When it comes to guaranteeing a lifetime income there are a couple of ways to approach it.
Of course most of us will get Social Security. If you’re lucky you may even get a pension. And even with those 2 income sources added together, it may still not be enough to cover your retirement expenses.
At that point you have to look to other sources. One other source that can guarantee lifetime income for you is annuities.
And there are different ways to use annuities to do this, including:
- Purchasing an Immediate Annuity that begins paying you income
- Purchase a Deferred Income Annuity (also known as Longevity Annuity) to begin paying you an income later
- Or purchase an annuity with an income rider, usually attached to a Fixed Index Annuity or a Variable Annuity.
When it comes to contractual guarantees, most of the time the Immediate Annuity or even the Deferred Annuity will provide a higher payout than the Fixed Index Annuity (or even Variable Annuity) with an attached income rider. Not always, but most of the time.
However, you lose some flexibility when you purchase an Immediate Annuity or even a Deferred Income Annuity. Your original premium has been turned into an income stream. You no longer have access to it as a lump sum.
Some people are fine with that. Others are not.
That’s why the Fixed Index Annuity with an attached income rider is so popular today. It allows you the flexibility to still have access to your lump sum while also enjoying the benefit of a lifetime contractually guaranteed income payout.
So let’s talk about how these work and what you should look for.
Annuity Income Riders – Marketed With Hype
Annuity income riders provide fantastic income guarantees that many retirees need. I love them for that purpose.
However, the way they are marketed to the public is, in my humble opinion, absolutely ridiculous.
The whole purpose of an annuity income rider is to guarantee the highest contractual income payout at some point in the future. So you’d think Payout Rates would be emphasized so consumers could easily see which one will give them the highest income guarantee.
It should work like this:
“I put $100,000 into an annuity, defer it for 5 years, and the contractually guaranteed income under the income rider would be $6,000/year for the rest of my life. In other words a Payout Rate of 6%.”
But no! That would be too convenient for the public. It would make it too easy to understand which annuity would give them the most income for the least amount of original deposit.
Instead of something simple we have a huge emphasis put on “Roll-Up Rates.”
If you’ve ever seen the “8% Annuity” ads out there… well that 8% is only on the Roll-Up Rate attached to an income rider.
The “8%” doesn’t stand for the Payout Rate. All it does is increase the Income Account Value of the annuity. And the Income Account Value is used to calculate what the Payout Rate will be.
I get it. I get it. It sounds so much sexier to say “I’ve got an 8% annuity.”
It’s a lot easier of a sell to the public. It has sizzle. It’s hot.
But it doesn’t make it easy to know if that annuity is the best deal that will give you the highest guaranteed lifetime income. So that stinks.
And that’s not all.
Some annuities will push a thing called a “Premium Bonus,” as if you are getting something for free.
And it’s true depending on how soon you want to draw your guaranteed income from the annuity, the premium bonus may play out in your favor to give you the highest contractually guaranteed lifetime income.
But the truth still remains that maximizing the income guarantee under the income rider is the most important thing. And to know which one is best… you need to know the Payout Rate.
So How Does The Annuity Income Rider Work?
Having said all that, let’s look at how the actual income rider works.
Income riders are typically optional benefits you can add to a Fixed Index Annuity or a Variable Annuity. Most of the time the income riders on a Fixed Index Annuity will offer a higher contractually guaranteed lifetime payout than the income riders on a Variable Annuity.
This may not be true in all cases, but for most of the cases I’ve seen and compared this is true.
Where the Variable Annuity income rider may perform better is if the Variable Annuity performs well and goes up in value with the market. It may then bump up the income guarantee on the annuity.
This means you bear some of the risk of your income guarantees. You have to hope for good results. If you are comfortable with this, fine. If not, be aware of it.
Some Fixed Index Annuity income riders will have something similar to this with a “Stacking Option.” Essentially what that does is give you a baseline of guaranteed income. But they will increase that income guarantee by “stacking” on top of it additional income based on how the index performed.
