Annuities Fixed Index Annuities

Don’t Underestimate the Power of Zero

Every year since my wife and I began investing in fixed index annuities (FIAs) with income riders several years ago, we’ve received annual statements on the anniversary date of each contract. A reconciliation of the beginning- to the end-of-the-contract-year accumulation value is a key component of each statement. This includes additions, or premiums, premium bonuses, interest credits, withdrawals, surrender charges, and income rider charges.

Distinguishing Feature of Fixed Index Annuities

Interest credits and the methodology used to calculate them is a distinguishing feature of FIAs. The amount of interest credited is primarily dependent upon the performance of a stock market index associated with one or more selected indexing strategies during the previous contract year.

There’s generally a cap rate, or preset maximum amount of interest that will be credited for a particular strategy each year. No interest is credited in years where there is negative performance. The current interest rate of a fixed account also affects total interest credited to the extent that this has been selected as part of one’s overall allocation in a particular year.

The annual interest credits on my wife and my FIA contracts have exceeded our income rider charges as a result of the recent performance of the stock market. This has resulted in an increase in the accumulation value and death benefit of our contracts each year, ignoring additions and premium bonuses.

Protection from Stock Market Downturns

Although we’ve experienced, and are delighted by, the annual net increases in the value of our FIA contracts, my wife and I have yet to realize the unique benefit of owning a FIA compared to other types of investments, i.e., protection from inevitable stock market downturns. Unlike direct investments in mutual funds and exchange traded funds that decrease as well as increase in value, FIAs are insulated from market declines. This is sometimes referred to as the “power of zero.”

How is a FIA owner protected from market downturns? As previously stated, no interest is credited to individual indexing strategies in contract years when performance is negative. In other words, index credits will never be less than zero. This is very comforting when this occurs in a negative year, let alone in a prolonged bear market.

To appreciate this, let’s suppose that you invested in an exchange traded fund tied to the S&P 500 that experienced a decline of 20% in one year. You would need to realize a return of 25% just to break even. This turnaround could potentially take several years. On the other hand, the portion of a FIA tied to the same S&P 500 index would be unaffected by the 20% decline. This would simply be a non-event with no interest credited in the contract year in which this occurred.

In the foregoing example, assuming that 100% of your FIA was tied to the S&P 500 index and there were no additions or withdrawals, your end-of-the-contract-year accumulation value would be identical to what it was at the beginning of the year unless your contract includes an income rider. In this case, your contract’s accumulation value would be reduced by the income rider charge, which generally is 0.5% to 1% of the contract’s income account value. Although an income rider charge reduces a contract’s accumulation value, it has no affect on the amount of income distributions you will ultimately receive.

If you’re approaching, or are in, retirement, or if you’re more sensitive to loss than to gain, FIAs may be an appropriate choice for a portion of your investment portfolio. Don’t underestimate the power of zero.

Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Make Sustainable Income a Cornerstone of Your Portfolio Beginning at 45

A common theme I hear when I talk to retirees is “I wish I would have started saving sooner for retirement.”

There’s an underlying feeling of guilt that’s expressed each time this statement is uttered. The implication is that the individual had the ability to save more for retirement but chose not to do so.

While it’s ultimately the responsibility of each of us to make sure that we have sufficient funds to pay for our needs for the duration of retirement, it’s extremely difficult, if not impossible in many cases, to achieve this goal without proper guidance. Saving for retirement requires a totally different mindset than saving for any other financial goal.

It’s All about Income Replacement

Most financial goals require planning for the availability of a lump sum at a future date that will either be spent (a) one time, e.g., a down payment on a house or (b) over a specified number of years, e.g., college education. Retirement, on the other hand, typically requires you to replace one source of income, i.e., salary, or draw in the case of self-employed individuals, with multiple sources of income. Furthermore, the replacement income sources must be sustainable for the duration of retirement which is unknown.

You need to use the right tools for the job at hand if you want to achieve a successful result. Retirement is no exception. Given the fact that sustainable income is the name of the game, it makes sense that investments that are allocated for retirement are designed to provide you with a targeted amount of after-tax income that will meet your needs after other sources of sustainable income, e.g., Social Security, are taken into consideration.

