Two Ways to Get Lifetime Income

By Ken Nuss

To get a guaranteed lifetime income in retirement, you can annuitize an existing annuity when you’re ready to begin receiving income payments. You can also buy a longevity annuity that will pay a lifetime stream of income starting at a future date you set.

Another option is to buy a fixed indexed annuity and add a lifetime income rider to it.

It’s become quite popular in the last decade, and the rider can be a great choice. However, an income rider usually costs extra, so it’s not a good buy unless you’re pretty sure you’ll use it eventually.

A fixed indexed annuity is a type of deferred annuity that credits interest based on the changes to a market index, such as the Dow Jones Industrial Average or S&P 500. Interest is credited when the index value increases, but when it falls, you lose nothing. In exchange for that guarantee, you’ll typically get only part of the market’s gains.

Adding an income rider brings guarantees and flexibility. Normally, when you annuitize a contract, you no longer have access to your money. Since the insurance company has converted your savings into a stream of income, there is typically no cash surrender value.

An income rider avoids that disadvantage.

You can generate a high level of guaranteed lifetime income at a future date while still maintaining control over the unused account balance. And you also usually retain complete flexibility about when you start receiving income.

You can even stop receiving income and still access any remaining balance in your policy.

The income rider creates a second policy value called the income account value. The income account value is a calculating factor to determine the amount of your guaranteed income payments. It’s separate from the underlying contract value. It has no cash value and cannot be withdrawn.

With an income rider, the income account value typically grows at a guaranteed annual compounded rate of 4 percent to 8 percent.

The monthly lifetime payments are determined by three factors: your income account value, gender and age when you start taking payouts. Different insurers use different actuarial calculations. Therefore, you may get more or less from a particular insurer even when all other things are equal.

The rider has a lot of advantages, but there is a cost.

For instance, it may cost 1.05 percent per year to get a 7.25 percent annual income account value increase guarantee on the income rider. This fee will be subtracted from your account value.

Longevity annuity still a good choice

Indexed annuities offer the potential to earn a higher rate of interest than certificates of deposit and traditional fixed annuities. But they’re complex, interest earnings vary from year to year, and an income rider adds more cost and complexity.

People who want a simpler approach and don’t need immediate income should consider a longevity annuity—also called a deferred income annuity. It combines tax-deferral with a future stream of income.

A longevity annuity defers payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older.

You’ll know the exact amount of monthly lifetime income you’ll receive and the exact date when it begins.

You can buy either a single-life annuity or a joint-life annuity, which typically covers both spouses.

It’s a very efficient way to protect against outliving your assets in very old age.

The insurer invests your money for many years, enabling it to compound until you begin receiving income. Second, buyers who do not live to an advanced old age subsidize those who do.

The longer you delay taking payments and the more advanced age you start taking them, the greater the monthly payout.

The longevity annuity offers a different way to plan for retirement.

Suppose you’ll retire at 65. You can use part of your money to buy a longevity annuity that will provide substantial lifetime income starting at 85, for example. Then, with the balance of your retirement money, you only need to create an income plan that gets you from 65 to 85.

You don’t have to deal with the uncertainty of trying to make your money last for your entire lifetime.

You can buy a longevity annuity with taxable savings or within an IRA. The latter is called a qualified longevity annuity contract. A QLAC is a type of longevity annuity designed to meet specific IRS requirements. It lets you delay required minimum distributions. There’s currently a $130,000 lifetime limit on deposits.

A longevity annuity can be purchased with a lump sum or a series of deposits. The issuing insurance company guarantees a lifetime income to begin at whatever age you choose, starting no later than 85.

If you’re married, you and your spouse can each buy individual longevity annuities. Or you can purchase a joint payout version, where payments are guaranteed as long as either spouse is living.

Neither an income rider nor a longevity annuity is the best choice for everyone. Both have their places. As with any retirement-planning process, choosing the best income solution takes analysis and careful consideration.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at https://www.annuityadvantage.com or (800) 239-0356.