Many experts agree that the happiest retirees are those who can rely on a regular income for the remainder of their life – regardless of how long that may be. Unfortunately, though, unexpected events like a change in health or the loss of a spouse can occur. And when they do, they could also cause a significant change in your income. That’s why adding an income rider to a fixed indexed annuity could be a viable part of your overall retirement planning strategy.
Many people work hard all of their lives to save for retirement. Throughout your working years, it is common to face a long list of changes, such as:
You may even face all of the above – and oftentimes, these major life changes will also have an impact on your financial situation.
The same can hold true during your retirement years. So, as you move through this period of your life, your financial scenario could face the need for adjustments – some positive, and some that could be devastating, at least without doing some planning in advance.
For instance, the loss of a spouse can be devastating. In addition to the emotional toll that this loss can take, it could also mean that your income may be drastically reduced going forward, due to the loss of their pension and/or Social Security benefits.
Taking a look at an example, let’s say that Joe receives $1,200 per month from Social Security. His wife Betty receives half of that amount, or $600 per month, as a spousal benefit – which brings the total amount of the couple’s Social Security income to $1,800.
When Joe passes away, Betty keeps the higher of the two incomes – but not both. So, while Betty will receive $1,200 as a widow’s benefit, she will lose her own spousal benefit of $600 per month – taking her total household income from Social Security from $1,800 down to just $1,200.
This can make meeting her monthly living expenses more difficult for Betty, because even though Joe has passed away, many of Betty’s expenses – such as her mortgage payment and utilities – will still remain the same.
In some cases, a widowed spouse’s expenses actually may increase in certain areas. For example, taxes are higher for single filers. If Betty has yet to qualify for Medicare, she may have to pay higher insurance premiums because of her spouse’s passing. Also, Betty may find herself paying for household maintenance that her spouse previously provided. She may incur new expenses for help with cleaning, yard work, cooking and other tasks. Travel, visits to family and social activities may provide new categories of expenditures for Betty.
By planning ahead for the loss of this income, though, Betty could “fill in” the income gap and maintain her same standard of living, even after the loss of her spouse. One way to accomplish this is by adding an income rider to a fixed indexed annuity.
Annuity income riders are defined as a benefit that may be added to certain annuities and that can solve for specific needs, such as income, legacy or confinement care needs. These riders are typically added on to an annuity contract. Depending on the option that you choose, you could ensure a “floor,” or a minimum on the asset value, the withdrawal amount(s), and/or income gains in the asset base.
Some of the most common income riders that can be added to an indexed annuity include the Guaranteed Minimum Withdrawal Benefit (GMWB), the Guaranteed Minimum Income Benefit (GMIB), the Guaranteed Minimum Accumulation Benefit (GMAB) and the Guaranteed Lifetime Withdrawal Benefit (GLWB).
Common Indexed Annuity Income Riders
|Income Rider Name||Purpose / BenefitPurpose / Benefit|
|Guaranteed Minimum Withdrawal Benefit (GMWB)||This rider guarantees a specific withdrawal amount as a percentage of the initial investment each year.|
|Guaranteed Minimum Income Benefits (GMIB)||This rider guarantees a growth rate to the annuity’s benefit / income base during the accumulation period.|
|Guaranteed Minimum Accumulation Benefits (GMAB)||This rider guarantees that the annuity’s asset base will not fall below a certain level – oftentimes the premium that you paid into the annuity – after a stated period of time, such as ten years.|
|Guaranteed Lifetime Withdrawal Benefit (GLWB)||This rider can essentially combine the best features of the GMWB and the GMIB riders – with guaranteed income base growth and a fixed / known withdrawal percentage during the payout period, without having to annuitize (i.e., convert the annuity’s account value to an income stream).|
There are other types of riders that may be added or included with a fixed indexed annuity, as well, such as a:
Having the security of an income rider on an annuity can sometimes provide benefits that individuals or couples cannot get elsewhere, such as through life insurance or long-term care insurance, because these riders generally do not require underwriting. This means that, even with certain pre-existing health conditions, the benefits can be obtained through the annuity.
It is important to keep in mind, though, that typically, the cost of an annuity rider will be deducted from the value of the account on an annual basis. In addition, not all riders work the same. So, it can be beneficial to work with an advisor who is well-versed in annuities and can explain the advantages and the potential drawbacks.
Nobody knows exactly what the future will hold. But in most cases – and particularly when planning for your future income needs – it is recommended that you hope for the best yet prepare for the worst, just in case.
When doing so, before you commit to any type of income-producing financial vehicle, it is important that you discuss your objectives with a retirement planning specialist so they can provide you with a good understanding of how it works and in turn, what you can anticipate in various situations.
An Alliance America financial advisor can assist you in maximizing your retirement resources and help achieve your retirement goals. Alliance America’s planning process is focused on personalized retirement income planning. As fiduciaries, our advisors are required to act in your best interest, and we are dedicated to helping you achieve the retirement lifestyle you seek. You can request a no-obligation consultation by calling 888-864-2542 today.