How Much Do Fixed Annuities Pay?
Income payouts on fixed indexed annuities depend on several variables.
In the end, everyone should be looking for the highest guaranteed payout available but many of these variables individually can distract people from finding the best product.
Bonuses are the biggest distraction. Many advisors and consumers alike are guilty of focusing only on a single detail that makes a product easy to sell. Soon you will see that none of it matters and everything boils down to which contract produces the highest level of income.
There are just a few factors that determine how much income can be expected from a fixed indexed annuity. Using $100K as an example, the variables below are all specific to each person. That’s a good place to start before we look at how each contract is different.
Individual Variables that Affect Income Amounts
Single or Joint Life- Higher payments are available for one person rather than two. Two people live longer than one so this is a required part of the calculation. One major benefit of fixed indexed annuities is that you can buy the contract now but not have to decide if it’s a single or joint payment until you take income.
Age of Annuitants- The older you are, the higher the payment. If it’s a joint payment then joint life expectancy is calculated based on the younger person. It doesn’t matter how big the age gap is.
When Income Starts- Payments can begin immediately or be deferred for several years. As each year passes the guaranteed income payments increase. It’s just like delaying social security payments.
Level or Inflation Adjusted Payments- Level payments are higher but some choose to have increasing payments. For the same amount of premium, inflation-adjusted payments will start lower and increase by a guaranteed or index adjusted rate, depending on the contract.
Contract Features that Affect Income Amounts
Bonuses- Several contracts offer what can be considered a ‘phantom bonus’ that does not increase the account value but only enhances the guaranteed income amount.
Roll-Up Rate- Annual increase to the income payments for each year of deferral. This can be a guaranteed annual increase or may be indexed to an external market index, depending on the contract.
Payout Rate- This is based on the age at which income payments begin. Payout rates increase for each year of age and joint payments are based on the age of the youngest annuitant.
A contract with a large bonus might pay less income than a contract that has a higher payout rate.
If one person takes immediate income the bonus might be a bigger factor. If another decides to defer income for a few years, the roll-up rate might give a different product the edge. The payout rate is the deciding factor because you must not forget that it all comes down to the highest level of guaranteed income.
Once all individual variables have been set and all contract features have been considered, it’s easy to see why each person will come to a different conclusion.
Let’s look at a quick example of something that actually happens every day.
We’ll assume we have a 65-year-old who wants immediate income, a 63-year-old who wants to defer income for two years, and a 61-year-old who wants to defer payments for four years.
Three different scenarios will result in three completely different products. Everyone is taking income at age 65 but more variables come into play based on the years of deferral. Contract features will be the determining factor and I’ll assure you that three custom solutions will come out of it.
How Much Do Fixed Annuities Pay?
It’s only complicated because your situation is unique. You decide on the variables and the products are easy to figure out after that. Some other things come into play based on personal preference for additional benefits or insurance company financial strength but that changes on a case-by-case basis. You may not buy the highest level of guaranteed income but it shouldn’t be because you didn’t get a chance to see it.