Tag: lifetime retirement paycheck

Categories
Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Charge – Is It Worth It? – Part 2 of 2

Part 1 of this post explained the benefits of attaching an income rider to a fixed index annuity (“FIA”). It also discussed the charge for this rider, including how it’s calculated. Now we come to the crux of the matter – is a FIA income rider charge worth it?

Before answering this question, I want to make it clear that the charge doesn’t reduce the lifetime income, or lifetime retirement paycheck (“LRP”) amount that you will receive. It’s deducted from the accumulation value of your FIA, or value of your FIA before any applicable surrender charges. As explained in Part 1, the income account value is used to calculate the amount of your LRP and is separate and apart from the accumulation value of your annuity contract.

Not to state the obvious, however, when you purchase something for yourself, you generally do so only if you plan on using it or benefiting from it in some way. This applies to a FIA income rider. The reason that people purchase a FIA with an income rider is to obtain the security that no matter what happens with the rest of their investment portfolio, subject to individual life insurance company claims-paying abilities, they will receive guaranteed lifetime income beginning at a flexible income start date, with the amount of income increasing the longer the start date is deferred.

Furthermore, per Part 1, one of the five benefits offered by an income rider is the ability to calculate the LRP amount that you will receive beginning on a specified future date on the date of purchase. When you invest in a FIA and tack on an optional income rider, your retirement income planner should be able to show you (a) the amount of annual income that you will receive beginning on different dates with specified initial and additional purchase amounts and (b) the amount of your projected retirement income need that will be met by your FIA income.

Assuming your goal is to receive a specific amount of income each year beginning at a specified future date, you won’t withdraw funds from the accumulation value of your FIA before or after your income start date. If you do so, the income account value will decrease by the amount of your withdrawals, decreasing your LRP amount.

Assuming you won’t be withdrawing funds from the accumulation value of your FIA and you will only be using your FIA to generate lifetime income, the accumulation value will be of secondary importance to you during your lifetime. If there’s a chance that you may take withdrawals from your accumulation value, you shouldn’t be purchasing an FIA with an income rider.

With an income rider, once you start receiving income from your contract, you will continue to do so for the rest of your life even if the accumulation value has been reduced to $0 as a result of income withdrawals and income rider charges. Assuming that you use your income rider as intended, receiving lifetime income without taking any withdrawals from the accumulation value of your contract, the primary benefit of your contract’s accumulation value is as a potential death benefit to your beneficiaries. Keeping in mind that income distributions reduce accumulation value, the latter may be minimal or potentially depleted in the event that there have been ongoing income distributions for many years.

Assuming (a) you value the five benefits of a FIA income rider presented in Part 1, (b) you understand that the income rider charge won’t affect the amount of your lifetime income, (c) you recognize that the accumulation value is of secondary importance, and (d) the income rider charge is competitive with other FIA income rider charges assessed by similarly-rated life insurance carriers that will pay a similar amount of income, you will probably conclude that the income rider charge is a small price to pay to obtain the unique combination of benefits offered by a FIA income rider.

Categories
Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Charge – Is It Worth It? – Part 1 of 2

Although fixed index annuities (“FIA’s”) offer a number of attractive features, not the least of which is protection from stock market downturns, I recommend them as a sustainable lifetime income strategy for a portion of my retirement income planning clients’ investment portfolios when appropriate. In order to obtain this popular benefit, it’s generally, although not always, necessary to apply for an optional income rider when you apply for a FIA.

When you add an income rider, you turbocharge your FIA. A FIA income rider offers the following five benefits that, when taken as a whole, cannot be duplicated by any other investment:

  1. Guaranteed, subject to individual life insurance company claims-paying abilities, lifetime income or lifetime retirement paycheck (“LRP”)
  2. Flexible LRP start date
  3. Potential for increased LRP amount
  4. Ability to calculate an LRP amount that you will receive beginning on a specified future date on the date of purchase
  5. Ability to adjust initial and ongoing investment amount to match one’s income needs

A charge is deducted from the accumulation value of a FIA on a monthly, quarterly, or annual basis in exchange for the foregoing five features when they are provided by an optional income rider. It’s generally calculated as a percentage of the income account value, however, the charge is sometimes calculated as a percentage of the accumulation value. A typical charge ranges between 0.75% and 0.95% of the income account value.

