When you were a kid, what was the best part about a box of Crackerjacks?
The prize inside, right? Sometimes my friends and I would dump out the candy just to acquire the prize.
Many Fixed Index Annuities have a prize inside. It’s called the Guaranteed Lifetime Withdrawal Benefit (GLWB). It’s an optional rider – you have to proactively request it – but for the right person, it can be one of the best retirement prizes you’ll ever find.
Fixed index annuities can be powerful tools even without the prize. Backed by some of the world’s largest and most reputable insurance companies, FIA’s:
- guarantee a minimum rate of return
- protect your principal
- provide potential for long term growth
- offer the opportunity to participate in market gains
- guarantee no loss of premium due to market downturns
- deliver tax-deferred growth
- even award you a premium bonus in some cases
These are reason enough to consider a fixed index annuity. But where FIA’s can get really interesting is when the owner selects the GLWB rider. According to the Indexed Annuities Leadership Council, nearly 3 out of 4 annuity purchasers elect this option. Why? Two reasons: attractive guaranteed rates of return, and a predictable income stream in the future. Let’s look at how the GLWB works during the accumulation phase and then during payout.
Choosing the GLWB option creates two accounts during the accumulation phase: an account value and an income value. Growth in the account value is tied to the performance of the underlying index (subject to participation rates, caps, etc.). Growth in the income value is equal to your purchase payments + premium bonus, if any + your yearly rollup interest rate as stipulated in the contract. Today those rate range from 5% to 7%.
Let’s say your rollup is 6%. Every year, your income value increases by 6% compounded – even if the market stays flat or goes down. It is not a cash value and cannot be accessed. It is not an amount that is available for withdrawal as a lump sum, as a death benefit or for annuitization. But when it comes time to begin taking payouts, you can take your lifetime income stream based on the total in your account value or income value, whichever is higher. This can make a dramatic difference in your retirement income. Let’s look at an example.
Take a 53-year-old female living in the state of NJ who contributes $77,000 to a FIA with a 5% bonus and 6.5% roll-up. She doesn’t need the money right away, so she defers turning on her lifetime paycheck until age 70. At age 70 the insurance company promises to pay her $12,971.38 every year as long as she lives. Actuarial tables predict she’ll live until age 87. If so she will have received 17 years x $12,971.38 = $220,513.46 total.
The $12,971/yr. is guaranteed. If she waits ‘til age 73 to start collecting, her annual paychecks rise to $15,668.77. If she turned on her income stream at age 67, say, her annual payments would be $9,762.13.
She collects that amount even if the stock market goes down for 17 straight years. (That’s one of the best parts about the GLWB: you don’t have to sweat the ups and downs of the stock market.) If the reverse holds true, and the market goes up 17 years in a row, the account value could be higher than the income value. In that scenario, she can base her payouts on the account value.
The optional income benefit rider is not for everyone. For one thing, it’s not free; you have to pay a fee to get it. So don’t choose the GLWB rider if you think you’ll need your money in the near term because the cost probably won’t be worth it. Likewise, if you have no plans to withdraw money from your annuity contract, this rider may not make sense for you.
But for many, the Guaranteed Lifetime Withdrawal Benefit is the secret prize inside a fixed index annuity that makes it an attractive option for part of a retirement plan.
About Sage Financial Partners: Specializes in strategies that are not available, and often not discussed, at traditional investment advisory firms. Learn about a safe, simple, sleep-at-night strategy that 1) Protects and defends your principal; 2) Provides income for life; 3) Offers growth potential with downside protection; 4) Keeps you in control of your money in case your needs change. For a free report and CD about lifetime income planning, send an email to info@SageFinancialPartners.com.
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