Timing is Key

Fixed income annuities are well-suited for this purpose since they’re designed to provide sustainable income for the duration of retirement. Deferred fixed income annuities, including fixed index annuities (FIAs) with income riders and deferred income annuities (DIAs) make the most sense due to the fact that they require the least amount of funds to generate future known income amounts compared to other types of investments.

Even though FIAs with income riders and DIAs allow you to minimize initial and ongoing investment amounts compared to other types of investments, the potential length of retirement requires you to start early if you want to generate enough income to meet your needs.

You simply can’t begin saving a relatively small portion of your salary ten years before you plan to retire and expect your savings to provide you with adequate retirement income for 25 or more years. Age 45 isn’t too early to start in most cases.

FIAs with Income Riders vs. DIAs

If you establish a sustainable income plan before age 55, I generally recommend investing in one or more FIAs with income riders vs. DIAs to provide you with the most flexibility. For starters, unlike DIAs which generally have fixed income start dates, FIAs don’t require you to begin income withdrawals at a specified date. This is a distinct advantage when you don’t know if you’re going to retire at 60, 65, or 70 and you don’t necessarily know all of your potential sources, timing, and amounts of other retirement income.

Additional funds can periodically be added to flexible premium FIAs that generally isn’t possible with DIAs. Care must be taken, however, when researching these types of FIAs since some limit the number of years that additional premiums can be added or subsequent purchase amounts. See How Flexible are Flexible Premium Deferred Annuities?

Another benefit of FIAs is their accumulation value which can increase over time and provide a pre- and post-income withdrawal death benefit. In addition to the lack of an accumulation value, a death benefit with DIAs is generally optional and is limited to the amount of premium invested in exchange for a reduced income payout.

Finally, in addition to generating sustainable retirement income, investment in FIAs with income riders and DIAs reduces portfolio risk to the extent that funds from equity investments, e.g., stocks and equity exchange-traded and mutual funds, are used.

In conclusion, it’s not only about minimizing regrets regarding how soon you started saving for retirement when you’re retired. Making sustainable income a cornerstone of your portfolio using investments that are suited for this purpose, i.e., fixed income annuities, will help you sleep better at night – before and after you retire.

Annuities Deferred Income Annuities Retirement Income Planning

Consider a Death Benefit When Buying Deferred Income Annuities

If you’re in the market for sustainable lifetime income, you’ve come to the right place if you’re looking at fixed income annuities. A fixed income annuity is a fixed (vs. variable) annuity that provides income payments for your lifetime or for a contractually-defined term.

There are three types of fixed income annuities, each one serving a different purpose in a retirement income plan. The three types are as follows:

The main distinction between the three types of fixed income annuities is the timing of the commencement of income payments. As its name implies, the income from a SPIA begins immediately. The actual start date is one month after the date of purchase assuming a monthly payout.

The income start date of DIA’s and FIA’s with income riders, on the other hand, is deferred. With both DIA’s and FIA’s with income riders, it’s contractually defined and is generally at least one year from the purchase date. Although you choose it when you submit your application, most DIA’s have a defined start date; with some wiggle room available on some products. The income commencement date for FIA’s with income riders is flexible other than a potential one-year waiting period and/or minimum age requirement.

Assuming that a DIA meets your retirement income planning needs, you should always consider including a death benefit feature which is optional with most DIA’s. Keeping in mind that the income start date is deferred, and it’s not unusual for the deferral period to be 10 to 25 years, especially when purchasing a DIA as longevity insurance, you probably don’t want to lose your premium, or investment, if you die prematurely.

If you purchase a DIA without a death benefit or return of premium (“ROP”) feature, and you die during the deferral period, not only will the income never begin, your beneficiaries won’t receive anything either. The death benefit or ROP feature serves the purpose of insuring your investment in the event that you die before your income distributions begin.

So how much does it cost to insure your DIA investment by adding an optional death benefit? To illustrate, I recently evaluated the transfer of $100,000 from one of my client’s IRA brokerage accounts to a DIA. My client is approaching her 65th birthday and, like all individuals with traditional IRA accounts, must begin taking annual required minimum distributions, or “RMD’s,” from her account by April 1st of the year following the year that she turns 70-1/2.

