Annuity income riders are available on both fixed and variable annuities. Although they are not well understood by most, income rider are not that complicated. Although companies have different bells and whistles on them, income riders are all very similar regardless of the company offering them.
The basic concept of an income rider is that they are a product used to create a future income stream for the owner. The income can be determined down to the dollar at any future date which makes them very predictable. An example is the best way to describe an income rider.
(Example)- A person decides they would like to have a future income stream to supplement their retirement income they receive from Social Security and a pension. They decide they have $250,000 that they can dedicate to future income.
The $250,000 is put into an income rider. The income rider will show them exactly how much lifetime income they will be able to take in the future. They can choose to start income in any year they would like but once the income is started, the amount they receive every month will never increase. The income will payout for life but their initial investment will erode over time. When the $250,000 runs out they will still have the income payment however.
The positives of an income rider are the following…..
- Can predict future income right down to the exact dollar in any given year.
- The income is guaranteed and the longer you wait to turn it on the more it will pay out for life.
- Market conditions have absolutely no effect on the deferred income increase on the rider.
- There is still access to the lump sum investment even after income is turned on.
The negatives of an income rider are…..
- Once the income is turned on it will never increase.
- There is an annual fee for the income rider which is deducted out of the account value (The $250,000 in the example) of the investment.
- The account value will steadily decrease every year the income rider is paying out.
Income riders can be very useful if they are used for the right purposes (Generating future guaranteed income). They can also be a terrible investment if used for the wrong reasons. Many will argue that a larger future income stream can be created using other methods but they can not do it on a 100% guaranteed basis like an income rider can.