In the face of rising health care costs, longer lifespans and market volatility, many people have turned to annuities as sources of guaranteed income in retirement. In fact, annuity sales reached $229 billion in 2014, an increase of almost eight percent since 2012.
“One reason annuity sales have increased the last few years is because annuities are particularly attractive to people at or near retirement who have these concerns,” says Eric Henderson, senior vice president, Life and Annuities at Nationwide. “By offering guaranteed sources of income for life, annuities provide powerful solutions to this problem and peace of mind for retirees that they cannot outlive their income.”
That peace of mind comes at a cost, however: Annuities can carry annual fees of up to 2%. Most annuities offer riders to augment their benefits, and these riders also can typically charge annual fees of around 1%. To make an informed choice, consider the following common riders and their benefits and risks:
Guaranteed Minimum Income Benefit (GMIB)
These riders guarantee a minimum income stream once you annuitize the balance of your variable annuity. Even if the underlying investments in your annuity have performed poorly during the accumulation phase, this rider guarantees you a minimum income stream. And if the investments do well, your income can grow beyond the minimum. One downside: Most annuities require you to invest the annuity assets in relatively conservative investments when you purchase this rider, which could reduce some growth potential. But if you feel more comfortable knowing you’ll receive a minimum income stream in retirement, a GMIB may be worth the cost.
Guaranteed Minimum Withdrawal Benefit (GMWB)
This rider allows annual withdrawals up to a certain amount for a set period of time. The amount typically is limited to a rate that guarantees withdrawals at least equal to your initial principal, even if the account balance drops to zero during the designated period. For instance, you might have a guaranteed annual withdrawal rate of 7%, or $7,000, on a balance of $100,000. Even if the value of the annuity dips below $7,000, you’re still guaranteed a $7,000 per year withdrawal until you’ve recovered the full $100,000 in principal. One benefit: Unlike with a GMIB rider, you can make withdrawals from your account without annuitizing your contract. For people who want to start receiving income without losing the flexibility of accessing their savings, this can be appealing option.
With most annuities, if the annuity holder dies after the payout begins, the balance of principal in the account will remain undistributed and will revert to the insurance company that issued the annuity. For a fee, the death benefit rider lets you select a beneficiary to receive any balance remaining in your account. For example, if you purchased an annuity for $100,000 but received only $75,000 in payouts before passing away, the $25,000 remaining from the original principal would be distributed to a survivor of your choosing. Depending upon the terms of the rider, that balance might be paid out in a lump-sum, or through regular installments over a period of time.
Today, there is a 70% chance that people over the age of 65 years will need some kind of long-term care during their lifetime. Those not eligible for long-term care insurance because of their age or health might instead consider a long-term care rider on their annuity. Should you require long-term care, the rider allows you to make withdrawals from your account without sustaining surrender charges. An LTC rider also might provide additional income to help cover your costs: your monthly or yearly payout could increase by two or three times, or you may be granted access to more of the accrued value of your account. Because the rider is not insurance, there’s no need to qualify. If the rider is never used, income is typically distributed according to the annuity contract.
Cost, availability and the claims-paying ability of the backing insurance company are all important factors to weigh when considering the addition of a rider to your annuity contract. The most important, however, is choosing the option that best complements your overall investment goals. “Defining goals and uncovering how a particular product or rider helps to achieve the goal—or mitigates a risk to achieving the goal—is paramount,” Henderson says.