Planning for retirement income is an often overlooked but necessary piece of any financial plan. Some retirees rely on stocks and bonds, others opt for annuity accounts, and many use a mixture of both in order to diversify their assets.
Annuities have grown in popularity based on their history of safe & reliable returns and the guaranteed lifetime income they can provide. There are two classes of annuities used for future payments: Immediate and deferred income accounts.
This post will mostly focus on deferred annuity accounts with a guaranteed income rider. We offer both types to address all of our client’s needs.
Income riders are gaining in popularity as investors are better understanding these products. In a nutshell, a fixed amount (the principal) is deposited – in either a lump sum or over time – in a deferred annuity offering a guaranteed income rider. At some point later in time, the income rider is activated at the owner’s request and guaranteed lifetime income payments begin.
Let’s take a look at a very basic example of a 60 year old male who is planning for future income 10 years from now. We will use an 8% income rider and place this on a $100,000 deposit with an annuity offering a first year 10% bonus. (These are real numbers using a real annuity as of the writing of this post; future numbers might be more or less.)
|Years Deferred||Age||Income Account Value||Annual Payment|
If this account owner defers his income rider until age 70, then he will receive approximately $14,250 a year or $1,190 a month for his lifetime. Assuming he lives to be 87 years old, then his $100,000 investment would have paid out $240,000 or more over his lifetime. It is difficult to find a stock, bond or certificate of deposit portfolio that would provide such guarantees.
Now let’s take a look at a similar scenario that provides income for a husband and wife – both age 60. Just as before, a $100,000 initial investment is made and the income rider is deferred for 10 years.
|Years Deferred||Age||Income Account Value||Annual Payment|
After ten years, the rider is activated and lifetime income begins for the couple. Their lifetime payments would be over $13,000 a year or nearly $1,100 a month. Thus if only one spouse lives to be age 90, then their $100,000 investment would have paid out over $260,000. Again, this investment provides very appealing guarantees for those who are planning on future income.
It is also important to note that these illustrations are linear in nature. This means, all other factors being equal, if the $100,00 initial investment was doubled to $200,000, then all of the income numbers would also double.
If you look at both charts carefully, you will notice that there is a significant jump in income from age 69 to age 70 with this particular product. Like all income riders, the amounts paid to the owners are based on predetermined percentages as guaranteed by the insurance company.
In the case of the single man age 60, his withdrawal percentage jumps from 5% to 6% at age 70. And with the couple, their income withdrawal percentage jumps from 4.5% to 5.5% at age 70. Thus, the income stream can vary somewhat significantly depending not only on the product and the insurance company, but also based on the withdrawal percentages allowed by the annuity rider.
The annuity income rider illustrated above also offers an inflation rider that allows the future payments to increase by 3% each year.
The 3% inflation rider has no direct cost to the owner(s), but it will adjust the withdrawal percentages lower meaning the annuity owner(s) will see less systematic income at onset, but perhaps much more later in life.
Inflation riders can be a valuable asset when attached to a guaranteed stream of income – especially if the annuity owners live well beyond their life expectancy.
Inflation protection is also appropriate for those who might need less income in the near future, but larger sums later in life for health care or other unforeseen expenses.
Inevitably, investors want to know what happens if income is never taken or if only a portion of the income is withdrawn. If the income rider is never activated, then the annuity would remain in deferral and the principal would grow over time based on current interest rates and/or the performance of a chosen indexed investment sub-account.
Thus, there are always two accounts at work; the first is the contract value and second is the income account value that is used to determine the future income stream. The owners can always walk away with their contract value and invest their principal elsewhere should their income needs change in the future.
It is important to know that most income riders have a yearly cost that is withdrawn from the annuity contract value each year. This cost does not affect the income account value, but should the income rider never be activated, then the owner(s) has paid for something that was never used. In this way it is somewhat like a future income insurance policy.
A key benefit to these riders is that they can be turned on and off. Unlike most immediate annuities, where the payment stream is irrevocable, income riders allow the owners to stop the payments should their needs change. This provides much more flexibility and makes any decision about when to activate the rider much easier for the owner.
If there is an untimely passing and money still remains in the contract value, then those funds would be paid to the named beneficiary. They are not kept by the insurance company. However, if the contract value has been depleted, then the income payments would cease once the final owner of the account has passed away.
In some cases, any remaining amount in the income account can be taken by the annuity’s beneficiaries over a 5 year period. However, like all lifetime annuity accounts, these products are primarily designed with the owner’s income needs in mind and are not always appropriate vehicles to transfer wealth to any named beneficiary.
Hyers and Associates is an independent insurance agency specializing in annuity accounts. We work with the leading carriers offering income riders including; Allianz, American Equity, Aviva, Equitrust, Jackson National Life, Midland, National Western Life, North American, Phoenix, Sagicor, and many others.
Using proprietary software, we can show investors how to maximize their income stream through early contract withdrawals that allow their income rider to remain in deferral for a longer period of time.