Would you like to receive a monthly guaranteed payment despite volatility? Here’s how | National News
Variable annuities offer savers an opportunity for higher returns than they are likely to receive from fixed annuities. However, because variable bond yields are based on underlying investments in the markets, yields can also be lower. To avoid the risk of running out of money in retirement due to a market downturn, a variable annuity buyer can opt for an optional tab called a guaranteed minimum income benefit (GMIB). For a price, this guarantees the bond buyer that they will receive at least a minimum monthly payment no matter what happens in the markets.
If you need help buying annuities or with financial planning questions, consider working with a financial advisor.
An annuity is a contract with an insurance company that offers a regular stream of future payments in exchange for an upfront payment of the principal. This payment can be in the form of a one-off premium or in installments.
Annuities are structured with accrual periods, when the returns from investing the principle grow, and distribution periods, when the purchaser begins to receive payments. One benefit of annuities is that the annuitant pays no federal income taxes on income from investing the principle until withdrawals begin.
There are many types of annuities, but most can be broken down into either fixed or variable types. Fixed annuities have a fixed interest rate that never changes despite market trends and also offer buyers predictable, constant payments.
With variable annuities, the rate of interest generated by the principle may change according to the value of the underlying investments, which may be stocks, bonds, mutual funds, or other securities. Due to market volatility, a variable annuity may earn less in a few years. If an annuity buyer keeps withdrawals constant when investment returns fall, it is possible for the principle to run out and payments to stop.
The GMIB addresses this possibility by guaranteeing to maintain at least a minimum level of payments. To get this benefit, buyers pay an additional fee to the insurance company.
How GMIBs work
GMIBs are sometimes referred to as Guaranteed Interest Accounts, Guaranteed Retirement Income Programs, and other names by the insurance companies that sell them. Most work the same way. A pension with a GMIB driver maintains two accounts. One, the investment account, holds funds that the buyer can direct into a limited number of investments, usually low-cost mutual funds and index funds. The other account, the GMIB, is set up professionally.
The amount of the monthly, quarterly or semi-annual payment to the annuity purchaser is determined by the market value of the investment account or the market value of the GMIB account, whichever is greater.
For example, if a bond buyer buys a GMIB driver that guarantees 6% profit but the market only returns 5%, the GMIB account would be larger and the payment would be based on that account. The actual amount of the payments depends, among other things, on the amount of the basic pension and the length of the pension.
Annuity buyers can, with some restrictions, e.g. B. Pay penalties or have to wait several years after financing the pension, usually withdraw the entire amount from the investment account. This is not possible with the GMIB account. The GMIB account is used to determine and fund the payouts, but the annuity purchaser cannot withdraw this money.
GMIB pros and cons
The benefit of a GMIB is that it alleviates retirement savers’ fears of running out of money in retirement. However, this benefit comes with an increase in cost and complexity.
However, GMIB driver fees can impact investment returns. For example, a popular GMIB driver charges 1.25% in fees every year. This is in addition to the already high fees annuity sellers charge for operation, administration, distribution, and other costs.
GMIB drivers are also complex. It can be difficult for a buyer to understand the warranty, costs, and exactly how future payments are calculated.
Another limitation of GMIBs is that while they are widely available, not all companies offer them. Finally, most GMIBs have age limits.
GMIBs can address retiree savers’ concerns about running out of money in retirement by promising that no matter what happens in the market, they will receive at least a minimum regular payout. They are often offered as riders on variable annuities. GMIBs add to the expense and complexity of annuities, but they can be useful tools in retirement planning.
- An experienced and qualified financial advisor can help you decide whether and how to use annuities. Finding the right financial advisor to meet your needs doesn’t have to be difficult. SmartAsset’s free tool puts you in touch with financial advisors in your area in 5 minutes. If you’re ready to be matched with advisors to help you achieve your financial goals, start now.
- Don’t rely on just one annuity. Be sure to save with a workplace account like a 401(k) if you have access to one, or an Individual Retirement Account (IRA) if you don’t.
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