The income account value is used to calculate the amount of your LRP and is separate and apart from the accumulation value of your annuity contract. The starting point for the calculation is your initial and ongoing investments plus any premium bonuses offered by the life insurance company. A simple or compound growth factor is applied to the income account value for a specified number of contract years or until income withdrawals begin, whichever occurs first.

As an example, let’s say that you invest $100,000 in a FIA with an income rider that uses 6% annual compound growth for the first 12 years of the contract to calculate the income account value in exchange for an income rider charge of 0.95% of the income account value that’s deducted from the accumulation value. At the end of year 1, your income value is $106,000 ($100,000 x 1.06). An income rider charge of $1,007 ($106,000 x 0.95) will be deducted from your accumulation value. At the end of year 2, your income value is $112,360 ($106,000 x 1.06). An income rider charge of $1,067 ($112,360 x 0.95) will be deducted from your accumulation value.

The income account value will continue to increase by the 6% compound growth factor for 12 years in this example, assuming income withdrawals aren’t taken in the first 12 years. Consequently, the income rider charge will also increase for the first 12 years of the contract before it levels off and begins decreasing when income withdrawals begin.

Is the income rider charge worth it? Find out in Part 2 next week.

Categories
Annuities Fixed Index Annuities

5 Things You Receive From a Fixed Index Annuity Income Rider – Part 2 of 2

Retirement Income Center

Part 1 of this post last week made the point that fixed income annuity, or “FIA,” riders are a dream-come-true for a retirement income planner like me since it enables me to offer a unique solution for meeting clients’ income needs that isn’t available elsewhere from other investment products. It emphasized that the five things you receive from a FIA income rider, when taken as a whole, cannot be duplicated by any other investment.

The first two features, guaranteed income and flexible lifetime retirement paycheck, or “LRP,” start date were the subject of last week’s post. This week we’ll take a look at the other three features.

Potential for Increased Lifetime Retirement Paycheck (“LRP”) Amount

Tied directly to benefit #2, flexible lifetime retirement paycheck, or “LRP,” start date, is a third important perk that’s associated with a FIA income rider – potential for increased LRP amount. The longer you wait to begin receiving your LRP, the greater your income will be.

There are several reasons for this which will be the topic of a future blog post. Suffice it to say that the difference in annual income can be significant depending upon the variables of a particular case. In one of my recent proposals for a married couple, the potential annual income ranged between $46,000 and $100,000 depending upon whether they began taking income at the husband’s age 65 or 75.

Ability to Calculate an LRP Amount on the Date of Purchase

As a retirement income planner, either my life insurance agency or I can run an illustration using the software for a particular product for the first two types of fixed income annuities discussed in last week’s post, i.e., (a) single-premium immediate annuities, or “SPIA’s,” and (b) deferred income annuities, or “DIA’s,” to determine the periodic payment that my client will receive given certain specified assumptions. This can only be done using product-specific software.

While there’s also product-specific software available for all FIA’s that can be used to determine an LRP amount assuming the purchase of an income rider, I’m not dependent on it. Given my client’s initial and potential subsequent investment amounts, including frequency of same, I can independently calculate his/her potential LRP amount beginning at various ages for different FIA products to determine which one(s) would be best suited for meeting my client’s needs. This capability enables my client to know how much income he/she will receive beginning at various ages before making any investment.

Ability to Adjust Initial and Ongoing Investment Amount to Match One’s Income Needs

While it’s great to be able to know the annual income amount you will receive beginning in 15 years assuming you invest $200,000 today with annual additions of $20,000 for the next five years and further assuming that you’re 52 now, it’s preferable from a retirement income planning perspective to be able to do the reverse calculation. That is, assuming that when you retire at 67 with an annual income need of $100,000 and you’re projected to receive $25,000 from Social Security and $30,000 from another source, how much do you need to invest today and for the next 15 years in order to close your income need gap of $45,000 ($100,000 – $55,000)?

