate cannot be calculated as including principal in order to reflect a (for example) 4% "distribution rate" rather than an actual 4% growth rate.

The salesperson that sold the annuity that I saw told the buyer that the annual return was a minimum of 6%, and that the same 6% could be distributed yearly without surrender charges. And even when I questioned the salesperson several times, the salesperson continued to insist that the 'return rate' was equal to what you are calling the 'distribution rate', because that's what you allowed to withdraw, so it was 'returned' to you, even though the principal balance was decreasing. So it may be that they were actually guaranteeing a 4% return, and allowing a 6% distribution. However, the marketing material did nothing to differentiate between 'return rate' and 'distribution rate', and when I looked at the numbers, the minimum guaranteed interest credit each year was less than what was allowed to be distributed.

YMMV - it may be that this was just a salesperson spouting the line he had been taught. But annuities are complex enough that I suspect that many people selling them don't completely understand them, so having a salesperson that does this is probably not uncommon. In the OP's case, since his friend was insisting that there was 'no risk', I would suggest that the OP's friend was spouting the line he had been taught.

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