Do you like the idea of putting a plan in place for your retirement income? If so, let’s dig into how an income annuity could benefit your retirement plan.
We insure our cars, homes and lives. Shouldn’t we insure our income too?
An income annuity is a solution that can guarantee you an income stream for as long as you live. Plus, an income annuity could be the foundation of a protection-first approach to your retirement income, helping you cover your expenses in retirement.
How an income annuity can work for you
A type of income annuity, a fixed indexed annuity (FIA), protects your principal, is never directly invested in the market and has the potential to earn some interest tied to a market index. And like all annuities, an FIA offers lifetime income, tax deferral and death benefit features for your beneficiaries.
There’s a rider called a guaranteed minimum withdrawal benefit (GMWB) that allows you to protect and plan for your income at the same time. A GMWB rider may be optional or already built into the FIA depending on the company and specific product. Be sure to talk with your financial professional to know what your options and limitations may be.
From the protection side, the income you receive from an FIA will never decrease due to stock market losses. You choose the amount you use to fund the annuity based on the percent of your retirement income that you want guaranteed.
From the income planning side, an income annuity with the GMWB rider can offer you the potential to create more income with less cash from the start. For example, if you’re able to take money out of the annuity at a higher percentage than the normal 4.0% safe-withdrawal rate, you may not need as much cash to begin with — potentially leaving extra cash on hand for you to use or save as you need.
Let’s look at a hypothetical situation.
Assume a 60-year-old woman has other income sources (e.g., Social Security) and has a gap of $36,000 per year in her retirement income plan. She wants to earn a 7.0% return each year on her money to make her income last throughout her lifetime, assuming she takes income starting at age 70.
If this woman doesn’t have an FIA or a GMWB rider but wants a 7.0% annual growth rate from a typical diversified portfolio, she will need to start with $460,000 up front. By age 70, that value is worth $904,890. By taking a 4.0% withdrawal rate, she would receive the $36,000 that she needs each year.
However, this diversified portfolio without a guaranteed income annuity is not contractually guaranteed to last as long as she lives. Therefore, she could potentially outlive her money. Also, it’s unlikely that she could earn 7.0% every year for 10 years. If her assets are invested in the market, she could potentially have a loss of her principal.
Now, if she has an FIA with a GMWB rider, in this example, she would need about $329,500 up front. By age 70, that value would be worth $670,110. She would then take a 5.3% withdrawal rate to get the $36,000 she needs each year. While the value at age 70 is lower than the first example, the withdrawal percentage is higher, the income is guaranteed to last as long as she lives and she needs less cash up front.
Person without an FIA Person with an
but with 7% annual growth FIA and GMWB rider
Initial capital needed $460,000 $329,500
Income value – Age 70 $904,890 $679,110
Withdrawal rate 4.0% 5.3%
Income per year $36,000 $36,000
Guaranteed for life? No Yes
The above example is hypothetical and is not an indication of the annuity’s past or future performance. The non-FIA values are not contractually guaranteed. The annuity income in this example is based on, as of April 2021, a 60-year-old woman purchasing an F&G 7-year fixed indexed annuity with a GMWB rider providing an income base rolling up at 7.5% per year and a 5.3% guaranteed withdrawal payout percentage at age 70. The diversified portfolio assumes a 7.0% annual return for 10 years and a 4.0% withdrawal rate in the first year of income.
All in all, an income annuity can create a level of certainty in your retirement plan.
Now that we’ve talked about the importance of protecting your retirement income, a next step would be to talk with your financial professional about adding an income annuity to your retirement portfolio.