Assuming that $100,000 of my client’s IRA is transferred from her brokerage account to a DIA, and assuming that the income from her DIA begins when she turns 70-1/2, she can expect to receive lifetime monthly income of approximately $600 to $700, depending upon the DIA chosen. In one case, the monthly benefit would be reduced by $2.27, from $691.68 to $689.41 with a death benefit feature. In another case, the monthly benefit would be $1.09 less, at $664.41 without any death benefit vs. $663.32 with a death benefit.

In other words, the cost to insure the return of my client’s investment of $100,000 in the event of her death prior to turning 70-1/2 translates to an annual reduction in lifetime benefits of $13.08 or $27.24, depending on the DIA chosen. Not only is there no question about the value of the death benefit in this situation, it would be negligent in my opinion for any life insurance agent not to illustrate the addition of this feature.

Assuming that a fixed income annuity makes sense for you, and further assuming that a DIA is an appropriate solution as a piece of your retirement income plan, always evaluate your potential lifetime income payout with and without a death benefit.

Annuities Fixed Index Annuities

With a Fixed Index Annuity, You Can Have Your Cake and Eat It Too

Beginning with the August 1, 2011 post, Do You Want to Limit Your Potential Gains? through the November 5, 2012 post, Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4, there were a total of 58 posts about fixed index annuities (“FIA’s”). Not to state the obvious, however, that’s a lot of information about one subject!

The impetus for the volume of material on FIA’s was, and continues to be, the fact that a FIA with an income rider is a unique and underutilized strategy that can provide a meaningful lifetime income floor for many retirement income plans while protecting against downside risk. As evidence of this fact, fixed index annuity sales have been increasing at a rapid pace the last two years while sales of variable annuities have been on the decline. Furthermore, their use as a retirement income planning tool is affirmed by the fact that the majority of sales have included an optional income rider.

What’s so special about a FIA? In one word – flexibility. A FIA is the only fixed annuity where you can receive a stream of income and also enjoy an investment value — that comes with downside protection. The other two types of fixed annuities, i.e., single premium immediate annuities (“SPIA’s”) and deferred income annuities (“DIA’s”) fulfill the income role (immediate in the case of SPIA’s and deferred with DIA’s), however, neither one of these two vehicles has an investment value. In addition, the lifetime income stream from a DIA often isn’t as competitive as lifetime payments from a FIA income rider with the same deferral period.

Another example of the flexibility associated with FIA’s is the income start date. Unlike a DIA where there’s a contractual fixed start date, the commencement of lifetime income from a FIA is totally flexible. It can typically be turned on at any time beginning one year after the contract date. Furthermore, while the lifetime income amount generally increases the longer you defer the start date, there’s no requirement to ever begin taking income withdrawals.

While SPIA’s and lifetime DIA’s (there are also period certain, or fixed term, DIA’s), are both designed to protect against the risk of longevity, the fact of the matter is that premature death can reduce their value, in some cases significantly. Some DIA’s can be purchased with a death benefit to protect against the possibility of death prior to their deferred annuitization date, however, the added insurance protection often increases the required investment amount, all else being equal.

When FIA’s are purchased with an optional income rider, it’s usually done in conjunction with some type of retirement income planning. As such, the emphasis is on deferred lifetime income, with the investment, or accumulation, value playing a secondary role. The fact of the matter is that the investment value is the anchor that provides the following four important benefits in addition to the sustainable lifetime income from the income rider:

  • Principal protection
  • Minimum guarantees
  • Upside interest potential
  • Death benefit

Assuming that no withdrawals are taken from the accumulation value in addition to income rider distributions, the accumulation value will only decrease by the income rider charge prior to turning on the income stream. Given this fact, unlike SPIA’s and lifetime DIA’s, FIA’s will have a death benefit available from day 1 that continues for much of the life of the FIA.

