Fixed Indexed Annuity Withdrawals
Fixed indexed annuity withdrawals or liquidity on safe assets, is one of the main problems that retirees have to deal with.
Fixed indexed annuity withdrawals or liquidity on safe assets, is one of the main problems that retirees have to deal with. Regular income streams are often needed but sometimes people simply like discretionary access to the money without penalty.
If neither of those is applicable then at some point most people will be required to distribute money from qualified assets. Liquidity in retirement is a necessary planning component for just about everyone.
Alternatives to Fixed Indexed Annuity Withdrawals
Alternative safe assets don’t have much to offer. Aside from bank accounts and money market funds, which are 100% liquid, longer-term guarantees fall short for many people.
CDs must reach maturity before being liquid so a complex ladder of contracts needs to be created to produce regular income streams or RMDs.
Bonds create steady interest payments but if you need more, you’d have to sell principal, which exposes the bond holder to interest rate risk.
CDs are a decent place to park money that you don’t need. Bonds are a traditional asset favored by investment managers but fall short of being a versatile retirement asset.
Fixed and fixed indexed annuities certainly have an edge here. There are two ways that annuity withdrawals exceed the liquidity of CDs and bonds.
You can either get it from a guaranteed lifetime income rider or skip the guaranteed income and use the free withdrawal provision available in every contract. Regardless, the annuity will meet and most likely exceed liquidity for other safe assets.
Guaranteed Lifetime Income
For those looking to produce steady retirement income, a guaranteed payout from an insurance company has been proven to be the most beneficial method.
Income payouts exceed interest payments from bonds, meaning it takes less investment to create the same amount of income or you can receive more income from an identical investment.
This takes a tremendous amount of pressure off a retirement portfolio and leads to greater accumulation over time. While not technically classified as a withdrawal, it certainly fits the definition.
Annual Free Withdrawal
Not everyone needs consistent lifetime income. For those who like more flexibility, this provision, available in all indexed annuities, creates the opportunity for safety, growth, and more liquidity than any other asset.
Some contracts offer interest-only withdrawals while most contracts offer 10% of the account value annually. The full 10% free withdrawal can be used to simulate income payments, produce RMDs, and even allow rebalancing a portfolio from time to time.
10% is the maximum amount, not the amount you are required to take. The contract owner has discretion over how much and how often the withdrawal is made.
Payments can be made monthly, quarterly, or annually. A simple form submission to the insurance company can start, stop, or change the withdrawal request at any time.
This is where an experienced advisor is helpful so your options are clear from the beginning. It’s certainly not an area where you want any surprises right when you’re looking to make a withdrawal.
Enhanced Free Withdrawal
This deserves an honorable mention because it exists, not necessarily because it’s more beneficial.
Several fixed indexed annuities offer an ‘additional benefits rider’. This is optional and provides a few extra benefits that don’t always offer an advantage.
In terms of a free withdrawal, 10% is standard but the additional benefit allows the contract owner to take up to 20% the year after you didn’t maximize the free withdrawal. 0% withdrawal in one year allows taking 20% the next year just like 5% in the first year lets you get to 15% in the second year. This can be helpful for larger planned expenses but I feel you can do this without the rider.
Several clients have taken 10% the day before an anniversary and 10% the day after the anniversary. Close to 20% was taken in total and there was no penalty because each withdrawal was taken in a different contract year. Because the additional benefits rider comes with a fee, I usually recommend this strategy for anyone who may want a larger withdrawal in a given year.
Weigh your Options
Withdrawals are a necessary component of all indexed Annuities, especially when market assets are involved.
The stock market goes down at times and no one should be forced to sell assets at a loss. Bonds have interest rate risk for additional liquidity and there have been several instances in the past few years when both bond values and the stock market were negative at the same time.
Annuities eliminate the risk from both sides and provide a way to meet all planning objectives in retirement.