When planning for retirement, one of the biggest concerns is ensuring that your income will last as long as you do. A powerful tool to address this worry is the living benefit rider. For those looking to secure a stable, guaranteed income throughout their retirement, it’s crucial to consider whether to buy a living benefit rider. This rider can provide peace of mind by guaranteeing a specific income level for life, regardless of market conditions or how long you live. But is purchasing a living benefit rider the right move for you? Let’s dive into how it works and whether it aligns with your retirement goals.
What Is a Living Benefit Rider?
The greatest fear of many retirees and near-retirees is outliving their money. The living benefit rider addresses and significantly alleviates this concern by guaranteeing a specific income level that will be available for the entire life of the annuitant. So how is this income level configured?
FIAs have accumulation and distribution phases just like other types of annuities. Let’s say you deposit $100,000 into an FIA and leave the contract alone for 15 years before you retire and begin distributions. In that time, let’s assume your income value, sometimes referred to as a guaranteed income benefit base, jumps to $250,000 between annual interest crediting and additional credits you receive due to market performance and any available bonuses.
Your contract may then specify that you can take 5% annual lifetime payments based off of the $250,000 balance, assuming you are at least 65 years old at the time you turn on the income. That would guarantee you $12,500 each year for life, even if you live to the ripe old age of 95. In that scenario, you would collect $375,000 in payments from an original investment of $100,000.
Some forms of income riders even allow for ongoing income increases during retirement based on index performance. This is significant because the actual cash value may be significantly less, and if invested in a traditional equity or bond investment, would not provide guaranteed inexhaustible lifetime income.
Is it Worth it to Buy a Living Benefit Rider?
The answer to this question will depend on your profile as an investor. It is nearly impossible to determine whether you’re better off purchasing the living benefit rider or not because the exact rate of return of a different type of investment is unknown and cannot be precisely determined in advance.
That said, if you have longevity in your family and expect that you may live beyond your life expectancy, then you’re likely a good candidate for a rider like this. Another reason you may opt for a living benefit rider is if you don’t have many sources of guaranteed income and will sleep better with something like this in place.
Critics may argue that the same money is better off invested in a simple portfolio of stocks and bonds. Whether or not that is true doesn’t matter to most people who purchase a living benefit rider. They want to know that regardless of lifespan or market-based results, a predictable income will be there. If you were invested directly in stocks and bonds, there is always that possibility that the market can crash and disrupt your retirement income.
Why Investors Choose FIA’s and Living Benefit Riders
The approach many people take when it comes to FIAs and living benefit riders is to assess what your other income and asset sources are and then figure out what you need. If you and your spouse have pensions and will receive maximum Social Security benefits, perhaps you don’t have as great a need for a living benefit rider. However, if your assets are mostly in the market, you may want to use an annuity strategy that guarantees some of your retirement income.
The good news is that most FIAs with living benefit riders cost only a fraction of what variable annuities or expensive managed fee-based accounts cost. Some do not even charged fixed fees but instead charge a spread only during periods of positive index performance.
At Howard Kaye, we have pioneered and taught many of the most popular insurance and income planning strategies used today. Our unique solutions have helped countless people improve their retirement and estate plans and pass more money along to heirs. Contact our advisors at Howard Kaye today to explore how a living benefit rider can secure your retirement income and help you achieve a worry-free future.
