Guaranteed lifetime income is common with annuities. Annuities with an income rider add flexibility by providing lifetime income without requiring annuitization or giving up control of your assets.
You can receive guaranteed payments while still having the option to take lump sum withdrawals if needed. These riders may also help protect income from market volatility, though they typically come with added fees, charges, and withdrawal limits that could outweigh the benefits.
Income Rider Defined
An income rider is an optional feature available with deferred annuities. It provides guaranteed income for the rest of your life, starting at a specified age, sometimes as early as 60. Some riders also include a growing benefit base, which the insurance company uses to calculate future income payments.
Income riders come with an annual charge. You can review your annuity disclosures to understand how this cost is calculated, or consult a registered representative for guidance.
How the Benefit Base Works
The benefit base usually starts with your original investment, but it is not the same as your actual account value. Instead, it is a hypothetical value the insurance company tracks over time.
Depending on your contract, income payments may be based on:
- Your actual account value, or
- Your benefit base, whichever is greater
Income riders typically pay a fixed percentage of the benefit base each year.
Example:
- Benefit base: $100,000
- Payout rate: 5 percent
- Annual income: $5,000
Income payments can continue even if the account value reaches zero, as long as all contract requirements are met.
Benefit Base Growth
Some income riders increase the benefit base automatically. In certain cases, they may add growth on top of any investment gains in the annuity, for an additional fee. This growth applies only to the benefit base and can be accessed only through withdrawals that follow the rider’s terms.
Example:
- Initial investment: $100,000
- Annual benefit base growth: 7 percent
- Benefit base after one year: $107,000
This growth applies regardless of how the actual account value performs. Growth commonly continues for up to 10 years, though other arrangements may be available.
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How Does an Income Rider Affect Distributions?
You can generally withdraw money from a deferred annuity at any time. Withdrawals made before age 59 1/2 usually trigger a 10 percent IRS penalty.
However, the benefit base, sometimes called a hypothetical account value, is not available as a lump sum. It is used only to calculate systematic income payments from the annuity provider.
What you can withdraw:
- Your actual account value, which reflects market gains or losses.
- Amounts may be subject to taxes and surrender charges.
An income rider works differently from an immediate annuity. Taking income is not an irrevocable decision. Each year, you can:
- Withdraw your guaranteed amount.
- Take more or less than the guaranteed amount.
Withdrawing more than the guaranteed amount can reduce your benefit base and lower future income. Before taking excess withdrawals, it may help to review the details with a financial representative or registered representative.
When Could an Income Rider Make Sense?
Income riders are not a fit for every financial goal, but they can support specific income goals.
An income rider may be worth considering if you want to guarantee a minimum level of income while protecting against major market downturns. Many riders still allow flexibility, including the option to take lump sum withdrawals if something unexpected comes up.
Income riders tend to work best when income is not needed right away. They are typically available on deferred annuities, which allows time for assets to grow or for the insurance company’s guaranteed benefit base to increase. If you need lifetime income immediately, an immediate annuity or another option may be a better match.
Because income riders are built to pay benefits over time, usually monthly or annually, they may not be ideal if you plan to take large lump sum withdrawals. However, if your annual withdrawals stay below the guaranteed income amount, this approach may still work.
Some income riders also offer lifetime income options for both you and your spouse, depending on the contract.
Since an income rider is generally intended to last for your lifetime, choosing an annuity provider with strong financial stability matters. That decision can help support your long term retirement income goals.
Conclusion
An income rider can turn a deferred annuity into a predictable stream of lifetime income while offering flexibility. Understanding how the benefit base works, the fees involved, and how withdrawals affect future income can help you decide if it fits your plan. Reviewing the details with a financial or registered representative may help you determine whether an income rider aligns with your long-term income goals.
An annuity income rider adds stability to your retirement income. Start Your Free Plan