Once income begins, the accumulation value, i.e., death benefit, will decrease by the amount of income withdrawals in addition to the income rider charge. An optional death benefit rider can be added to the contract at the time of purchase to provide a guaranteed death benefit that will be paid even if there’s no accumulation value.

A fixed index annuity with an income rider is truly a unique retirement income planning tool. Unlike other types of fixed annuities where income begins immediately, i.e., SPIA’s, or at a contractually fixed date in the future, i.e., DIA’s, a FIA income start date is totally flexible. In addition, unlike SPIA’s and DIA’s which are only about lifetime income, FIA’s include an investment value. Furthermore, the investment value has built-in downside protection. Who said you can’t have your cake and eat it too?

Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4

The first three posts in this series discussed five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. If you haven’t done so already, I would recommend that you read each of these posts.

This week’s post presents a sample case to illustrate the use of a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement.


As with all financial illustrations, assumptions are key. A change in any single assumption will affect the results. The following is a list of assumptions used in the sample case:

  1. 55-year old, single individual
  2. Planned retirement start age of 68
  3. Life expectancy to age 90
  4. Current annual LTCI premium of $4,000 payable for life
  5. Need to plan for infrequent, although potentially double-digit percentage increases in LTCI premium at unknown points in time
  6. Given assumptions #4 and #5, plan for annual pre-tax income withdrawals of approximately $6,000 beginning at retirement age
  7. Solve for single lump sum investment at age 55 that will provide needed income
  8. Investment will come from a nonqualified, i.e., nonretirement, investment account
  9. One investment option is a fixed index annuity (“FIA”) with an income rider with lifetime income withdrawals beginning at age 68.
  10. Second investment option is a deferred income annuity (“DIA”) with no death benefit and lifetime income payout beginning at age 68.
  11. FIA premium bonus of 10%
  12. FIA annual return of 3%
  13. FIA income rider charge of 0.95% of income rider value otherwise known as the guaranteed minimum withdrawal benefit (“GMWB”)
  14. No withdrawals are taken from the FIA other than the income withdrawals.
  15. All investments are purchased from highly-rated life insurance companies known for providing innovative and competitive retirement income planning solutions.

Investment Amount

The first thing that needs to be solved for is the amount of investment that must be made at the individual’s age 55 in order to produce lifetime annual income of approximately $6,000 beginning at age 68. The goal is to minimize the amount of funds needed for the investment while choosing a strategy from a highly-rated insurance company that’s known for providing innovative and competitive retirement income planning solutions.

It turns out that an investment of $50,000 to $65,000 is needed to produce lifetime annual income of approximately $6,000 beginning at age 68. Given the fact that my goal as a retirement income planner is to use the smallest amount of investment for a fixed income annuity to produce a targeted income stream in order to preserve the remainder of a client’s investment portfolio for my client’s other financial goals, the amount of the investment needed is $50,000.


There are three items we will examine to compare the results between investing $50,000 in a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement. They are as follows:

  • Annual gross income
  • Annual taxable income
  • Value/death benefit

Annual Gross Income

Per the Exhibit, the annual payout, or gross income, from the FIA is $5,764, or $236 less than the annual gross income of $6,000 from the DIA. This equates to a total of $5,428 for the 23 years of payouts from age 68 through age 90.

Annual Taxable Income

If the investment was made in a retirement account like a traditional IRA and assuming there have been no nondeductible contributions made to the IRA, 100% of the income would be taxable. This would be the case for both the FIA or DIA.

As stated in assumption #8, the investment will come from a nonqualified, i.e., nonretirement, investment account. Per Part 2 of this series, this makes a difference when it comes to taxation of the withdrawals. Per the Exhibit, 100% of the annual FIA income of $5,764 is fully taxable vs. $3,066 of the DIA income. This is because the DIA, unlike the FIA, is being annuitized and approximately 50% of each income payment is nontaxable as a return of principal. Over the course of 23 years of payouts, this results in $62,054 of additional taxable income for the FIA vs. the DIA.

The amount of income tax liability resulting from the additional taxable income from the FIA will be dependent upon several factors that will vary each year, including (a) types, and amounts, of other income, (b) amount of Social Security income, (c) potential losses, (d) adjusted gross income, (e) itemized deductions, (f) marginal tax bracket, and (g) applicable state income tax law.

