Annuities Fixed Index Annuities

10 Fixed Index Annuity Income Calculation Variables

In order to receive a fixed index annuity lifetime payment, you must purchase an income rider which is a separate component of a FIA contract.

The last five weeks’ posts have focused on what you don’t receive (Your Fixed Index Annuity Income Rider – What You Don’t Receive – Parts 1 and 2 and Annuitization Tax Treatment of Nonretirement Distributions) and what you do receive (5 Things You Receive From a Fixed Index Annuity Income Rider – Parts 1 and 2) when you purchase a fixed index annuity income rider.

As stated in Part 1 of 5 Things You Receive From a Fixed Index Annuity Income Rider, there are three types of fixed income annuities that offer lifetime income payments: (a) single-premium immediate annuities, or “SPIA’s,” (b) deferred income annuities, or “DIA’s,” and (c) fixed index annuities, or “FIA’s.”

Per Part 2 of the same post, product-specific illustration software must be used to determine the periodic payment that you will receive from SPIA’s and DIA’s given certain specified assumptions. The reason for this is that the payment from both of these types of fixed income annuities is an annuity that must be actuarially calculated using a life expectancy factor amongst other variables.

The lifetime payment that you receive from a FIA, unlike a SPIA or DIA, isn’t an annuity that’s actuarially determined. In order to receive a FIA lifetime payment, you must purchase an income rider which is a separate component of a FIA contract. While it’s possible to annuitize the accumulation value of the base contract, distributions from the income rider are considered to be withdrawals.

So how are FIA income amounts determined? In addition to the accumulation value of a FIA which is the value of your investment before reduction for potential surrender charges, there’s generally a separate income account value when you purchase a FIA income rider. Unlike the accumulation value, withdrawals cannot be made from the income account value. The latter is used instead to determine your FIA income, or lifetime retirement paycheck (“LRP”) amount.

There are ten potential variables that are used to calculate the FIA income amount as follows:

  1. Initial and subsequent investment amounts
  2. Premium bonus availability
  3. Income account value interest rate
  4. Number of years income account value interest rate is in effect
  5. Lifetime payment election date
  6. Maximum lifetime income withdrawal percentage
  7. Accumulation value withdrawal amounts and timing of same
  8. Surrender charge schedule
  9. Premium bonus recapture provision
  10. Death of owner prior to commencement of income payments

In order to help you understand how a FIA income amount is calculated, FIA income calculation variables will be the topic of Retirement Income Visions™ posts for the next several weeks.

By Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.