Are you concerned about having enough money in retirement? It’s natural to be worried about how you’re going to maintain a comfortable lifestyle. A guaranteed lifetime income stream can bring financial security, freedom, and peace of mind.
When you retire, things change. In many cases, retirees’ financial paradigm shifts from accumulation to preservation. Annuities represent a vehicle for preserving retirement assets while providing a steady income stream for the rest of your lifetime.
However, no one retirement strategy works for everybody. Additionally, annuities differ in terms of the lifetime income benefits they provide. It’s important to understand the basics before choosing an annuity.
Why Annuities for Retirement Income?
Annuities are the only vehicle to guarantee a lifetime income stream. An annuity also offers more than just being an ongoing income source. Overall benefits include:
- Retirement confidence with income stream for life
- Protection secured by financial strength and claims-paying ability of insurance carriers behind annuities
- Insurance carriers may be reinsured by other carriers for further protection value
- Growth potential with fixed index annuities crediting interest tied to index performance
- Tax-deferred money growth until money is withdrawn or annuity payments started
Some fixed and fixed index annuities offer more flexibility, more choices, and more growth potential in how and when you decide to distribute your income in retirement with their lifetime income riders.
These riders are purchased as an addition to the fixed or fixed index annuity product. There’s usually a fee associated with these types of riders. The way the fee is calculated will vary from contract to contract.
Major Misconception about Annuity Income Benefits
A common misunderstanding of annuities is when someone dies, the money in their annuity goes to the insurance company, not their beneficiaries. This actually only applies to life-only immediate annuities with no certain period (or life-only SPIAs (Single-Premium Immediate Annuities) with no certain period).
With a life-only SPIA, people will be able to receive the highest income stream based on your life expectancy. However, when someone passes away, the remaining money will go to the insurance carrier. This only applies to an SPIA with a life-only payout. SPIAs offer an immediate income stream for the period that you desire.
In most cases, you have access to only your income stream, not your principal (which can matter in emergencies). You’re also locked in to an interest rate between 1% and 3% depending on when you purchased your SPIA. However, with fixed annuities this is not the case.
What Does Guaranteed Income Mean with Income Riders?
Annuity riders can guarantee income for life, but just how much income can they generate? These annuity income riders will help you to determine when to retire based on a guaranteed minimum income without indexing assumptions.
Annuities are great for tax-free growth without the volatility of financial markets like the stock market. However, given low interest rates, the interest rates on fixed index annuities aren’t very exciting. Adding an income rider to an annuity contract can be valuable when you need guaranteed income that will last for a long remaining life expectancy.
What are Downsides?
The caveat is financial advisors/life insurance agents must do an honest job of explaining what these riders do – and what they do not do.
Say you own a fixed index annuity – imagine the following:
- You’ve been told you’re making 6.5% compounded on your money yearly.
- This holds so long as you defer taking out money
- This actually isn’t the case for how your money’s growing
- You purchased the annuity contract with an income rider, which actually guarantees the 6.5% interest you’re credited is toward your income-only account
- The income-only account is only where you can draw an income stream from
- So the 6.5% isn’t really credited to the money in the annuity
In fact, the insurance company will tell you that your money in the annuity is credited, depending on if there are positive index changes.
What about Income Rider Fees?
Not all income riders are equal. Some income riders have no fee, and others may cost 3% or more. It’s important to fully know your options so you choose the right annuity with the right income rider. Ask the right questions:
- What is the fee?
- How is the fee calculated?
- Does it utilize a Cash Value Calculation or Income Value Calculation?
- Is the fee calculated based on the income account value or the accumulation/cash value?
If you think an annuity with an income rider may be right for your situation, a consultation with an independent financial professional may help you. They can help you clarify your needs, goals, and objectives, and pinpoint powerful options for your income and financial goals in retirement.
Looking for Guidance?
If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 or contact us here to schedule an appointment with an independent trusted and licensed financial professional.
🧑💼Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities.
