And a better question might be, do I really need one and why? We won’t bore those of you reading who may suffer from Adult ADHD, so we’ll cut to the chase… YES, in today’s investment world and economic climate, you most definitely do need an income account rider. Or not, if you are young enough and patient enough to wait out the stock market earning back its losses. However, most Baby Boomers and Generation X members have had enough of the schizophrenic stock market and are in dire need of a new guaranteed solution.
But before you discount our message as soon as you read the “annuity” word, consider the type of market where gains earned one year, get wiped out the next year. Ergo, the market index moves basically sideways by giving back or losing any gains from one period to the next. This is described as a Bear market and they historically last on average eighteen years.
If you are less than 40 years old, and have the discipline to not sell out when times get scary, then you do not need an income account rider.
Click on this link to view market chart: 116 year Dow Jones History
For the rest of us and the majority of My Money Track’s audience, those baby boomers and generation x folks along with seniors, we wonder how any of these groups can sleep well without an income account rider protecting their investments and retirement income.
So after say just fifteen years the market recovers your losses, you’ve also lost those fifteen years that your money could have been earning something! And that “something” could be the wise choice of an income account rider that will increase your income account value between 5% and 7%, contractually guaranteed, every year! So how does this amazing but relatively secret simple rider work?
First understand that when you purchase an index or equity index annuity (or a variable annuity) you have two values associated with your account. One value is the accumulation value, which is the actual cash you could walk away with. The other value is the income account balance, which is the balance you have the option of using to calculate how much money you could withdraw for life from your annuity. The best annuity will have this income account as an option. Even better, there is also a totally income tax free retirement solution!
These income account riders are fairly new and came about after Y2K and the extremely volatile stock market and the collapsing interest rates one could earn on fixed income investments. Think of the income account as a safety net. It’s a pool of money that you control and one that will grow by a contractually guaranteed percentage rate every year. The income account provides you the choice and control to decide when to begin taking withdrawals from your investments.
You get the option to use either the accumulation value or the income account value, whichever is LARGEST, to calculate your annual income. And if things such as the economy and stock market go back to the way they were between years 1982 and 2000, when the S&P 500 index averaged a total return exceeding 17% per year, you’ll may earn market gains exceeding that of the income account guaranteed rate. So in that case, you’d use the market or accumulation value to calculate your income.
It’s almost like having your cake and eating it too.
In an index annuity, you must realize that in exchange for never losing money due to the stock market going backwards, you agree to accept a portion of the return of a stock market index. That portion will be calculated by either a set percentage participation amount or a fixed capped amount. Simply stated, if the stock index increase by 10% and your index annuity has a 3% cap, then you’d only get the first 3% (with no fees subtracted as in other index type securities) and the insurance company gets any amount above the cap.
This may be the best retirement investment.
Before interest rates plummeted, the capped index rates offered were very lucrative; averaging around 6-7%. But when interest rates dropped to virtually zero percent, the cap rates also declined to around 3%. Thus, the income account rider or safety net that would increase the value of the account you would use to generate in income stream was born. Many of us baby boomers do not have enough time until retirement to gamble on the stock market. This secret strategy for income is your best investment.
The important thing to remember is that the income account value and the rider and interest associated with calculating the rider is only a value used to determine income.
You will never actually be able to walk away with that income account value, until now! Just recently a new income account rider was introduced that would allow the account to have a 13% cap! This means that you’d increase your income account value by as much as 13% per year if the index it was tied to increased by at least that amount. In years where the index did not gain or lost money, your account still earns a nominal amount of interest, say ½%.
The cool part is that once the income account value reaches 160% of the initial amount invested, the income account also becomes the accumulation value!
Hypothetically, this could occur as early as in five years but that is highly unlikely. Nonetheless, it is still an attractive income account rider alternative plus, currently there is no charge or fee for this special income account rider. This would be most ideal or best for money you’ll not expect to need or touch for at least ten years, e.g. your 401k rollover; otherwise your return would be much less than it would have been with traditional income account riders. But compared to current interest rates offered on Certificates of deposits, Money markets and savings accounts, this still isn’t too much of a disadvantage.
The more important benefit of index annuities is that they are fully income tax advantaged and totally tax deferred. You decide when to pay taxes on any gains earned. This tax deferral is mitigated and not necessary if you hold the tax-deferred annuity inside your IRA or 401k but many will purchase the annuity for their lifetime guaranteed monthly income stream. The brand new Qualified Life Annuity Contract (QLAC), was specifically designed to be owned in a 401k plan.
To learn more about these types of new income account vehicles we hope you will contact My Money Track and Michael Ham. But we understand you may already have a relationship with a local Dallas or Ft. Worth financial planner who provides you with help and best advice for your retirement plan and investments. We will gladly provide to you information about the monthly income ideas. Call 972-490-9400 today!