Why should you add an income rider to your annuity?
How can an annuity income rider give you more peace of mind in retirement.
A core part of planning for retirement is ensuring that you have as few worries as possible. That’s why we make it a priority to ensure that all of our clients’ essential income needs are covered by their guaranteed income.
There are three main ways to guarantee income in retirement. The first is a pension, the second is Social Security, and the third is adding an income rider to an annuity. This third option creates, in essence, a personal pension paid directly to you every month for the rest of your life.
You can watch the video on this topic further down the post. To listen to the podcast episode, hit play below, or read on for more…
In part five of our “Annuities – Why Ever Use Them” series, we discussed attaching an income rider to an annuity to produce guaranteed income. We encourage you to read part five before reading this post as we go into further detail about why we recommend adding an income rider to an annuity and explain how their rates of return work.
Our annuities series breaks down this product in short, easy-to-understand episodes to help you discover how this product works and why it’s a beneficial income source in retirement.
To get the full picture about how to make an annuity work for you, read the “Annuities – Why Ever Use Them” posts on our blog, listen to the episodes on the Secure Your Retirement podcast, or watch them on our YouTube channel.
Why add an income rider to an annuity?
Many people opt for an income rider for the same reasons they’d take a pension or Social Security. It can give you more than just guaranteed income – it can provide you with peace of mind that your essential income needs will be covered in the future.
When you’re planning for retirement, you’ll work out how much income you need every year to cover your essential costs. This is where an income rider can be very useful. We often use them to plan for our clients, considering what income they’ll need 5-10 years down the road.
Understanding annuity income riders
In most cases, income riders come with a fee. This is usually around 1%. However, if the income rider is built into the annuity and doesn’t come with a fee, the rider may not have the highest possible rate of return.
Generally, built-in riders will not generate as much guaranteed income because the insurance company won’t be making enough money to pass it on to you.
If an agent states that their annuity has a 6% or 7% rate of return, it’s important to note that this is only for the income rider. This rate is not going to grow your principal at 6% or 7%. To get this maximum value from this income rider, you need to take income.
If you have a fixed index annuity, your principal will still grow, as we detailed in Part 4, How Fixed Index Annuities Grow Your Money With Low Risk. But this rate isn’t the same as the income rider.
Annuity income riders and rates of return
Let’s use a hypothetical example. If you add $100,000 into a fixed index annuity, it may earn 3%, depending on the index’s performance. Your income rider base, however, will grow separately at 7%. In 10 years, your original account value could be about $130,000, but your income rider may be worth around $200,000 in value.
A good way to think about these numbers is to consider what money you can access. If you were to pass away, the insurance company would only give your annuity’s account value (in this example, $130,000) to your beneficiaries. This is also what you would be able to walk away with if you decided to close your annuity.
But if you want to take income, this will be based on the income rider’s growth (in this example, $200,000). The insurance company will pay out a percentage of this figure to you as income.
Say this pays out at 6%, then you’ll get $1,000 a month, or $12,000 a year, guaranteed, for the rest of your life. This does not come out of or affect your account value.
If you did not have an income rider but wanted to take this same amount out of your account, you’d reduce your principal by a massive 10% in one hit. Over time, your annuity would empty, as you’d be withdrawing money faster than it could grow.
Why we recommend annuity income riders
What’s great about an income rider is, even if your account value drops down to zero, you are still guaranteed that income for the rest of your life. It’s a type of longevity insurance that can’t be beaten.
It’s best to think of an annuity and income riders as two separate entities. One is death benefit and walkaway money (your account value, the money you put into the account), and the other is like a pension that you cannot outlive. When the time comes to pay out your guaranteed income, these two sides do not affect each other.
So, if you’re concerned about covering your essential income needs, then adding an income rider to an annuity is a good option. This way, you’ll know you have a guaranteed $1,000 (or however much is possible in your situation). It won’t fluctuate and will be delivered to you every month for the rest of your life, from when you decide to take income.
To learn more about how an income rider could fit in with your personal retirement plan, get in touch with us. We offer a complimentary 15-minute phone consultation to discuss your specific needs and how you can put our advice into action. Book your free call with our expert advisors today.