The Income Rider: Today’s Pension.
Originally posted on https://www.annuityexpertadvice.com/annuity-101/income-rider/
The Income Rider (Guaranteed Lifetime Withdrawal Benefit) is an optional feature on fixed indexed annuities and variable annuities that will convert your retirement savings into a guaranteed income stream for the rest of your life like the pension plan.
An annuity’s income rider is flexible, unlike a pension plan.
Basically, the Guaranteed Withdrawal Benefit will provide your retirement paychecks for the rest of your life.
The History of the Income Rider
This is my opinion, not a fact.
In the past, annuities have earned a bad rap for “cementing” owner’s funds into products that provided a forced annuitization. These annuities were called Two-Tier Annuities.
Basically, annuity owners purchased these annuities thinking they would safely grow their funds over a period of time, and then walk away with their original principal and earnings in a lump sum.
That was hardly the case.
Annuity owners found the only way to receive their money back was over an irrevocable distribution plan aka annuitization.
See the two-tier annuity was meant to be an alternative to the fading pension plan by providing safe growth and a retirement income stream in the future.
Insurance companies found out the hard way that retirees want control over their money, but still needed to figure out how to spread their hard-earned retirement savings over their lifetime(s).
And like any product in any industry, there’s always the first version of a product, and then an improved second version, then a third, and so on and so on.
From those lessons and experiences, the “income rider” was created.
Now the annuity income rider would allow owners to generate a fixed retirement income for the remainder of their life with more flexibility and control.
Now annuity owners can choose if they want to add a lifetime income benefit rider or not.
They could turn the income stream on or off, or simply walk away from their contract with their earnings in a lump sum when their contract expired.
Over time the annuity income rider has evolved into better solutions in retirement than just income planning like long term care assistance, enhancing estate plans, and inflation protection.
Income Rider Names
Lifetime Income Benefit Rider
Income Benefit Rider
Lifetime Income Benefit and Wellbeing Rider
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Enhanced Guaranteed Minimum Withdrawal Benefit (EGMWB)
This might get a bit confusing, but you’ll know how your lifetime income amount is determined.
What determines how much my retirement paycheck will be?
Income Benefit Base Value + Withdrawal Percentage = Lifetime Income Amount
What’s an Income Base?
An income benefit base (Guaranteed Lifetime Withdrawal Benefit Base) is a separate value from your account value that builds up until the time you are ready to start your income stream distribution.
Income Values are typically fictitious values which means they are not values you can walk away with.
Example: Your guaranteed lifetime withdrawal benefit or income rider may grow (roll-up) at 6% annually for up to 20 years guaranteed.
Note* There are some income benefit riders that offer access to the income value in alternative forms such as long term care or nursing home assistance or an enhanced death benefit.
If you ever see an advertisement that expresses something “too good to be true”, it probably is referring to an income value which is not tangible.
Example: “Get up to 7% guaranteed income w/ no market risk. Get a free quote & compare today”
This 7% is referring to your income value “growing” at 7% annually on your income rider NOT your account value.
Remember your income value isn’t real money.
If you see this type of advertisement, run.
What is the Withdrawal Percentage?
The withdrawal percentage is the % of the income base you get to withdrawal in the year you want to start your retirement income.
Withdrawal percentage is typically based on your age, and sometimes age and gender.
Income Rider Payout Types
Single Life: Distributes a fixed income for the remainder of one covered person’s life.
Joint Life: Distributes a fixed income for both the remainder of the owner’s life and the surviving spouse’s life. The income amount will not change.
Death Benefit Options on Income Riders
Single Life Payouts
If you choose a single life payout, and you have a surviving spouse, the spouse can either:
- Inherit the Accumulation or Account Value in a lump sum.
- Spousal Continuation: A spousal benefit provision that allows the spouse to continue the contract after the contract holder dies. A new annual income amount will be recalculated based on the remaining income values, and the surviving spouse’s age at the time of death.
Joint Life Payouts
If you choose a joint-life payout, your surviving covered spouse can:
- Continue receiving the same income amount.
- Inherit the Accumulation or Account Value in a lump sum.
Income Rider Types
Guaranteed Income Riders
Guaranteed riders simply guarantees today what you’re retirement checks would be today or tomorrow by growing at a fixed interest rate (roll-up percentage) each year. The lifetime income amount won’t go up nor down, it is a fixed income amount for the rest of your life.
Performance-Based Income Rider
Performance-based riders offer a retirement income that is based on how well the policy performs (with a guaranteed floor) up until the owner is ready to start their income stream.
The idea is that you have the potential to earn a higher retirement income amount than a guaranteed rider would provide.
You can get an idea of what the annual income payment could be based on product illustrations, but you won’t know for sure.
