There is a common problem we run into when helping our clients plan for retirement. Retirees, like you, instead of having a pension, have a big bucket of retirement money that they’ve been accumulating their whole life. Now that they’re going to retire, they need to find a way to make this money into an income.
An income rider on an annuity is a common tool we use with clients to solve this problem. More specifically, an income rider that provides a Guaranteed Minimum Withdrawal Benefit. This rider guarantees an income gets paid to you for the rest of your life, even if the account runs down to a zero balance.
Retirement Income: Income Riders on Annuities
An example of an GMWB income rider for a retired couple
The best way to demonstrate the value of a guaranteed minimum withdrawal benefit rider is to show it in practice. We are going to start with an example of a policy we recently set up for our clients. (This policy can also be used for a single person.)
We had a couple come to us with a large worry about making sure their money would last throughout retirement.
They both are going to collect substantial Social Security checks, adding up to about $5,000/month. From this, we figured out that to live comfortably, they would need $2,000 a month in addition to their Social Security. This is where the annuity came in.
To make the $2,000 income, we figured they needed to invest $300,000 into the annuity. This is not all their savings though. At Cardinal, we would never advise putting all your money into an annuity. We calculated that they would still have plenty of money to draw from in other accounts if needed for an emergency or other large expense.
The policy we got for them is a deferred, fixed income annuity. This means, at the most basic level, it is designed to create an income for life.
Below is the breakdown of the what the rider looks like on this policy:
If we look further into each column it becomes clear how valuable this policy is going to be.
Column 1: Age
In the first column, we track the age of the couple. They were both age 67 when we purchased the policy. We didn’t start the income payments right away though.
These income riders work best when you delay turning or, or starting, the income for 4-10 years. For this couple, they are waiting 4 years, so the income will start at age 71. For them, we knew they had enough other money in savings to use during the 4 years until this payment got turned on.
The longer you wait, the larger the guaranteed monthly payment is, but since this couple was already retiring when they came to see us, we figured out a way to get them the money they needed with the least amount of waiting time.
Column 2: Estimated Cash Value
The second column is the estimated cash value of the policy. If both spouses passed away, this is the estimated death benefit that would be paid out to their beneficiaries.
For example, say at age 82 the second spouse passed away. A good estimate of what their children would get is $243, 726.
This payment is estimated because it is based on the market. If the market for some reason did really poorly the entire life of this policy, the cash value would look more like column four.
As you can see, this estimated cash value does not run out until age 92. At that point, the insurance company will have paid out the initial $300,000 plus all the estimated interest this money earned to the couple in income payments and will not owe the beneficiaries anything when both spouses die.
Since people are living so long now, there is a good chance that this could happen with this policy. This is why we also suggested this couple purchase a small life insurance policy for their beneficiaries.
Listen to learn more about income riders:
Column 3: Yearly Guaranteed Income
Column 3 is the most important section of the policy. This is their guaranteed yearly income payment, the reason that we even suggested this policy to the clients.
The Guaranteed Minimum Withdrawal Benefit, or GMWB, means that this $24,057 payment will be available to the couple no matter what the market does or how long they live. Even if they live past the age of 92, say they live to 100, they will still receive a check for $24,057 yearly.
This payment will continue until both spouses pass away. This means that if one spouse dies and the other spouse lives another 15 years, they will still get this money every year.
Column 4: Guaranteed Cash Value
Another guaranteed part of this policy is the principle, including the credited interest earned every year.
In practice, this means that if both spouses pass away before they have been paid back the $300,000 they put in, plus any interest, their beneficiaries are guaranteed to get the rest of the money.
In the second column, the estimated cash value of the policy for every year was shown. In the fourth column, the guaranteed cash value is shown. The numbers in column 4 look much lower since they are the guaranteed amount, and based on the premise that the market would do poorly the entire life of the policy. It is more likely that your beneficiaries would get an amount closer to the numbers in the second column, but the fourth column shows the minimum amount they would receive.
If we look at the chart, we can see that at age 81, the couple would have received their full $300,000 back in yearly income payments. That means that starting at age 81, their heirs are guaranteed nothing.
But, if both spouses passed away early, say age 72, and only got 2 years of income payments, their heirs would receive, at a minimum, $257,133.
As you can see from this example, an income rider is a great financial planning tool, and if used correctly, can provide you with a guarantee that you will not outlive your money. We have many people look at these policies and tell us “I could make more in the stock market.” You certainly could, but that comes without the guarantees, and definitely without a guaranteed income.
Cardinal wants to help you create an income from your retirement savings, an income set up in such a way that you’re not going to run out of money in your 70’s,80’s, or 90’s. Give us a call today to get started.