Most annuity income riders will have an approximate fee of 1% each year. This is to compensate the insurance carrier for taking on the risk that you may live longer than they expect. And also to compensate them for allowing you to have a lifetime income guarantee while also having the option to access your lump sum if your plans change.
You can activate your annuity income rider and begin taking your lifetime guaranteed income after you purchase. The longer you wait to activate and begin taking income, the higher the payout will be to you.
The lifetime payout can be on your life only, or it can be joint. Many times spouses will use a joint payout. The income lasts until the last spouse passes away.
If you withdrawal more from your annuity than is allowed under the lifetime guaranteed payout rate, in most cases the insurance company will reduce the lifetime guaranteed income to you on a pro rata basis.
So if you are planning to use the income rider to generate your income in the future, make sure you don’t sabotage your plan by withdrawing additional funds from the annuity. You will be reducing your guaranteed income amount.
Planning properly and being properly educated on this will allow you to easily avoid this mistake. In fact, after reading that previous paragraph you are now “properly educated” on the fact that you shouldn’t withdraw more than what the income rider is paying you.
Clap On, Clap Off
Remember the old lazy man’s commercial for the Clapper? Want the lights off? Just clap your hands. Want to turn them on again? Clap away. No getting up required.
An annuity income rider is the same. You can turn the income stream off in the future if you decide you don’t need the income. Then you can turn it on again later.
This is good if your plans change in the future. It’s an extra level of flexibility that you don’t typically get with an immediate annuity.
Since the income rider is paying you back your own money first, you may decide that you’d like to stop the payments. If you no longer need the income, this will keep your account balance from continuing to deplete.
But if your account balance has already reduced to $0 then it only makes sense to continue receiving the payments. After all, at that point you are digging into the insurance company’s pockets. They guaranteed you a lifetime income and they must stand by it… even if all your money has been used.
This, by the way, is a strong value proposition that annuities provide. You cannot outlive the income stream. For retirees that no longer draw an income from work, this benefit is huge.
How You Can Choose The Right Annuity Income Rider
Creating guaranteed income is one of the main reasons people buy an annuity.
If you are specifically looking for a Fixed Index Annuity (or even a Variable Annuity) with an income rider to generate your income then here is what to look for.
First, use a strong company. If possible go with an A rated insurance carrier. This means an A.M. Best Rating of A-, A, A+, or A++. Even the “B+” and “B++” are not bad ratings. Those are still categorized as “Good” by A.M. Best.
But if you can stick with the “A’s” why not?
This isn’t some 3-year maturity annuity. These are lifetime income guarantees you are going after here. That could span 30 years. You want a strong company to be with you through that.
And second, ask for the highest Payout Rate.
If you are looking to maximize the income you can get off an annuity income rider, you must be able to compare its payout rates with other annuities.
All other things being equal, go with the one that gives you the highest contractually guaranteed lifetime income Payout Rate.
If you want to take a little bit of the risk yourself, you could choose an income rider that has a “stacking” option. It will give you a guaranteed baseline income guarantee. And then you may actually get more income if the index performs well before you activate the rider and begin receiving income.
The baseline guarantee may be lower than the highest guaranteed payout rate. But it may give you the potential of higher income if the index does well.
To make the best choice for you, this will require that the advisor you are working with will have to show you some different options.
You need to see at least 3 different options (sometimes I show more than that) to know that the advisor has done his due diligence for you. You need to know that he has shopped around and let the insurance carriers compete for your business. You need to know that he has found you the highest income guarantee that he could find.
You stick with this advice here and you’ll have a much better chance of getting the annuity that will guarantee you the highest income for retirement.
If you know someone that is thinking about purchasing an annuity and are confused about all these “roll-up rates” and “premium bonuses,” and overall just don’t know what to do, then forward this article to them to help them out.
You can even share it with all your friends on Facebook by simply clicking the Facebook icon on the left of the screen. We can reach more people together trying to get the word out on this than I could ever reach alone.
And if you have any questions about an annuity that you are considering purchasing you can always send me a quick email or get on my calendar for a 20 minute phone conversation. I’ll help you answer your questions and point you in the right direction.