It goes without saying that most adults are worried about having enough funds invested for a secure and comfortable retirement. Granted, if seniors scale back to just the bare essentials most can retire on what they’ve invested into Social Security. However, this is often a treacherous and restrictive road not knowing what lies around the corner in terms of medical conditions, disability, and such.  Retirement planning is crucial when preparing for your golden years.

Investment and retirement strategies typically change once individuals retire.  Most often, a retired individual’s financial outlook switches from accumulation to preservation.  Luckily, annuities provide a legitimate, funding strategy that maintains retirement assets while distributing income for life.

Unfortunately, no one retirement plan works for every retiree – not to mention, annuities differ in respect to the lifetime income produced. Let’s take a look at the basics of annuities in order to understand them better.


Why Choose Annuities?


Annuities are the tool that produces a lifetime stream of income.  Additional benefits of annuities include:

  • Retirement security provided by annuities’ lifetime income stream
  • Guaranteed protection provided by the claims-paying capability and financial stability of the annuity provider
  • Additional protection provided by the annuity provider’s reinsurance with other insurers
  • Fixed indexed annuities offer growth possibilities by crediting interest based on the index’s performance
  • Tax-deferred gains until funds are withdrawn or annuity payments distributed

There are numerous fixed and fixed-index annuities that offer additional choices, additional flexibility, and additional growth potential with lifetime income riders, however, that does depend on how and when you decide to receive your retirement income stream.  These riders are purchased as an addition to a fixed or fixed-index annuity., and typically include a fee based on the individual contract.

The Annuity Income Benefits Misunderstanding


A common misconception surrounding annuities is the assumption that once the insured passes away, the annuity funds are returned to the insurance provider and not the named beneficiaries.  This only pertains to life-only immediate annuities with no specified period or life-only SPIAs guaranteed lifetime income with no specified period.

Individuals are able to obtain the highest income stream, depending on their life expectancy, with life-only SPIAs.  However, when the insured dies, the remaining funds are returned to the insurance company. Keep in mind that this rule applies only to an SPIA with a life-only payout.  Furthermore, SPIAs provide an instant stream of income for the time period you specify.

Most often you will have access to your stream of income only, and not your principal (this will matter in emergencies).  Additionally, depending on when you acquired your SPIA, you’re also most likely locked into an interest rate between 1-3%., however, with fixed annuities, this is not the case.


What Does Guaranteed Income Mean with an Income Rider?


It’s true that annuity riders are able to generate income for a lifetime, but exactly how much can they produce? These particular annuity income riders assist you in determining when to retire predicted by a guaranteed minimum stream of income without indexing assumptions.

Without the unpredictability of index performance, such as the stock market, annuities are perfect for tax-free growth.  It’s beneficial to include an income rider with an annuity agreement when searching for guaranteed income that will last a lifetime.


The Downsides


Financial advisors and life insurance agents must explain honestly what these riders do and don’t do.  If you own a fixed index annuity, consider the following:

  • You’ll be earning 6.5% compounded on your money annually.
  • This is able to hold as long as you postpone taking out any money
  • This is not the best situation for your money to grow
  • You bought the annuity contract with an income rider, that genuinely guarantees the 6.5% interest you’re credited toward your income-only account
  • You can draw an income stream from the income-only account
  • Therefore, the 6.5% isn’t really credited to the money in the annuity

Your insurance carrier will inform you when your annuity funds are credited, depending if there are positive changes in the index.


Fees and Riders

Income riders do vary, and a number of them have no fee attached at all, while others may cost 3% or more.  It’s important to completely understand the various options available so that you can choose the most appropriate annuity with the most suitable income rider.  Ask these questions…

  • What is the fee?
  • How is the fee calculated?
  • Cash Value Calculation or Income Value Calculation?
  • Is the fee based on the accumulation/cash value or the income account value?


Retirement planning and the decisions involved can be challenging and confusing.  Contact your retirement planning professional to discuss your needs and retirement goals.


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