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Annuities: Part II

Last week we touched on some basic constructs of annuities; this week we look briefly at annuity income and riders.Retired couple discussing the budget at home

Annuity income is determined by different factors.  Some contracts are set up to provide retirement income for a specified period, some are constructed to supply retirement income for life, and certain plans even afford income to beneficiaries when the investor passes away.  The specifics vary from one contract to the next.

Case in point?  The fixed annuity.  Investors have a good idea as to the minimum income they will collect, but they may only receive payments for ten years because of the way the contract is written.  However, another fixed contract could provide an income for life.  Even so, a variable annuity contract may go kaput (meaning the income is gone) after a short time because of poor investment choices and/or a market plunge.  Bottom line?  Annuity income is determined by the particulars in the agreement.

Riders typically provide security and peace of mind, mainly for variable annuities.  There are different varieties, but the objective is mostly to protect the investor against outliving his or her assets.  Let’s look at two common types.

  • Guaranteed Minimum Withdrawal Benefits.  This rider guarantees that the original payment for the variable annuity (hypothetically, $70,000) will be paid in a series of withdrawals independent of how well the investments are performing (as long as withdrawals do not exceed the guaranteed yearly amount).  So, if you are receiving $6,000 per year, you still receive $6,000 per year.  Sound fair?  Perhaps.  Still, if the investor passes away shortly following the beginning of the withdrawals, then the rider cost may not be realized (and riders can be expensive!).
  • Guaranteed Minimum Income Benefits.  In simplistic terms, this rider allows the contract to pay a guaranteed minimum income regardless of how well the variable annuity is doing.  For example, if an individual is receiving roughly $6,000 per year in income because of favorable returns and problems then occur within the investment, the individual still gets a minimum income (theoretically, $5,000 yearly) for the remainder of the contract.

There are additional dynamics to riders besides the ones listed above; subsequently, it is best to do your homework.  Annuities can be complicated to understand, and riders may compound the confusion.  This type of investment can be very beneficial for certain investors and all wrong for others.  Therefore, it is always wise to seek the counsel of a trusted financial advisor.  Protecting your retirement income is extremely important, especially in these uncertain times.

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