Fixed Index Annuity Income Rider Similarities to Social Security – Part 3 of 4

Fixed Index Annuity Income Rider Similarities to Social Security – Part 3 of 4

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I hope that you’re enjoying this series about fixed index annuity income rider similarities to Social Security. I personally find it easier to understand a new concept when there’s something familiar I can compare it to.

Parts 1 and 2 discussed the first five of eight characteristics shared by fixed index annuity (“FIA”) income riders and Social Security. This post addresses characteristics six and seven as follows:

6. Income ceiling
7. Portfolio risk reduction

Income Ceiling

Characteristic #4, increased annual lifetime income, which was discussed in Part 2, is a very important benefit shared by FIA income riders and Social Security alike. By deferring the income start date, Social Security recipients and FIA income rider holders will receive larger annual lifetime income amounts than if they elect to receive income sooner.

Deferring the start date of Social Security retirement benefits from 66, assuming 66 is full retirement age, to 70 translates to a 32% increase in monthly benefits. Waiting to receive lifetime retirement payments (“LRP’s”) from FIA income riders can also result in a significant increase in payments.

There’s a limit in the ability to realize additional income by deferring the start date of both Social Security benefits and LRP’s from FIA income riders. In the case of Social Security, other than potential annual cost of living adjustment (“COLA”) increases, payments max out at age 70. Once you achieve this milestone, there’s no benefit to delaying the start date further.

Although it’s not a set age and it varies by product and situation, there’s also an income ceiling when it comes to FIA income riders. Unlike Social Security where benefits max out at age 70, this may not occur until age 90+ with various FIA income riders. The FIA income rider ceiling for each situation is different and is dependent on three factors: (1) age at which a particular FIA is purchased (2) number of years in the accumulation, or roll-up, period, and (3) age at which withdrawal percentage no longer increases.

Although the vast majority of individuals elect to begin receiving Social Security by their full retirement age, with longer life expectancies and the associated possibility of living to 90 and beyond, it makes sense in many situations to wait until age 70 to begin receiving benefits.

On the other hand, given the fact that FIA income rider LRP’s may not max out until age 90+, while it’s prudent to defer the income start date for several years, it generally doesn’t make sense to wait until the year in which the income ceiling is reached. Unlike Social Security, however, where income is the only benefit, if income hasn’t been started at the time of death, a FIA owner’s beneficiaries will receive the contract’s accumulation value which may be substantial.

Portfolio Risk Reduction

Since they both provide predictable lifetime income, Social Security and FIA income riders, in addition to all of their other benefits, reduce portfolio risk. In both cases, the present value of the future income stream comprises an important, if not dominating, piece of the fixed income component of one’s investment allocation model.

When viewed this way, Social Security reduces overall portfolio risk, and, in turn, reduces the dollar amount of traditional fixed income assets, e.g., CD’s, bonds, etc. that would otherwise need to be included in a portfolio if Social Security wasn’t available. To the extent that significant income will also be received from a FIA income rider, this further reduces a portfolio’s dependence on traditional fixed income instruments.

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