I was talking to a client recently who was worried about a dilemma many retirees face: Is it better to purchase conservative, guaranteed investments to fund your retirement, or should you take on more market risk with the hope of generating higher returns? I told him one popular option I recommend is a fixed index annuity (FIA) because it can do both. It provides a fixed, guaranteed return plus the possibility of additional contract credits if a linked market index performs well.
This post, though, isn’t about the pros and cons of FIAs. Today, we want to tackle the living benefit rider, an optional feature that is available with many annuity contracts. Living benefit riders come at an additional cost, so it’s important to assess your need for one before including it within your contract.
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 off 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?
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.
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. Speak to one of our advisors today by calling 800-DIE-RICH and learn how we can help you as well.
