15 May Ortiz Method #11: Annuity Riders
Let’s imagine you’re in high school and you decided to start a lawnmowing business. You’re a likable kid, and the neighbors know you, so it’s easy to get everyone on the block. But now you are about to have enough money for a car, what car do you buy? You want a lot of things, but at the end of the day, it makes sense to buy a truck, or at least something so you don’t have to push your office around the neighborhood all day. Now, you are on the lot at the local used car dealership. You don’t have a lot of money, but you do have options. At first, all you care about is the price, the gas mileage, and if it can carry your lawnmower and rake. But fifteen minutes with that car salesman and now you’re worried about the suspension, freeway mileage, tire traction, and everything else that you weren’t thinking about before that conversation. Next thing you know you’re test driving a chrome boat with wheels fit for a tractor. As you are driving you’re enjoying all the bells and whistles, the salesman is reminding you of how it handles great on the freeway, it can even go off-road if necessary, etc… you realize that this car doesn’t even have storage for your tools, and is way too high for you to even get your lawnmower in the truck. It is useless to you. This is exactly how annuity riders can turn around and bite you if you aren’t careful.
Annuity riders are add-ons or features for your annuity contract that address a certain need, concern, or goal intended from the annuity. These include guaranteed lifetime income, long-term care, death benefits, and minimum returns and withdrawals. These riders are added to the annuity contract at signing and cannot be changed afterward. It is also important to know that all types of annuity riders vary based on the company they are issued by.
One of the most common of these riders is pretty obvious, guaranteed lifetime income. For many people, this is the whole point of the annuity, anyway right? to make sure that you can keep the lights on every month no matter what happens. So, it makes sense. But how does it work? First of all, these kinds of riders only work with deferred annuities, so make sure you aren’t going to need that money anytime soon. When you select an annuity income rider you have to be aware of a few things. Mainly the roll-up rate. This is the rate that your money is going to grow at as long as it is being deferred. Simple enough, at first. Roll-up rates and their terms are dependent on your life expectancy at the time of the signing. Roll-up rates also have a time limit to them. This means that you may start with a roll-up rate of 6% but after a set period of time, it is going to drop to 3%. It could also be based on age. You could have a rider that allows for a 6% roll-up rate until you begin taking withdrawals or until you turn 90. And of course, lifetime income has to come with fees, which generally sit around 1% per year from the roll-up rate, not your principle.
Then there are guaranteed minimum accumulation and guaranteed minimum withdrawal riders. Minimum accumulation riders guarantee you get all that is agreed upon (especially your principal) if the index your annuity is in severely underperforms. Guaranteed minimum withdrawal riders function the same except by allowing you to withdraw a certain
amount of your funds each year.
Death benefit riders ensure that the annual growth amount that can be used for legacy planning. Long-term care riders can help increase your payments if and when this becomes a part of your expenses. This goes the same for nursing home riders, which can cover 100% of the expenses in some cases. There are even cost-of-living riders that adjust annually for inflation. But be warned, these types of riders cause you to start with lower payments than standard annuities due to the adjusted income in the future. No matter what the rider is they all come at a cost. Whether it be a lack of control of your money, lower payments at first, or just plain expensive, all riders come with weight. If you were to add every rider for everything you were worried about in the future, your annuity payments will not end up being a very big number.
Just as with the car and the lawnmower, it is important to think about your goals. What was the whole point of getting the annuity? At the end of the day, you want an annuity for the contractual guarantee that you are going to get a paycheck every single month. This paycheck is most likely not going to be enough for you to completely live on for most people, so it is usually intended for and enough to pay the bills. Adding on riders (especially multiple) can quickly diminish the effectiveness of your returns. Yeah, you want a guaranteed check every month, but you need it to pay for more than a trip to the store and your Netflix subscription. So, make sure that you completely understand your annuity, what it will do for you, and what other options you may have before putting pen to paper on the dotted line. Contact us here at Ortiz World Wealth to make sure that you meet your financial goals. And remember, Plan Smarter Live Better.
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