A fixed index annuity with an income rider is a wonderful tool to use in this situation. It can be used to calculate a single lump sum amount that is required to match your income needs as well as a smaller initial investment with subsequent periodic investment amounts.

As stated at the conclusion of Part 1, the foregoing three features, together with guaranteed lifetime income and a flexible LRP start date, distinguishes FIA income riders as a powerful and unique addition to an otherwise conservative investment product with the potential for meeting a retiree’s ongoing income needs.

Categories
Annuities Fixed Index Annuities

5 Things You Receive From a Fixed Index Annuity Income Rider – Part 1 of 2

Retirement Income Center

As the saying goes, it’s better to give than to receive. With this in mind, the last three week’s posts focused on what you don’t receive when you purchase an income rider with a fixed index annuity, or “FIA.” With Christmas and Hanukkah just behind us as I write this week’s post, it’s time to take a look at what you receive from this optional addition to your FIA.

Let’s start with some basic terminology. Although many life insurance companies refer to it as an income rider, you will also see the phrase, guaranteed minimum withdrawal benefit rider, or “GMWB” rider, for short. The latter terminology is simply another name for an income rider.

FIA income riders are a dream-come-true for a retirement income planner like me since it enables me to offer a unique solution for meeting clients’ income needs that isn’t available elsewhere from other investment products. Specifically, a FIA income rider has the following five features that, when taken as a whole, cannot be duplicated by any other investment:

  1. Guaranteed, subject to individual life insurance company claims-paying abilities, lifetime income or lifetime retirement paycheck (“LRP”)
  2. Flexible LRP start date
  3. Potential for increased LRP amount
  4. Ability to calculate an LRP amount on the date of purchase
  5. Ability to adjust initial and ongoing investment amount to match one’s income needs.

While all features except for #2 are available with other types of fixed income annuities, there are no other investment products that offer all five in one package. The first two features are the subject of this week’s post, with features #3 – #5 discussed in Part 2 next week.

Guaranteed Lifetime Income

A FIA income rider is designed to create lifetime income, or a lifetime retirement paycheck, or “LRP.” Moreover, since it’s being paid by a life insurance company, it’s intended to be a guaranteed payment, subject to each individual company’s claims-paying ability. While this is a wonderful feature from a retirement income planning perspective, it’s one that’s common to all fixed income annuities. As such, in and of itself, it isn’t a unique feature of FIA income riders.

Flexible LRP Start Date

When it comes to lifetime income payments, there are three types of fixed income annuities that offer this: (a) single-premium immediate annuities, or “SPIA’s,” (b) deferred income annuities, or “DIA’s,” and (c) fixed index annuities, or “FIA’s.” The LRP start date for SPIA’s is one month after purchase. LRP’s from DIA’s are deferred to a contractually specified date that can be any time beginning at least one year after date of purchase. Whether you purchase a SPIA or a DIA, your start date is locked in when you make your investment.

When you purchase an income rider with a FIA, on the other hand, your LRP start date is flexible. Furthermore, unlike SPIA’s and DIA’s, you aren’t required to lock in your start date when you purchase your FIA. With all FIA’s, there’s a one-year waiting period between the effective date of the income rider and the date when you may begin to receive your LRP. The effective date of the rider is always the same as the effective date of your FIA contract since an income rider must be added to your contract when your purchase a FIA. In addition to waiting a year to begin your LRP, with most FIA’s, you must also be at least 50 years old.

The foregoing two features, in and of themselves, would make for a very nice retirement income planning solution. As you will learn next week, this is just the tip of the iceberg that distinguishes FIA income riders as a powerful and unique addition to an otherwise conservative investment product with the potential for meeting a retiree’s ongoing income needs.