Top 10 Reasons Not to Buy an Income Rider on Your Annuity

Choosing the right financial products is crucial to ensuring a stable and prosperous retirement. Today, I want to discuss why you might want to think twice before purchasing an income rider on your fixed annuity or variable annuity.

Here are the top 10 reasons to reconsider:

1. High Fees

Income riders typically cost between 0.5% to 1% annually. For example, if you invest $100,000, over 10 years, you’ll pay about $10,000 in fees—this increases to $20,000 over 20 years, and $30,000 over 30 years. These fees can significantly erode your potential returns.

2. Lower Income Payout Rates

Income payout rates for most riders have decreased over time. What might have once been a good deal at a higher rate may not be as beneficial under current lower rates.

3. Reduced Growth Rates

The guaranteed growth rates of income riders have also declined, from rates as high as 8-10% annually to now just 4-6%. These lower rates may not offer the same value as before.

4. The Growth Portion Isn’t Yours to Keep

It’s important to understand that the guaranteed growth is not a lump sum that you can withdraw; it’s distributed over a long period, typically over 20 years or your lifetime.

5. Returns Depend on Underlying Investments

The actual return on your annuity depends on the performance of the underlying investments after deducting rider fees. With volatile markets or low caps in indexed annuities, achieving a good return can be challenging.

6. Income Payments Reduce Your Principal

When you activate the income rider, payments are drawn from your invested amount first. If your capital depletes, only then will the insurance company cover the payments, which may require living to an advanced age.

7. Risk of Never Benefiting From the Rider

If you pass away before your investment runs out, you’ve paid for a rider that you didn’t fully utilize, offering no value to your heirs.

8. False Sense of Security

The guarantee might tempt you to withdraw income sooner or in larger amounts than necessary, potentially depleting resources intended for your family’s future.

9. Potential Tax Disadvantages

Increased income from the rider might lead to higher tax liabilities, pushing you into a higher tax bracket or causing more of your Social Security to be taxed.

10. Commitment to a Single Investment

To benefit from a lifetime income rider, you must stay invested in the same product with the same company indefinitely. Economic conditions, company stability, and personal needs change over time, making this inflexibility risky.

Making the Right Choice for Your Retirement

As your financial planner, I am committed to providing unbiased advice that puts your best interests at the forefront. It’s essential to evaluate not only the potential benefits but also the constraints and costs associated with any financial product.

Remember, it’s crucial to review all aspects of financial products with a professional who understands your unique financial landscape. I’m here to help guide you through these decisions, ensuring the choices you make align closely with your long-term financial goals.