Piecing together a retirement income plan can be just like putting a puzzle together. There are many different pieces and parts that can work, but your individual plan is different from anyone else’s. What works in your puzzle won’t necessarily work in another. As an increasing number of Americans fear that they won’t be financially stable in retirement, Investor’s Business Daily said that a “Fixed Index Annuity Can Help Solve (the) Retirement Income Puzzle.” The article, by Paul Katzeff, explained how fixed indexed annuity products work, including those with a rising income rider.
Eleven percent of Americans said that they are terrified about the rising cost of living ruining their retirement plans. Another 36% said that they are very concerned about this. That’s almost half of Americans who are worried about running out of money during retirement or not being able to retire at all. Allianz Life found in a recent study that health care, housing costs and food are the most worrisome expenses facing these Americans. Most Americans are worried about increasing inflation as well. Fixed indexed annuities are one product that many people are turning to in retirement. Indexed annuities have been outselling traditional fixed annuities since 2012, mostly because of their growth potential. FIAs allow you to lock in a guaranteed income stream during retirement and some products guarantee that your income will rise.
Fixed indexed annuities have both an annuity segment and an income rider segment. The annuity segment guarantees an increase in the value of your annuity based on the stock market index to which it is linked. Most FIAs have a participation rate that limits the amount of increase you will actually receive. If your participation rate is 50% and the index rises by 8%, you will actually receive half of that or a 4% increase in your annuity value. Obviously higher participation rates are more desirable. Indexed annuities may also have caps that limit the amount of increase you can receive or an interest-credit threshold that won’t increase your income until a minimum interest rate increase occurs. The annuity company keeps any additional increase in value, which is your trade off for a product that is guaranteed not to lose value or income.
Some indexed annuity products have a rising income rider that promises an increase in your income regardless of the index performance. Many of these are based on you reaching a certain age, but the specifics vary from annuity to annuity and company to company. As with other annuity products, you have a variety of options with rising income rider fixed indexed annuities. The income can last for as long as you live, over you and a spouse’s lifetime, and can also be paid out to beneficiaries upon your death. The income you receive could be your principal, interest, or a combination of both. Make sure you know the specifics of your particular annuity for tax purposes.
As with any financial product, there are drawbacks to consider as well as the benefits. A fixed indexed annuity with a rising interest rider will cost more than a regular FIA with the same other benefits. You have to determine at what point the cost benefit ratio is better for you to add the additional rider. Keep in mind that while your income payouts will be higher with the rising income additions, you can’t actually cash that money out or take it with you if you decide to transfer annuities. It’s best to keep that money in your FIA for the long haul so that you can take advantage of the gains you have earned. The benefits of fixed indexed annuities with a rising income rider include principal protection, rising income that you can count on for the rest of your life, and additional riders that you can add for things like long term or other medical care.
Written by Rachel Summit