Value/Death Benefit

While the present value of the future income stream of a DIA represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment. In addition, while some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income, per assumption #10, this isn’t the case in this situation. Consequently, the DIA column of the “Value/Death Benefit” section of the Exhibit is $0 for each year of the analysis.

On the other hand, there’s a projected value for the FIA from age 55 through age 79. This value is also the amount that would be paid to the FIA’s beneficiaries in the event of death. There’s a projected increase in value each year during the accumulation stage between age 55 and 67 equal to the net difference between the assumed annual return of 3% and the income rider charge of 0.95% of the income rider value.

Per the Exhibit, the projected value/death benefit increases from $56,278 at age 55 to $68,510 at age 67. Although the assumed premium bonus of 10% is on the high side these days, this is reasonable given the fact that FIA values never decrease as a result of negative performance of underlying indexes, the assumed rate of return of 3% is reasonable in today’s low index cap rate environment, and the assumed income rider charge of 0.95% of the income rider value is on the upper end of what’s prevalent in the industry. The projected value/death benefit decreases each year from age 68 to age 79 until it reaches $0 beginning at age 80 as a result of the annual income withdrawals of $5,764.


As discussed in Parts 1 – 3 of this series, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums during retirement in a given situation. Two of the differences, income start date flexibility and income increase provision, haven’t been addressed in this post.

In addition to the five differences, the amount of the investment required to produce a targeted lifetime annual income amount to pay LTCI premiums, including potential increases, will differ depending upon the particular FIA or DIA strategy used. In the illustrated case, which isn’t uncommon today, an investment of $50,000 resulted in an almost identical lifetime income payout whether a FIA with an income rider or a DIA is used.

As illustrated, the taxable income associated with a DIA in a nonqualified environment is much less compared to a FIA. As previously discussed, the amount of tax savings resulting from the reduced taxable income will depend upon an analysis of several factors and will vary each year. Ignoring the potential income tax savings resulting from the tax-favored DIA payouts, the FIA with income rider would be the preferred investment choice for many individuals in this case given the presence, duration, and projected amount of, the investment value/death benefit.

The FIA edge is reinforced by the fact that, unlike most traditional DIA’s, the income start date and associated annual lifetime income payout amount for FIA’s is flexible. This would be an important consideration in the event that the year of retirement changes. Furthermore, this is quite possible given the fact that the individual is 13 years away from her projected retirement year.

As emphasized throughout this series, the purchase of LTCI needs to be a lifetime commitment. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement. Whether it’s a FIA with an income rider, a DIA, or some other planning strategy that’s used for this purpose will depend on the particular situation.

Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 3 of 4

Last week’s post discussed the first three of five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. Once again, the differences are as follows:

  1. Income start state flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

This post will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Investment Value

Although guaranteed lifetime income is the primary purpose when using a FIA with income rider or DIA strategy for funding LTCI premiums during retirement, the presence of an investment value may be important for many people.

With traditional DIA’s, you purchase from a life insurance company the promise to pay a periodic income stream for either a term certain or lifetime, with or without inflation, beginning at a defined future date at least 13 months from the date of purchase. Although the present value of your future income stream represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment.

A FIA, on the other hand, has an “accumulation value” in addition to the right to receive income withdrawals when you purchase an optional income rider. The accumulation value is increased by initial and ongoing investments, premium bonuses if applicable, and periodic interest crediting. It’s reduced by income and other withdrawals, income rider charges, and surrender charges.

Death Benefit

There may or may not be a death benefit with both FIA’s with income riders and DIA’s. In the case of DIA’s, it’s a contractual issue vs. a function of the accumulation value in the case of a FIA.

Some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income. If this is the case, the income payment will often be less than what it would be if there’s no death benefit.

