“Think of income annuities as the term insurance of the annuity world.” – Professor of Retirement Income Wade Pfau of The American College in an article for Forbes – August 27, 2015.
As I outlined in Part I, fixed-rate and fixed indexed annuities can be utilized as a sleeve in an asset allocation program to minimize overall portfolio volatility. Fixed annuities are not subject to downside risk, and in the case of FIAs, allow partial participation in the upside of major stock indexes like the S&P 500.
Income riders or addendums may be added to FIAs to convert them to income annuities deferred to some period in the future, usually ten years or longer.
As referenced in Part I, riders add ongoing annual costs to annuities; formal financial planning should be completed before guaranteed income riders are considered to determine whether there’s a household retirement funding shortfall. In other words, if your investment portfolio has a greater than 30% probability of depletion in retirement before you and your spouse run out of time on the planet, annuitizing a portion of retirement assets should be considered along with a plan to maximize Social Security benefits.
A method to accomplish this is to add a rider to convert the fixed annuity into a future stream of income. Another idea is to purchase an income annuity indexed to inflation early in retirement.
Income annuities are solely designed to provide a stream of income now or later that recipients cannot outlive. These annuities are simple to understand and are generally lower cost when compared to their variable and indexed brethren.
Deferred income products where owners and/or annuitants can wait at least 5 years before withdrawals, may participate in market index gains (subject to caps) and have an opportunity to receive higher non-guaranteed annual income withdrawals depending on market performance. Withdrawals can never be less than the guaranteed withdrawal benefit established by the insurance company but may be higher depending on annual market returns. As with all annuities, there is never market downside risk. Details about deferred income annuities will be outlined in Part III. Here, I focus on the purest form of annuity: The SPIA. It’s the “Ivory Soap” of insurance products.
Single Premium Immediate Annuities – “The Pension Replacement.”
SPIAs are splendidly simple – Provide a life insurance company a lump sum and they pay you or you and a spouse for life. That’s it. I consider SPIAs the best replacement for the pension your company no longer provides. You as an employee must create a pension on your own.