Are you thinking about rolling some of your IRA or 401k into an Indexed Annuity with an Income Rider?
Billions of dollars are going into these plans because they are a safe and flexible way to build your own personal pension to help supplement your Social Security in retirement.
However, there are a few sticking points that need to be addressed.
1. Roll up rates are not really your money
You may see advertisements saying “Earn 7% for future income” or “Earn 7% guaranteed” or something like that. This is an area of confusion and misunderstanding.
The easiest way to understand Roll Up Rates and Income Riders is to think of it like Social Security. The longer you wait to start the income, the more income you get.
Can you get a lump sum Social Security payout? No, of course not.
Income Riders work the same way. There is no way to get a lump sum of your income rider value.
So what is it then?
The Roll Up Rate is a calculator to determine your future income.
Let’s say you deposit $100,000 into an indexed annuity with a 7% Roll Up Rate on the Income Rider. After 1 year your Income Account Value is worth 107,000. After the second year it grows to 114,490 and so on.
It keeps growing at 7% until you decide to start the income. When you decide to start the income, the insurance company will base your payments off this number. So overall, it’s a good thing.
Just don’t be confused and think that you can get a lump sum of the Income Account.
Steve DeJohn does a really good job explaining this in his video Paycheck For Life.
2. Inflation adjusted income, or level income
Is $1.00 today going to be worth $1.00 in 20 years?
Probably not. Inflation usually averages around 3% a year.
So this brings about a dilemma with Income Riders. Do you want level income payout or inflation adjusted income.
Level income payouts start higher at the time you decide to turn on the income payments.
Inflation adjusted income payouts start lower, but then increase over time. Some inflation increases go up at a fixed rate, and some go up based on the CPI Inflation index. It depends on your contract.
So you can start with the highest income possible, knowing that it will stay level for the next 20-30 years, or you can go with lower income at the start, and have it go up with inflation.
The answer for you may depend on how long you think you will live. A licensed agent can help you with your decision.
From the illustrations I have run for clients, the break-even point is usually around 7-8 years. This is when the inflation adjusted income catches up with the level.
Some companies offer both choices in one contract, and the nice thing is you don’t have to decide right away. You decide in the future when you start getting income.
3. What is the withdrawal rate when you finally need income
In my opinion, this is an overlooked, under-represented and seldom talked about area of Income Riders. Yet it’s also one of the most important as far as retirement income goes.
The reason is this. These annuity withdrawal rates are a solution to the question “How much can I withdraw from my IRA or 401k and make sure I don’t run out of money?“
Most people just use mutual funds and they take a wild guess and say it’s a 3-4% withdrawal rate. There is no guarantee with mutual funds. With annuities they contractually guarantee a withdrawal rate, and it’s higher than the wild guess using mutual funds.
This is a major reason why people should consider these accounts for some of their money.
Withdrawal rates can vary tremendously from company to company. And the chart to find out is usually buried on page 9 of the brochure.
Withdrawal rates are aged based, meaning the older you get, the higher percentage payout you get.
So at age 70 one company may have a 5% withdrawal rate while another might be at 6%.
So let’s say you have an income account that has grown to 200,000 and all other things are equal between the two companies.
At 5% withdrawal your annual income would be $10,000. At 6% your income would be $12,000.
That’s 20% more income for the rest of your life by going with the company with the higher payout.
Over 20 years that could add up to $40,000. So keep this in mind when you are choosing your annuity.
There is no perfect investment. Everything has its Pros and Cons and all financial products are just tools to do a job.
The job that Index Annuities with Income Riders do pretty well is:
• Protect Your Principal
• Growth potential with downside protection
• Flexibility to stay in control of your money if your needs change
• Guaranteed income for life
For more information, the Paycheck For Life video is a great resource. Watch it at http://www.protectmyira.com/paycheckforlife.
Click here (Carl Ostenson) to see more of this author’s articles.
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