08/15/2012

MANAGING Your Retirement Income

Fixed Index Annuities With Income Riders

As discussed in the previous section, there are two types of deferred income stream strategies that we recommend in our clients' income portfolios:  (a) Deferred Income Annuities, or "DIA's" and (b) Fixed Index Annuities ("FIA's") With Income Riders. The latter is a powerful retirement income planning strategy and is the subject of this section.

 
Courtesy of Indexed Annuity Leadership Council
David Leeper isn't a client of Retirement Income Center.

Two-Part Investment

What is a fixed index annuity, or "FIA," with an income rider? It's basically an investment with two parts as follows:

  1. A fixed index annuity is a fixed annuity (vs. a variable annuity) that offers a minimum guaranteed interest rate and potential for higher earnings than traditional fixed annuities based on the performance of one or more stock market indices.
     
  2. When attached to a fixed index annuity, an income rider, or guaranteed minimum withdrawal benefit ("GMWB") rider, as it's sometimes called, gives the annuitant(s), i.e., the individual(s) entitled to receive benefits from an annuity, the ability to activate a lifetime income withdrawal beginning at a time specified in the rider, with the amount of income calculated in accordance with a formula specified in the rider.

Limit Your Losses to Zero

Like all fixed annuities,  FIA's have higher interest rates than similar-duration CD's as well as tax-deferred growth when used as a non-retirement investment. FIA's also offer upside potential, i.e., a higher potential rate of return than fixed annuities. Although the higher rate of return isn't guaranteed, there's always a fixed rate of return that provides downside protection.

How is upside potential provided by FIA's? FIA's are a hybrid product, with returns directly tied to the performance of one or more chosen stock market indices. Unlike a direct investment in a stock market index where you fully participate in all gains and losses, there are two basic differences when it comes to investment return when you invest in a fixed index annuity:

  1. If the index's return is negative, no loss is credited to your account.
     
  2. If the index's return is positive, only a portion of the return, often times subject to a cap, is credited to your account.

To learn about FIA indexing strategies, please read Retirement Income VisionsTM 13 weekly posts beginning with the August 22, 2011 post, How Does Your Fixed Index Annuity Grow? through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines

Fixed index annuities are an ideal investment to use at the beginning of a prolonged stock market downturn. To see an illustration of the benefit of this strategy, take a look at Retirement Income VisionsTM July 25, 2011 post, Limit Your Losses to Zero.

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

A retirement income planning strategy that's becoming more widely used, and we recommend for our clients' income portfolios when appropriate, is the addition of a rider, or endorsement, to a fixed index annuity to generate a retirement paycheck. Since the features of the income rider aren't included in the base contract, an additional charge is deducted from the accumulation value in order to obtain the benefits associated with the rider.

FIA income riders are a dream-come-true retirement income planning solution since they provide us with the opportunity to design a plan for a client to generate a targeted amount of lifetime income beginning at a specified age. FIA income riders offer a unique opportunity to meet clients' retirement income needs that isn't available elsewhere.

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

Retirement Income VisionsTM has a wealth of information about fixed index annuity income riders. Please refer to weekly posts beginning with the December 12, 2011 post, Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck through the August 6, 2012 post, Why Isn't the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement? to learn more about this unique strategy.

Summary and Conclusion

When you combine the foregoing five features of a FIA income rider with the features of the base FIA contract, including (a) protection from loss of principal, (b) potential for increase in investment value, (c) death benefit, (d) potential automatic increase of investment amounts with a premium bonus feature, and (e) tax-deferred growth in the case of nonretirement FIA's, you have a powerful retirement income planning strategy that's difficult to beat.

Since a FIA is a unique long-term investment with several moving parts in the base product as well as the income rider that change on a regular basis in response to market conditions, it's important that you work with an independent retirement income planner who works with this investment strategy on a regular basis and has access to at least two dozen FIA's offered by at least six different highly-rated life insurance companies. Retirement Income Center not only meets this criteria; we are a leading authority in this advanced income portfolio strategy.

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