Are you interested in maximizing retirement income? Fixed-rate, income, and indexed annuities provide several techniques for achieving this objective, either as stand-alone options or in sequence.
In addition to Social Security and pensions, annuities are the only financial products that may promise lifetime income.
Three primary options are available if you wish to protect future income with an annuity. Each is suitable for nonqualified (taxable) accounts and IRAs and Roth IRAs, and each has benefits and drawbacks.
Option 1: Deferred income annuities are simple and predictable, but a little flexible
A deferred income annuity (DIA) is a commitment by an insurer to pay a stream of income beginning on a predetermined date in the future. Typically, a single premium payment is required for this contract.
You can take the income for a specific term, such as 15 years, although most individuals pick the lifetime option. A single or joint annuity can be purchased to cover both couples. The popular optional cash-refund provision assures that your premium money will be returned to your beneficiaries in the case of your premature death before the income start date.
This plan is straightforward. You know precisely what your revenue will be beginning on the designated date. The disadvantage is that there is minimal to no flexibility. In exchange for future revenue, you have sent funds to the insurer, and you are dedicated.
Option 2: Income rider fixed indexed annuity is flexible but complicated with additional fees.
Fixed-indexed annuities allow purchasers to participate in a share of the stock market’s profits while providing complete loss protection. Dow Jones Industrial Average and S&P 500 indexes are used to calculate interest. However, you suffer no losses during bad years.
By adding a lifetime-income guarantee rider, you may ensure future income. Since the beginning date of payments is not determined at the time of purchase, you maintain flexibility.
Typically, when an annuity is converted into a stream of income (“annuitization”), its cash surrender value becomes zero. This is not the situation; you retain ownership of the unused value of your annuity.
The choice seems to offer the best of both worlds, but there are disadvantages.
One of the most significant is cost. Most insurers charge around 1 percent of the annuity’s assets annually to add an income rider. Therefore, your wealth will expand more slowly with the rider.
The lifetime income amount is decided by the size of the income account and your gender and age when payments begin. Income accounts increase in value at a guaranteed 4% to 8% compounded yearly rate, so the longer you wait, the more you earn.
The cash value and income account value of your contract are distinct. The value of your income account is only utilized to compute your guaranteed income payments, and it has no financial value and is not redeemable. In contrast, contract value may be withdrawn or bequeathed to heirs.
Moreover, shifting interest rates are a disadvantage. If the market enters a prolonged bear cycle, you may not earn anything on the value of your contract for years.
Option 3: Converting a fixed-rate annuity into an immediate annuity now provides flexibility and guaranteed growth, but future income is uncertain.
This may be the greatest option for those wishing to maintain control over their current finances, maintain flexibility, and increase their future income.
A fixed-rate delayed annuity (officially, a multi-year guarantee annuity, or MYGA ) functions similarly to a bank CD. You deposit a large sum and get a fixed interest rate for a specified time, often between two and ten years.
You will know the exact value of your annuity at the end of the period (assuming no withdrawals). Interest is postponed until it is reinvested in the annuity.
Here’s how this strategy works.
Suppose you intend to retire in five years. You purchase a fixed-rate five-year annuity. You may shop for the best value on an immediate-income annuity after the five-year period. If you hold your annuity in a nonqualified account, you can exchange it tax-free for an immediate annuity via a 1035 exchange.
An immediate annuity is virtually identical to a deferred income annuity (DIA), except that income payments begin immediately. Because immediate annuity rates will have changed in the interim, you won’t be able to predict your precise income.