Top 5 Reasons to Use an Income Rider Instead of Investment Accounts for Retirement Income
Do you want to put aside a portion of your retirement savings so it will guarantee you income when you retire? Here’s my Top 5 reasons why using an indexed annuity with an income rider could be a good solution:
1) LOCK IN THE LAST 5 YEARS OF GAINS:
Since the market bottom in March of 2009 the SP 500 Index is up 165% without any real major correction. (As of 2/24/14) You are also 5 years older now and have less time to recover if a crash happens again. Congrats on the gains, but maybe now is a good time to consider locking in some of those gains and setting yourself up for some future retirement income.
2) KNOW WHAT YOUR INCOME WILL BE FOR THE FUTURE:
We get statements from Social Security estimating what our future income will be. If you are lucky enough to get a pension you also get statements telling you an income that you could expect in the future.
Why not use some of your IRA/401k to do the same thing. Put a portion in a good indexed annuity with an income rider and you will get the same kind of assurance on a level of income you can get in the future. The younger you do it, the more your income has a chance to grow before you need it. Just like Social Security. The longer you wait, the more income you get.
It’s pretty much a guess if you use investments because you don’t know exactly how much they will grow or how much income you can take.
3) DO THE MATH:
There’s a battle between using investments and using annuities to provide retirement income. Lately there have been lots of reports about the 4% withdrawal rule not working anymore. (So that means a 5% or 6% withdrawal is way too high)
Some reports now say a 3% withdrawal rate from an investment portfolio gives you about a 99.9% chance of not running out of money. I’m not securities licensed, so I’ll let the Wall Street people and academics keep guessing at what the right number is.
So let’s do the math. Let’s say you will need $15,000 in extra income from your IRA/401k when you retire at age 65, to supplement Social Security.
- At a 3% withdrawal rate you will need deposit $500,000 to get the $15,000 income you need. If you take more than 3% out your odds of running out of money before you die increase.
- At age 65 there are indexed annuities with income riders that will guarantee you a 5.5% withdrawal rate at age 65. So you only have to deposit $260,000 to get the same amount of $15,000 in income. (And it’s contractually guaranteed)
That would leave you $240,000 left over to invest however you want, because you know your basic income needs are met. The math and contractual guarantees work in favor of annuities, in my humble opinion.
4) FREAK OUT FACTOR:
This doesn’t get talked about much. But I saw it plenty back in my stockbroker days. As you withdraw money from any type of account, if you don’t get enough gains to keep up with the withdrawals, your principal starts to decline.
On top of that, if you also happen to lose money because the underlying investments go down, AND you continue to take out money you have a double whammy.
If you see your account value dropping year after year, there will be a point where you will FREAK OUT and be afraid to keep taking out your withdrawals because you are afraid of totally running out of money.
Income riders can help to eliminate the FREAK OUT FACTOR because even if you deplete your account value to zero, the rider will continue to pay your income for as long as you live. It’s like a reserve parachute.
5) PIECE OF MIND:
You can set aside a portion of your money now. Wait 3,5,10 years and know exactly how much income you will get for the rest of your life. This can help you plan and budget for when you stop getting a regular paycheck.
Getting consistent cash flow that’s enough to meet your expenses helps lead to piece of mind and a good night’s sleep.
Disclaimer. I am not securities licensed. I am insurance licensed only. This is not a recommendation to buy or sell anything. This post is not intended to be used as investment advice. It is for educational and informational purposes only. Please consult with a financial professional before you buy or sell anything.
Click here to see more educational articles from Carl Ostenson.
P.S. – Please share this article with others by simply clicking on the blue social media icons at the top of your screen!
Annuity123 does not offer insurance, investment, or tax advice. You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters. Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics. Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.
annuity contracts do not provide for a return of principal.
This reduces the yield substantially.
Is there an alternative?
Hi Edward. Thanks for reading. I’d love to answer your question but I’m not exactly sure what you mean?
Some annuities do provide a guarantee return of principal, some do not.
What type of annuity are you asking about?