It’s a gamble.
Regardless of performance, there is always a guaranteed floor of how much retirement income you can generate in the future.
Guaranteed Lifetime Withdrawal Benefit Pros
Income riders generate a fixed and predictable income in retirement.
You can not outlive the income if you utilize a guaranteed withdrawal benefit.
Income riders can cover a single-life or joint lives (You + Spouse).
They are flexible in terms of turning the income on and off or walking away.
You can know today what your guaranteed income will be in the future.
You can map out your retirement income goals today, and plan how to achieve them for tomorrow.
Some benefits enhance to assist with eldercare, estate planning, and inflation.
Guaranteed Lifetime Withdrawal Benefit Cons
Single Payouts can take between 15 and 20 years of distribution before you tap into the insurance company’s money.
It’s even longer for a joint payout.
Basically, you’re getting your money paid back to you with the hopes you live longer than 15 years.
You have to elect up front regardless if you use the feature or not.
Most guaranteed withdrawals are fixed meaning your income paychecks may not increase overtime to help with inflation.
Fees can be expensive especially with variable annuities.
Enhanced Income Rider Features
Income rider can be built-in at no additional cost.
Some offer the opportunity to increase your retirement income to keep up with inflation.
Often riders double your income for eldercare such as long-term care, nursing home, and home health care.
Finally, some riders provide an enhanced death benefit as a life insurance alternative. This means the fictitious value becomes real.
The Annuity Vs. The Pension Plan
The annuity’s income rider works similarly to pension benefits in that you invest money towards retirement, and the outcome is a retirement income stream.
The big difference between the two retirement solutions is the pension plan offers an irrevocable income stream (retirement checks) either for a specific period of time or lifetime(s) without flexibility, and the annuity distributes a steady income stream for the remainder of your life, or both you and your covered spouse’s lives.
Since most companies don’t offer a pension anymore, the guaranteed withdrawal benefit fills in that gap.
You can either roll over a portion of your retirement accounts into an annuity with a guaranteed lifetime withdrawal benefit, or start a new flexible premium annuity with an income rider, either way, you will know today what your retirement income will be tomorrow at any given retirement age.
Income riders are similar to yesterday’s pension plans and a good option for consumers seeking retirement income planning.
These are the only products outside an immediate annuity or deferred income annuity that will generate a guaranteed fixed income stream that can not be outlived in retirement.
What is a guaranteed lifetime withdrawal benefit rider?
The GLWB is an optional feature on most annuities that will convert your retirement savings into a guaranteed income stream for the rest of your life like the pension plan, but more flexible.
The GLWB is also known as an income rider, living benefit, or lifetime income benefit rider.
What is a pension?
A pension is a retirement plan that will provide a retirement income over monthly, quarterly, semi-annually, or annually over a guaranteed period of time or lifetime(s).
How does a pension plan work?
Your employer contributes money to the retirement plan while you’re actively employed. When you retire, a steady retirement check will be paid to you directly from that pension plan.
Your retirement income check is based on your years of service with the company, your current age, and the compensation you made at the company.
How is pension and guaranteed lifetime withdrawal benefit income taxed?
Unless the pension plan or annuity is after-tax money or a Roth IRA, the retirement income will be taxed as ordinary income.
If the annuity is a non-qualified account, only a portion of your income will be taxed.
Where can I buy a pension plan?
Most companies do not offer a traditional pension plan. Instead, the 401(k) was created.
You can mimic a similar outcome with an annuity that offers an income rider that will generate a lifetime income in retirement.
What is the difference between a lifetime income benefit and annuitization?
A lifetime income benefit provides income payments for the rest of the annuity owner’s life, and the remainder of the account value is passed down to beneficiaries. The income payments are more flexible in that they can be turned on or off during the distribution phase. You can even decide not to use the withdrawal benefit, and take a lump sum withdrawal of the account value instead.
Annuitization provides income payments for a specific amount of time or lifetime. Annuity contracts are irrevocable meaning the income payments can not be turned on or off during the distribution phase. There is no flexibility. You do receive higher income payments than an income rider.
What’s the difference between a pension and a guaranteed lifetime withdrawal benefit?
A pension plan typically doesn’t guarantee today exactly with your retirement income will be down the road. You’ll get updates, but the payments can change. The income generated is in the form of an annuitization which means once you start the income, there’s no turning it on or off. Also, there might not be any death benefit for your beneficiaries depending on the pension payout you elect.
A guaranteed withdrawal benefit generates an income for the rest of your life with the flexibility to turn the income on and off, or simply walk away with your account value in a lump sum. The remaining amount in your annuity is the standard death benefit, your beneficiaries will receive in a lump sum.
Want to create a pension plan for yourself? Need a quote? Just ask.