Tag: retirement paycheck

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Annuities Fixed Index Annuities

Your Fixed Index Annuity Income Rider – What You Don’t Receive – Part 1 of 2

Retirement Income Center

As stated in last week’s post, while a fixed index annuity has several unique conservative and desirable investment features, assuming your goal is to create a lifetime retirement paycheck, you need to apply for an optional income rider when your retirement income planner submits your application. As pointed out last week, income riders are currently available with less than 40% of all fixed index annuities.

What exactly do you receive when you purchase an income rider with your fixed index annuity? How does it work? How can it be used as part of a retirement income planning strategy to create a lifetime retirement paycheck?

Before we talk about what you receive when you purchase an income rider with a fixed index annuity, it’s important to understand what you don’t receive. The remainder of this post will begin a two-part discussion devoted to this topic.

In order to understand what you don’t receive when you purchase an income rider with your fixed index annuity, we need to place it in the context of fixed income annuities. A fixed income annuity is the broad class of annuities under which fixed index annuities fall.

One of the unique features that’s associated with a fixed income annuity is the right to annuitize your investment. Per the Glossary, annuitization is defined as the irrevocable structured payout of an annuity with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the annuitant’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. That’s a roundabout way of saying that you’re entitled to receive an income stream for a specified length of time.

In addition, when you purchase a fixed income annuity, the timing of commencement of payments can be different, depending upon whether you purchase an immediate or deferred fixed income annuity. With an immediate annuity, payments begin one month after date of purchase. Deferred annuities generally won’t begin making payments for at least 12 months from date of purchase.

Finally, with fixed income annuities, when the income stream as defined by the terms of the annuity contract ends, so does the annuity contract. Unless there’s a refund feature, there’s no accumulation value that’s payable to the annuitant(s) or to his/her beneficiaries.

Now that you have a basic understanding of fixed income annuities, I will continue the discussion regarding what you don’t receive when you purchase an income rider with a fixed index annuity next week when I share with you the unique characteristics of fixed index annuity income riders compared to fixed income annuities in Part 2.

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Annuities Fixed Index Annuities Retirement Income Planning

Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck

Retirement Income Center

As stressed in the last three week’s posts, Where Have All the Pensions Gone?, A Retirement Paycheck is Essential, and No Pension? Create Your Own, we need to know that when we stop working, we will receive a predetermined monthly payment, i.e., a retirement paycheck, for the rest of our life, and, if married, our spouse’s life. Furthermore, due to its inadequacy and uncertainty, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Per last week’s post, No Pension? Create Your Own, a retirement income planning strategy that’s becoming more widely used the last few years is the addition of a rider, or endorsement, to a fixed index annuity to generate a retirement paycheck. The concept of fixed index annuities isn’t new to readers of Retirement Income Visions™. This topic has been featured for the last five months, beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall.

Up until now, the fixed index annuity strategy has been presented as a conservative, tax-deferred investment approach to obtain (a) higher interest rates compared to similar-duration CD’s, (b) a higher potential rate of return than traditional fixed annuities, and (c) downside protection. As discussed in several posts, greater potential return is available as a result of interest crediting being tied to the performance of one or more stock market indices. Fixed index annuities also offer downside protection since interest crediting is never less than zero, even when the return of selected stock market indices is negative.

When you purchase a fixed index annuity, although you will realize all of the benefits mentioned in the previous paragraph, you won’t create a lifetime retirement paycheck unless you also apply for an optional income rider when your retirement income planner submits your application. An income rider, like all insurance contract riders, provides coverage that’s in addition to, and isn’t included as part of, the base contract. Since the features of the income rider aren’t included in the base contract, an additional charge must be paid to the life insurance company in order to obtain the benefits associated with the rider.

Income riders aren’t available with most fixed index annuities. In a search of 484 products, only 182, or 37.6%, offer an income rider. It’s important to keep in mind that all fixed index annuity income riders aren’t created equally. When available, each fixed index annuity income rider has its own specifications for determining the amount of income that the annuitant(s) will receive when the rider is activated. In addition, every life insurance company that offers an income rider reserves the right to change the specifications for products offered to new applicants.

How does a fixed index annuity income rider work? Specifically, how can it be used as part of a retirement income planning strategy to create a retirement paycheck? Next week’s post will be the first in a series of posts about this topic.

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Annuities Fixed Index Annuities Retirement Income Planning

No Pension? Create Your Own

Retirement Income Center

Last week’s post, A Retirement Paycheck is Essential, emphasized that it’s imperative for each and every one of us to have a retirement income plan. The cornerstone of a retirement income plan is a retirement paycheck. Specifically, we need to know that when we stop working, we will receive a predetermined monthly payment for the rest of our life, and, if married, our spouse’s life. Furthermore, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Given the fact that the majority of us won’t receive a pension from an employer’s defined benefit plan that our parents’ generation took for granted (see the November 21, 2011 post, Where Have All the Pensions Gone?), it’s incumbent upon us to create our own retirement paycheck. This isn’t an task and generally requires the assistance of an experienced retirement income planner.

As pointed out in the Where Have All the Pensions Gone? Post, the nature of many investment vehicles don’t lend themselves to plan for a predictable known future lifetime or joint lifetime stream of income. This is true, for example, whether you’re talking about a savings account, CD, bond, stock, mutual fund, or exchange traded fund.

Fortunately, there exists a long-standing, reliable, conservative investment solution that’s specifically designed to provide us with a predetermined monthly payment for the rest of our life. The payment will be made without interruption, no matter how the stock market is performing. This investment solution is commonly known as a fixed income annuity and is offered exclusively by life insurance companies.

Unlike a traditional defined benefit pension plan that pays a defined stream of income that generally doesn’t change beginning at retirement age and ending at death, a fixed income annuity strategy can be quite flexible. There are several types of fixed income annuities that can be used to customize a retirement income plan that dovetails with one’s retirement income needs. This entails both timing and amount of payment, including adjustment for inflation.

There are two broad classes of fixed income annuities that are distinguished by the timing of the commencement of the initial income payment: (a) single premium immediate and (b) deferred. A feature shared by both types of annuities is “annuitization,” or the conversion of an annuity to an irrevocable structured payment plan with a specified payout by a life insurance company to an individual(s) or “annuitant(s)” over a specified period of time through different lifetime and term certain options offered by the insurance company.

Single premium immediate annuities, or “SPIAs,” make periodic payments, typically monthly, for a specified number of months or for an individual’s lifetime or joint lifetimes as applicable. The payments generally begin one month after purchase of a SPIA, hence the name “immediate.”

The second broad class of fixed income annuities, deferred income annuities, or “DIAs,” although they play an important role in a retirement income plan, aren’t as prevalent in the marketplace as SPIAs. Like SPIAs, DIAs pay periodic income for a specified period of time or over one’s lifetime or joint lifetimes as applicable. Unlike SPIAs, the start date of the payments for DIAs is deferred for at least 13 months from the date of investment.

SPIAs and DIAs can be used alone or in combination to create a retirement paycheck. In addition, a rider, or endorsement, can be added to a fixed index annuity to generate a retirement paycheck. This retirement income planning strategy, which is striking a chord with more and more people the last few years, will be introduced in next week’s post.