“If you want to create a lifetime income stream from your fixed index annuity you can either take a lump sum payment or turn it into a series of payments using an income rider.”- Lyle Boss
Annuities were initially created with only one option for lifetime payments. An annuity purchaser had to take their lump sum principal and turn it into payments, a process known as “annuitization.” Choosing to annuitize meant that the annuity owner gave up access to their principal. That didn’t seem like a great idea to people considering buying annuities. Even today, it’s not a popular idea. Fewer than 10% of people who purchased annuities choose to annuitize.
As a response to this pushback, the industry invented what’s known as an “income rider.” Income riders are optional enhancements for fixed index annuity (FIA) and variable products. You can create a lifetime income without annuitizing a lump sum when you choose to add an income rider.
Income riders are helpful because they allow you to grow your principal while creating an income stream that you cannot outlive. An FIA with an income rider attached helps keep the safe money portion of your portfolio more flexible and secure while still providing some growth.
If you could get a reasonable rate of return for the rest of your life without having to hand over your lump sum, wouldn’t that be a powerful tool for your retirement? Income riders help you achieve this, ensuring that your portfolio has another source of reliable income that can last you for the rest of your life.
Also, subject to the claims-paying ability of your chosen annuity company, your principal is guaranteed. Such a guarantee may give you more peace of mind when you finally stop working. Income riders let you control your principal while preserving the death benefit for a more extended period.
There are several types of income rides. The most common varieties you will encounter are:
The guaranteed lifetime withdrawal benefit (GLWB). Most riders issued in 2022 are guaranteed lifetime withdrawal benefits. Many annuity purchasers find GLBWs the most straightforward available rider options.
Guaranteed minimum withdrawal benefit. (GMWB). You may run into this option if you are considering a variable annuity. It’s wise to approach this type of rider with caution. That’s because the GLWBs offered by some variable annuities may not last you your whole lifetime. Compare this to your typical fixed annuity using GLWBs for life. Isn’t the idea of having a rider in the first place to allow lifetime income withdrawals, even if your principal falls to zero?
Guaranteed minimum income benefit. (GMIB) These riders, which may include time and age limitations, require you to annuitize before you get the benefit. GMIBs provide a specified lifetime income upon retirement.
However, you must give up your principal to get this income. Your payment amount depends on either the contract’s value or the investment amount plus an interest rate of between 1% to 4%, whichever is greater.
Take it from the Boss: Income riders can benefit safe money investors looking to create streams of guaranteed lifetime income. They do, however, add costs to your annuity that you need to understand before deciding to purchase. Savvy annuity purchasers should partner with a trusted retirement income specialist who can help them discover which option provides the most income at the lowest cost without the need to annuitize.