It’s certainly safe to say that most adults are concerned about having enough money invested for a comfortable retirement. Yes, if we downsize to just the bare essentials, many of us can retire with what we’ve invested in Social Security, but that road is a bumpy one and most of us prefer to take a smoother road or even a highway. Knowing this, the methods we deploy for retirement planning are critical.
When people retire, their strategies typically change. In most cases, a retiree’s financial perspective shifts from accumulation to preservation. Annuities present a funding vehicle for maintaining retirement assets while offering a steady stream of income for the rest of your life and are a legitimate strategy for retirement planning.
Nevertheless, no one retirement strategy works for every individual. On top of that, annuities are different in terms of the lifetime income they produce. It’s essential to understand the basics of annuities before choosing one.
Why Choose Annuities for Retirement Planning?
Annuities are the single vehicle to generate a lifetime income stream. An annuity additionally provides more than just simply being a continuous income source. Benefits also included are:
- Retirement security with a lifetime income stream
- Protection guaranteed by financial durability and claims-paying capability of insurance companies supporting annuities
- Insurance companies may be reinsured by other insurers for additional protection value
- Growth possibilities with fixed index annuities crediting interest tied to index performance
- Tax-deferred money growth right up until the funds are withdrawn or annuity payments started
A number of fixed and fixed index annuities offer additional flexibility, additional choices, and additional growth potential in how and when you determine to distribute your income stream during retirement with lifetime income riders.
All these riders are bought as an addition to the fixed or fixed index annuity. There is typically an additional fee connected to these types of riders. The method the fee is computed will vary from contract to contract.
The Primary Misunderstanding about Annuity Income Benefits
A common misunderstanding concerning annuities is when an individual passes away, the funds in their annuity returns to the insurance carrier, not their named beneficiaries. This essentially only applies to life-only immediate annuities with no certain period or life-only SPIAs guaranteed lifetime income with no certain period.
With a life-only SPIA, individuals will be able to obtain the highest income stream dependent on your life expectancy. Although, when someone dies, the residual funds will go to the insurance company. This rule only applies to an SPIA with a life-only payout. SPIAs offer an instant income stream for the time period that you prefer.
In most cases, you will have access to only your income stream, not your principal (which will matter to you in emergencies). You’re also locked into an interest rate somewhere between 1% and 3% based on when you acquired your SPIA. Conversely, with fixed annuities, such is not the case.
What Does Guaranteed Income Actually Mean with an Income Rider?
Annuity riders can generate income for a lifetime, but just how much income can they produce? These particular annuity income riders will assist you to figure out when to retire predicated on a guaranteed minimum income stream without indexing assumptions.
Annuities are excellent for tax-free growth and without the unpredictability of financial markets like the stock market. Then again, given lower interest rates, the interest rates on a fixed index annuity just are not very exciting. Including an income rider to an annuity agreement will be worthwhile when you require guaranteed income that will last for a long life expectancy.
Are there Downsides?
The issue is that financial advisors/life insurance agents must take an honorable role when they explain what these riders will do – and what they will not do.
If you happen to own a fixed index annuity – consider the following:
- You’ve been advised you’re earning 6.5% compounded on your money annually.
- This is able to hold as long as you postpone taking out any money
- This essentially is not the situation for how your money is accumulating
- You bought the annuity contract with an income rider, that genuinely guarantees the 6.5% interest you’re credited toward your income-only account
- The income-only account is the only area where you can draw an income stream from
- So, based on the previous statements, the 6.5% isn’t really credited to the money in the annuity
The truth of the matter is the insurance carrier will advise you that your funds in the annuity are credited, depending only on if there are positive index changes.
Yes, there are usually Fees for Riders
Not every one of the income riders is the same. A number of income riders have no fee whatsoever, while others may cost about 3% or more. It’s crucial to fully understand your various options so that you can select the most appropriate annuity with the most suitable income rider. Remember to ask the right questions:
- How much is the fee?
- How is the fee determined?
- Does it use a Cash Value Calculation or Income Value Calculation?
- Is the fee computed based on the income account value or the accumulation/cash value?