Lifetime Annuity Income Options
When it’s time to turn your nest egg into retirement income, you may want some guarantees of lifetime income. Some retirees want to have a base of income from Social Security, annuities, and pensions if they have them. There are options, and there are multiple ways to pull money out of annuities, so let’s go ahead and briefly discuss some of them, and then we’ll come to the big daddy of them all.
Option #1: If you’re 70 ½ you have to do an RMD. RMD stands for Required Minimum Distribution, so you are required by the IRS to pull out approximately 4%, whether you want to or, not. Now, this changes a little bit every year.
Option #2: The second method of pulling money out of annuities is that you have the option of withdrawing 10% per contract a year without any kind of surrender charge. You could do this normally in a lump sum, and some companies let you take payouts on a monthly basis. Be very careful because you may trigger an event that may drastically affect Option Four very negatively. (I don’t have time in this short video to go deep into detail, but I am doing a separate video that discusses how the income withdrawal benefit rider works in contracts.
Option #3: Annuitization is the classic example people think of annuities. What happens here is you exchange your lump sum for monthly payments. The good news is that you have monthly payments for life or a certain period of time. The bad news is, in essence, in today’s interest rate environment, you’re locked in at very low-interest rates for the rest of your life. Would you lock in current bank CD rates for the rest of your life at 1% or 2%? I’m sure the answer is probably not. This is a calculation called the internal rate of return, IRR, which stands for internal rate of return. When it comes to annuitization, you are locking in today’s rates for the rest of your life. And remember, normally when you annuitize, it’s irrevocable. Just say bye-bye to your lump sum. However, back in the early nineties, I helped people annuitize contracts for the rest of their lives. It was a smart move back then, and some of my clients are still alive. We locked in a very high internal rate of return at 10% or 11% for the rest of their life. But that is not the case of rates today. It’s definitely not a smart move today. It doesn’t mean that when interest rates get much higher that it might not be a viable option.
Option #4: You can have your cake and eat it too. I call it the Big Daddy of them all. Some companies allow you to purchase an income withdrawal benefit rider for an extra charge annually. This option allows you to purchase a lifetime income rider that allows you to take out a predetermined amount of money for the rest of your life regardless of the performance of the accumulated value. Now, in this case, you’re not actually annuitizing. So in other words, if you start the lifetime income rider and you start taking out 7%, even though this money is deducted dollar for dollar out of the accumulated value, the accumulated value (your walk away from money minus surrender charge) will continue to grow as that index may track or positive. Now at some point in time that accumulated value may go to zero, so then you don’t have any walkway, but if you’re still alive, then you’re still receiving monthly payments. This concept works very well if you live for a long, long time. It works well if you decide you want to take your money after the surrender charges and walk away with the reduced accumulated value. The downside is that the rider cost -- nothing is free. You’re normally going to pay about 1% per year. Now, that annual 1% comes out and is assessed against your accumulated value. So if your accumulated value only grows 2%, then your net return for that year is going to be 1%. In the same vein, if your accumulated value had shown no returns, then actually the accumulated value is going to go negative 1%.
These income withdrawal benefit riders, I believe, are very confusing add-ons that I have ever seen, so I have developed an entire video just to this one subject. (Insert video link)
Is your current annuity not performing? You know, the market has been giving double-digit returns for years. However, you aren’t seeing it. Are you confused about your income options? Do you have an income rider that you don’t understand? Are you an annuity orphan? Well, maybe I can help. I certainly would be glad to. You don’t even have to come to the office, just shoot me an email or give me a phone call. I will either contact you directly or respond to your email. If you want to set up a time to talk to me on the phone, give my office a call.
Sincerely,
John Romano CFP®