Income riders are one of the top reasons that people buy deferred annuities. They offer a lifetime income stream to your annuity and get added on to most deferred products. Most commonly, they are used with indexed and variable annuities and are very valuable to consumers looking to guarantee income throughout their retirement. But they can be complex and are not always fully explained by the advisors selling them. In “The 4 legs of the annuity-income stool,” Stan Haithcock of Marketwatch tries to make the intricacies of income riders a little easier to understand.
First of all, the growth of your income rider in the contract is not the same as your yield; it can’t be compared to the yield from a CD. Also, your investments are separate from the calculations related to your annuity income rider. Any fees that you pay come from your investments, not from your income benefit calculations. The article says that there are 4 different aspects to income riders that work together and are important to understand. They are the percentage of your income rider, the time period of your deferral, any upfront bonus that your annuity offers, and the actuarial calculation of your payout. It’s important to understand all of these factors and especially for advisors to be up front with clients about how their income rider will work in the future.
Income rider percentages can be as high as 8% for some annuities, just remember that this roll-up rate isn’t the actual yield. Your growth will continue at this rate as long as you are deferring your annuity, but not once you start receiving lifetime income payments. Your guaranteed deferral rate can last 10 years, 20 years or even more. The longer you defer receiving annuity payments, the higher your payout will be. This is because your rider percentage has been allowed the time to grow your money and also because you get a higher payout the older you get.
Upfront bonuses can be tricky. They can automatically increase the amount of your annuity as soon as you make your purchase, but don’t come free. Each year you are charged a fee for this bonus over the life of the contract and some of these bonuses come with a vesting schedule. A larger upfront bonus may mean that you are losing something elsewhere in the policy. Don’t buy an annuity just for the upfront bonus before considering all of the other annuity factors. What Stan considers the most important of the four factors is your actuarial payout calculation. Each annuity carrier is going to use a different calculation for the amount of your payout based on your life expectancy. You will start receiving lifetime income payments from the higher balance of either your investment side or your income rider side. The percentage is crucial because 1% can make a big difference in your income stream down the road.
Consider all of these factors when looking at a deferred variable or indexed annuity income rider. Annuity FYI experts can help you determine what annuity product will offer you all of things that are important for your future income stream. Speak with an expert to ensure that you understand everything that goes into determining your actual payout.
Written by Rachel Summit