What is an Annuity Income Rider?

An annuity income rider is an optional feature of many annuities that retirees can use to provide themselves with a guaranteed minimum income for as long as they live. Income riders add cost and complexity to annuities but give retirees a reliable source of income insulated from market fluctuations. They’re best suited for people who don’t need immediate income.

A financial advisor can help you decide whether and how annuities can play a useful role in your retirement plans.

Annuity Income Rider Basics

An annuity is a contract you can purchase from an insurance company. In exchange for the premium you pay to buy the annuity, the annuity issuer is obligated to pay you back either a single lump sum or in monthly or annual installments. There are many different kinds of annuities and ways to customize basic annuities.

The first major categories refer to when payments start. Immediate annuities begin making payments to you as soon as you buy the contract. Deferred annuities start making payments at a later date.

Another variation is based on how much money you’ll make. Fixed annuities earn a preset interest rate on the funds in the annuity. Indexed and variable annuities may have changing growth rates depending on the performance of the market and individual investments.

Most annuities can be purchased with riders that add special features to the basic annuity. Riders can provide a variety of benefits and protections. Living benefit riders, for instance, pay out to you during your lifetime while death benefit riders pay a spouse or other beneficiary after your death.

Income riders, also known as guaranteed minimum benefit riders, provide for you to receive at least a certain level of payouts as long as you live. This minimum amount is guaranteed to be maintained by the issue no matter what happens to the economy, interest rates or the stock market.

Like other riders, you’ll pay more for an income rider in exchange for the knowledge that you won’t have to get by with less money. Income riders are normally sold only with deferred annuities.

How Annuity Income Riders Work

Income riders pay a benefit, either annually or monthly, that is determined by multiplying the annuity’s benefit base by the payout rate. The benefit base can change. It begins as the amount the purchase originally paid for the annuity. Then each year the benefit base will increase by a percentage called the growth rate that is specified in the annuity contract.

For instance, if you purchase a $100,000 annuity with a growth rate of 7%, after the first year the benefit base will have increased to $107,000. The following year it will increase by another 7% to $114,490 and so on.

The amount of the monthly or annual payment to the annuity holder is determined by applying the payout rate to the benefit base. So, if the payout rate is 5% and the benefit base is $114,590, the payout will total $5,724.50. Once the annuity holder starts receiving payments based on the payout rate, the growth rate is no longer applied.

Annuity Income Rider Pros

Annuity income riders are popular with people who don’t have pension income to fund retirement. Advantages include:

• Guaranteed minimum income for life,
• Protection against market downturns,
• Ability to take a lump sum distribution if needed.,

Annuity Income Rider Cons

Annuity income riders also have some limitations, however. Downsides include:

• An annuity income rider adds a fee, typically about 1%, to the already significant fees charged by annuity sellers.
• Not for immediate income. Annuity income riders are best for people planning in advance for retirement who don’t need immediate income and can purchase a deferred annuity.
• Better for younger pre-retirees. Annuity income riders work best if you plan to wait at least several years to begin receiving payments to allow the growth rate to increase the annuity’s benefit base.
• Better for steady stream. If you anticipate needing a lump sum payout from your annuity, another choice might be better.

Bottom Line

Annuity income riders can provide retires with guaranteed minimum income for life insulated from market fluctuations. Getting an annuity income rider requires paying an extra fee to the insurance company. Before purchasing an income rider, it’s important to know the growth rate percentage and the payout percentage.

Annuity Tips

• Whatever your retirement planning questions may be, a financial advisor can help you answer them. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• One of the most common concerns about retirement is whether you are saving enough to provide you with the lifestyle you have in mind. SmartAsset’s retirement calculator can supply an answer. Provide your location, age, income, savings amount, planned contributions and expected retirement spending budget and it will tell you how much to save.

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