In my previous article, I detailed how much income you can get from an immediate or deferred income annuity. This article will cover how much income a fixed indexed annuity with a lifetime income rider can produce.
A fixed indexed annuity is a type of deferred annuity that credits interest based on the changes to a market index, such as the Dow Jones Industrial Average or S&P 500. Interest is credited when the index value rises, but when it falls, you lose nothing.
In exchange for that guarantee, you'll typically get only part of the market's gains. Over the long term, an indexed annuity should outperform fixed-income vehicles, such as bonds, but underperform stocks, though with much less volatility.
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When you annuitize a more traditional fixed-rate annuity, such as a multi-year guarantee annuity (MYGA, also called a CD-type annuity) or a variable annuity, you no longer have access to your money.
Annuitization means the insurance company is converting your annuity contract value into a stream of income, and in exchange for that, you normally no longer have any cash surrender value.
I believe that creating your own private pension is often a great move. But many people are leery about turning over their savings in exchange for future income.
An indexed annuity with an income rider avoids that disadvantage because you can guarantee a lifetime income and still have control over any remaining annuity balance.
It's a kind of have-your-cake-and-eat-it-too approach, but of course, there is no "free lunch."
You also usually retain complete flexibility about when you start receiving income. You can even stop receiving income and still access any remaining balance in your policy.
How the income rider works
The income rider on a fixed indexed annuity creates the "income account value." It is based on the amount of money you deposited in the annuity, usually growing at some predetermined annual rate.
The rider is a calculating factor that helps determine the amount of your guaranteed income payments. It's separate from the underlying contract value. It has no cash value and cannot be withdrawn. But it is real with regard to your income calculation.
With the rider, your income account value typically grows at a guaranteed annual compounded rate of 4% to 8%. This explains the somewhat misleading ads promising an 8% guaranteed rate on an annuity. They don't tell the whole story.
Since you don't set the date in advance for income payments to start when you buy the annuity, you retain planning flexibility. You can choose to start receiving lifetime income, typically beginning at age 55 or later, for just yourself or you and your spouse.
The longer you delay taking payments, the greater the income.
Your future monthly lifetime payments are determined by three factors:
- Your income account value
- Your gender
- Your age when you start taking payouts
Different insurers use different actuarial calculations. Therefore, you could get significantly more or less income from different insurers even when all other things are equal.
After the income starts, payments are deducted from the contract value. If that value ever reaches zero, annual income payments are still guaranteed for the remainder of your lifetime, but the annuity will no longer have any cash surrender value.
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If you die before income activation, your beneficiaries will receive the full annuity contract value as a death benefit. If you die after income activation, the income payments will cease, and your beneficiaries will receive any remaining annuity contract value.
The rider has a lot of advantages, but there is usually a cost. For instance, it may cost 1.00% to 1.25% per year to guarantee a 7% to 9% annual income account value increase on the income rider.
This fee will be subtracted from your account value, and though seemingly modest, it can add up over time.
How much income — an example
A 55-year-old man deposits $200,000 into an indexed annuity and names a joint payee — his wife, also 55. She would keep receiving income if she outlives her husband.
Their income payments will begin at age 70. The current estimate is that lifetime income payments will be $37,392 per year. If they instead decide to start receiving payments at age 75, the figure increases to $46,663 per year.
Waiting till 80 would produce an estimated $50,758 a year.
Is an income rider worth it?
There's no easy answer because individual circumstances vary so much. Independent experts agree that most people should annuitize a significant part of their savings to ensure they'll never run out of money.
But people who have ample employee pensions and Social Security benefits may not need additional guaranteed income. Since the insurance company typically charges an annual fee for the income rider, it's not a good buy unless you're fairly sure you'll use it eventually.
But if you do want to reduce your risk and gain the peace of mind provided by guaranteed lifetime income, it's well worth investigating this innovative strategy and carefully comparing it with other options, including an immediate or deferred income annuity as discussed in my previous article.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-rider quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.
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