Most of our parents could expect a pension plan from one or more employers when they reached retirement.
This retirement payout was funded by the employer and is termed a Defined Benefit Plan. The payout amount was predictable and guaranteed.
The majority of my generation looks to a 401-K plan for retirement income. Usually, the employer has made ongoing matching contributions of some amount with the balance of funding coming from you as the employee. These plans are Defined Contribution Plans and while the cost to the employee is a lot lower, results have not been what were anticipated.
This is an area of retirement planning where annuities can provide a significant benefit. Most will agree that the major objective of retirement planning is having a high enough income base to generate sufficient income after you retire. I have seen more than a few situations where people will take too much risk to catch up the shortfall in their retirement piggy bank.
Over the years there have been several legitimate concerns about 401-Ks, including the lack of available investment options, particularly on the conservative side. Many people in the 55-plus ages tend to be more interested in guarantees. Currently, there just aren’t attractive returns available in CDs, money funds and treasuries.
Attaching an income rider to an index annuity will provide a very attractive annual credit to the income account.
Currently, these interest credits range from 5 to 7 percent and are guaranteed, usually for a minimum of 10 years. Many companies will add a bonus credit to the account. It is important to note that you cannot take this income account out in a lump sum. It is designed to function just like a traditional pension plan. Benefits are payable for a fixed period and the insurer will also guarantee these payments for life. These guarantees are based on the claims paying ability of the insurance company, so a carrier with solid financials needs to be selected.
Income riders are also available on variable annuities, but they tend not to be as attractive due to the higher fees and expenses required to maintain the equities.
The calculation of the future value of an income account is simple arithmetic. A premium of $50,000 with a guaranteed 6 percent credit will double in 12 years to $100,000. If you were utilizing another vehicle with a 4 percent credit your money will take 18 years to reach $100,000.
Of particular interest is the possibility of an “In-service distribution” from your employers’ 401-K plan. If available, it is written into the plan documents, and restricted to employees, age 59-and-a-half or older. Being able to move part of your 401-K into an annuity with a strong income rider could be a great help in providing guaranteed income.
A legitimate concern about the income rider account is the requirement that the account be distributed over time. It’s important to understand that but it’s nice to know that account is payable to you over time just like Social Security.
If you have an IRA with an income rider, “turning on” the Income Rider will make the IRA a defined benefit plan with no required minimum distributions (RMDs) necessary. According to David Vick, an RMD advisor in Arizona, the regularly scheduled payments will make this IRA no longer “like” other IRA accounts. RMDs would still need to be taken from other accounts.
Annuity income rider accounts have been available for nearly 12 years now, and I have placed more than a few for my clients. The income account has always generated more dollars to draw on.
The income rider will do a great job of providing competitive interest growth without risk of loss along with the ability to build an excellent income account that will payout for life. If you don’t want a lot of risk in your retirement portfolio, this product is worth a look.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached at 770-786-2781.