With FIA’s, the death benefit will be equal to the greater of the minimum guaranteed value or the accumulation value. As previously stated, the accumulation value is a moving target that increases and decreases as a result of various transactions. Depending upon the amount of cumulative income and other withdrawals as well as income rider and surrender charges, there may eventually be no minimum guaranteed value or accumulation value remaining.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 5 of 5

The first four parts of this series compared and contrasted the features available in two major types of fixed income annuities that defer the payment of their income, i.e., fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). So now that we’ve thoroughly analyzed both of these excellent retirement income planning tools, which is right for you?

The answer to this question depends upon your retirement income planning needs. The ideal retirement income planning strategy is one that will generate one or more guaranteed streams of income that will close the gap between projected expenses and projected existing sources of income with the smallest investment. Whether FIA’s or DIA’s or a combination of both strategies, will achieve this goal, will be dictated by the unique facts in a given situation.

Whenever possible, multiple FIA and DIA illustrations should be prepared to determine which strategy or strategies makes the most sense for a particular case. As discussed in the first four parts of this series, while FIAs and DIAs have much in common, each has features not found in the other.

Assuming that a similar amount of income will be produced whether a FIA or a DIA is used, the meshing of the unique features associated with each of the two types of fixed income annuities with the requirements of a particular retirement income plan will dictate what’s best for the plan. As an example, if income start date flexibility is important, a FIA will generally fit the bill. If, on the other hand, inflation-adjusted income is required over a specified term, e.g., from age 65 – 75, a DIA may be the best solution.

The presence of an accumulation value and associated built-in death benefit with FIA’s that’s not available with DIA’s often tips the scale in favor of FIAs. This is further reinforced when lifetime, vs. a specified term, income is important.

Cost is another factor that needs to be considered when comparing FIAs with income riders to DIA’s. DIA’s, as a stand-alone income-producing product, have no upfront or ongoing cost associated with them. Since the benefits of guaranteed income associated with FIA’s can generally only be obtained by purchasing an optional income rider, there’s an annual charge that’s assessed and deducted from a FIA’s accumulation value for this rider.

There are two other things to keep in mind when comparing FIAs with DIAs. Unlike FIAs with income riders, which are currently offered by numerous life insurance carriers with 169 products currently on the market, there are only a handful of carriers that offer DIA’s. One of the leading carriers, Hartford Financial Services Group, recently agreed to sell its units that develop, market, and distribute new versions of retirement income products.

A second thing to keep in mind is the ongoing tweaking of existing products and development of new products in response to marketplace demands. Of note, one of the top-rated carriers with a longstanding history introduced an innovative DIA within the last year that allows for ongoing investments as well as a flexible income start date, both features of which weren’t previously available with traditional DIA’s.

As you can see, the decision between FIAs with income riders vs. DIAs is complicated, to say the least. Determining what makes sense for you requires the skills and knowledge of an experienced retirement income planner who routinely works with these and other retirement income planning strategies.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 3 of 5

I hope that you’re enjoying this series so far comparing two innovative retirement income planning tools – fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). Of the 12 features offered by FIAs with income riders that are listed in Part 1, we’ve looked at three features that are also offered by DIAs, and five that aren’t applicable to DIAs.

This post will discuss the remaining four features that are applicable to DIAs on a limited basis. They are as follows:

  1. Known future income amount at time of initial and ongoing investments
  2. Flexible income start date
  3. Greater income amount the longer you defer your income start date
  4. Death benefit

Known Future Income Amount at Time of Initial and Ongoing Investments

One of the really cool things about fixed income annuities from a retirement income planning perspective is the ability to structure a guaranteed (subject to the claims paying ability of individual life insurance companies) income stream to match one’s income needs. In the case of both FIA’s with income riders and DIA’s, the amount of the future income stream is known at the time of initial and ongoing investments.

When you purchase a DIA, a known amount of income, with or without an annual inflation factor, will be paid to you as an annuity beginning at a specified future date for either a specified number of months or for life, either single or joint as applicable. With traditional DIA’s, you make a one-time investment; however, there are a handful of products that offer you the ability to make ongoing investments.

