People are living longer, more productive lives. While that’s a wonderful notion, it also means financial support is needed longer for many.
That challenge is why many investors choose to invest with annuities when thinking about financial planning for retirement. One advantage of buying an annuity is the ability to add a rider to your investment that provides you with guaranteed lifetime income.
With the rider in place, you will receive income payments for your full lifetime, even if your annuity has been depleted.
How Does a Lifetime Income Benefit Work?
Many people are concerned about outliving their savings. With a lifetime income benefit rider, your insurance company guarantees that you will receive income from the annuity no matter how long you live.
You will pay a small annual cost in exchange for the rider. You will then receive payments on a monthly, quarterly or annual basis for the rest of your life.
Here’s an example of how it works.
You take out a $250,000 annuity that pays you $10,000 annually beginning at age 60. If you end up living to 100, well after the annuity has been consumed, you will receive $10,000 every year for 40 years.
This type of guarantee is rare in your investment choices. It’s a smart reason to choose an annuity as your investment option.
What are a Lifetime Income Benefit Rider Components?
While the specific terms and conditions of lifetime income riders do vary, there are three common components to each:
- Rate – The percentage of growth that is guaranteed by the insurance carrier during the annuity’s deferral period.
- Period – The duration of the rate guarantee during the years of deferral.
- Payout – The percentage, determined by actuarial calculations, which the income stream is based on.
What Features Are Available for the Lifetime Income Benefit?
Most lifetime income benefit riders offer you some choice in setting your financial strategy. These let you control your benefits and payments. Other features are incorporated automatically into your annuity rider terms.
Here are some of the most common:
- Guaranteed minimum growth rate. Most insurance companies offer a minimum compound growth rate. This means that your annuity continues to grow. The percentage rate will vary based on your insurance provider. This means that despite market fluctuations, your annuity will grow. For example, with a 5 percent guaranteed minimum growth rate, a $100,000 annuity will be valued at $105,000 after the first year. The interest compounds, so in year 2, the annuity is valued at $110,250; in year 3, it’ll be valued at $115,762.
- Step up provision. With a lifetime income benefit rider on your annuity, you set the withdrawal percentage. Some riders include a step up provision. This condition means that if your annuity’s value increases due to investment performance, your withdrawal percentage is applied to the higher balance. This means larger income payments for you.
- Maximum withdrawal amount. You need to determine the high range of your payouts to cover your expected income needs. Typically, these maximum withdrawal amounts are 5 percent to 7 percent. Some insurance plans may allow for maximum withdrawals of 10 percent or more.
What Does a Lifetime Income Benefit Rider Cost?
You will be charged a small fee to add a lifetime income benefit rider to your annuity. The amount charged varies based on your insurance carrier and the type of annuity investment you choose. It usually ranges from 0.25 percent to 1 percent annually.
The rate you’re charged may also be based on some of the features in the rider. For example, a step up provision may result in a slightly larger percentage cost.
The fees are factored into your income payment. So if your lifetime income benefit rider cost is 0.5 percent, and your payout is 8 percent, you’re net payment will be 7.5 percent.
How Can I Learn More about Lifetime Income Benefit Riders?
At Fortified Retirement, we help people with pre-retirement planning. Our pre-retirement workshop offers retirement strategies and tools that help you determine the right retirement income planning approach. With Fortified Retirement, you gain valuable insights into how to have enough money for your lifetime, making sure you and your loved ones are protected and financial secure. To learn more, attend a pre-retirement financial planning workshop near you and discover how an annuity with a lifetime income rider is one way to prepare your financial future.
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