What are Annuity Income Riders and How Do They Work?
For many investors, the purchase of an annuity means that they will be able to count on an income stream for a set period of time, or even for the remainder of their lifetime, regardless of how long that may be. This, in turn, can reduce the concern that retirees may have about running out of income during their retirement years. One way to set up the income that is received from an annuity is to add an income rider.
What are Annuity Income Riders?
In their most basic sense, annuity income riders are defined as a benefit that is attached to a deferred annuity and that provide an income stream in the future. These riders will usually have a guaranteed rate of growth that can be used for income purposes.
Having an income rider on an annuity can help to make future income planning more flexible, essentially allowing the annuity to be more "customized" for various needs and goals. There are several different annuity income riders that you may be able to choose from.
Types of Annuity Income Riders and How They Work
There are a number of income riders that you may be able to choose from when purchasing an annuity. These can include the following:
- Guaranteed Minimum Income Benefit Rider (GMIB)
With the GMIB, or Guaranteed Minimum Benefit rider, the annuity will "guarantee" a minimum payout in the future - regardless of market performance. With this rider, then, you can receive a set base amount of lifetime income, no matter how the investments and/or the interest inside of your annuity's account have performed over time. It is important to note here, though, that you may be required to own the annuity for a certain period of time, such as ten years before you start to receive the income stream.
- Guaranteed Minimum Accumulation Benefit Rider (GMAB)
With the GMAB, or Guaranteed Minimum Accumulation Benefit rider, you will be guaranteed that the value of the annuity's income account is at least equal to a certain minimum percentage of the amount that you contributed after a set number of years. This is the case regardless of how the investment and/or interest actually performed.
As with the GMIB rider, it is also typically required that in order to receive the benefits in the GMAB rider, you must have held the annuity for a certain amount of time, such as for seven to ten years.
- Guaranteed Minimum Withdrawal Benefit Rider (GMWB)
Having the GMWB, or Guaranteed Minimum Withdrawal Benefit rider, on an annuity can help to guarantee that a certain percentage of the amount you contribute into the annuity will be fully recovered, regardless of how the account actually performed.
In this case, if the underlying investments in the account perform well, you could have an excess amount in your account at the end of the annuity's withdrawal period. Conversely, though, should these investments have poor performance - in turn, depleting the value of your account before the end of the set withdrawal period - then you will still be able to continue making withdrawals until the full amount of your contribution into the annuity has been recovered.
- Guaranteed Lifetime Withdrawal Benefit Rider (GLWB)
The Guaranteed Lifetime Withdrawal Benefit, or GLWB, rider can guarantee that you will attain a certain percentage of the annuity's account value for withdrawal each year, for as long as you (and a joint income recipient, if applicable) live. It is important to note that the annuity's income account should not be confused with the cash value in the primary annuity account, as these are two separate entities.
How to Ensure the Proper Income with Your Annuity
Although there are many annuities and annuity income riders that are designed for paying out an income stream, it is important to understand that all of these financial vehicles are not exactly the same - and because of that, you need to ensure that you are choosing the option(s) that are right for you and your anticipated needs.
In order to do so, it is recommended that you discuss your available alternatives with a financial professional who is well versed in this area. That way, you will be better able to determine which annuity and income rider may fit your specific goals for both the short- and long-term time horizon.