Unlike traditional DIA’s where you generally make a single investment and you receive a specified amount of income beginning at a specified date, FIA’s with income riders have more variations. For one thing, assuming you’re working with a flexible– vs. a single-premium FIA, you have the ability to make ongoing investments in a single FIA. In addition, the income start date, which will be discussed in the next section, is flexible. While the future income amount is known at the time of initial and ongoing investments, both of these variables combine to offer a much broader range of possibilities than a traditional DIA when it comes to the income withdrawal amount.

Flexible Income Start Date

All FIAs with income riders have a flexible income start date with the ability to begin income withdrawals either in the year of purchase or one year from the date of purchase assuming you’ve reached a specified age, generally 50. There’s no requirement with FIA income riders to commit to the income start date at the time of purchase, and, furthermore, you don’t have to ever start taking income withdrawals if you choose not to do so.

Per the previous section, traditional DIAs begin their income payouts at a specified future date. There are some nontraditional DIAs that provide for a flexible income start date similar to FIAs with income riders.

Greater Income Amount the Longer You Defer Your Income Start Date

With all fixed income annuities where the income isn’t payable during the first year, i.e., single premium immediate annuities, or “SPIAs,” the longer you defer your income start date, the greater the amount of income you will receive. This is true whether the income payment is for a fixed term, as it is with some DIAs, or if it’s for life.

FIAs with income riders, with their built-in flexible income start date, include this feature. In order to obtain this benefit with a traditional DIA, you need to choose a later income start date at the time of purchase.

Death Benefit

Income withdrawal is an optional rider with FIAs. The base product has an accumulation value that’s increased by initial and ongoing investments, premium bonuses, and interest credits and is decreased by withdrawals and surrender and income rider charges. To the extent that there’s accumulation value remaining upon the death of the owner(s), it’s paid to the contract’s beneficiaries as a death benefit.

Traditional DIAs may or may not include a death benefit prior to annuitization. Once annuitization occurs, there’s generally no death benefit payable. If you opt for a traditional DIA that includes a death benefit before annuitization, the amount of the benefit will generally be equal to your investment amount; however, the tradeoff will be a reduced income amount than would otherwise be payable by a similar product that doesn’t include a death benefit.

Annuities Fixed Index Annuities

Target Retirement Income to Match Your Financial Needs

Can you name an investment that offers all of the following features?

  • Guaranteed income*
  • Lifetime income
  • Tax-deferred income
  • Known future income amount at time of initial and ongoing investments
  • Flexible income start date
  • Greater income amount the longer you defer your income start date
  • Potential doubling of income amount to cover nursing home expense
  • Investment value in addition to future income stream
  • Protection from loss of principal
  • Potential for increase in investment value
  • Potential matching of percentage of investment amounts by financial institution
  • Death benefit

Sounds too good to be true? If you’ve been reading Retirement Income Visions™ for the last nine months, you know that the answer to this question is a fixed index annuity (“FIA”) with an income rider. There’s no other investment of which I’m aware that offers all 12 of the foregoing features.

The reason that I’m so enthusiastic about this particular investment and I’ve been writing about it for the last nine months, and will continue to do so for the foreseeable future, is that it’s a retirement income planner’s dream-come-true. As a result of possessing all of these different features, this gives me the ability to target retirement income to match my client’s financial needs.

Working within a client’s parameters, including, but not limited to, current age, marital status, desired retirement age, projected retirement expenses, projected Social Security and other sources of retirement income, current investment values and types of investments, e.g., Roth IRA, 401(k) plan, nonretirement, etc., as well as life and long-term care insurance protection, I can design a plan for a client to generate a targeted amount of lifetime income beginning at a specified age to match my client’s situation.

It should be emphasized that while a FIA with an income rider is a wonderful solution for targeting retirement income to meet a client’s needs, it isn’t the only solution. Whenever I prepare a retirement income plan for a client, I look at other opportunities for meeting my client’s specific needs. With my arsenal of retirement income planning tools and expertise, I can design and execute a customized plan that may include one or more FIA’s with or without income riders in addition to other retirement income planning investment vehicles.

*Guaranteed income refers to income for which an insurance carrier is contractually bound to pay to an annuitant(s) and/or an annuitant’s beneficiaries that is subject to the claims paying ability of each individual insurance carrier.