Guaranteed lifetime income add-on for annuities
Quick Definition: An income rider is an optional add-on to FIAs and RILAs (typically costing 0.75-1.5% annually) that guarantees lifetime income at a future date. The income base grows at a guaranteed rate, independent of your account value, providing certainty for future withdrawals.
Income riders create two separate values in your annuity:
1. Account Value: Your actual money that goes up and down with index performance (subject to caps/buffers). This is what you get if you cash out or what your beneficiaries receive.
2. Income Base: A separate calculation used only to determine your future income payments. This grows at a guaranteed rate (typically 5-8% annually) regardless of market performance. You can't cash this out—it only exists to calculate income.
When you activate the rider (usually at age 60-70), you receive a guaranteed percentage of the income base annually for life—typically 4-6% depending on your age.
Purchase: $200,000 FIA at age 55 with 6% income rider (costs 1% annually = $2,000/year)
Income base growth (guaranteed 6% compound):
Age 55: $200,000
Age 60: $267,600
Age 65: $358,170
Age 70: $479,160
Activation at age 70:
Income base: $479,160
Withdrawal rate at 70: 5.5%
Guaranteed annual income: $26,354/year for life (~$2,196/month)
Total rider cost over 15 years: ~$30,000
Break-even: Just over 1 year of income
Why not just buy a SPIA when you're ready for income? Here's the comparison:
| Feature | Income Rider (FIA/RILA) | Immediate Annuity (SPIA) |
|---|---|---|
| Flexibility | Can delay activation, change timing | Must start income immediately |
| Account value | Keeps growing with market (up to caps) | None—fully annuitized |
| Death benefit | Beneficiaries get remaining account value | Usually nothing (unless period certain) |
| Income amount | Lower—typically 4-6% of income base | Higher—typically 7-9% of premium |
| Cost | 0.75-1.5% annual rider fee | No separate fee (built into payout) |
Your income base grows at a set rate during the deferral period:
If your account value grows significantly, some riders "step up" your income base to match your actual account value on anniversaries. This locks in market gains.
Example: Income base is $300,000, but account value grows to $350,000 due to strong market performance. On anniversary, income base steps up to $350,000.
For married couples, income continues at 100% or reduced percentage (typically 80-90%) after first death. Costs slightly more or reduces initial payout rate.
Good fit if you:
Not ideal if you:
Income riders cost 0.75-1.5% annually. Over 15 years on $200,000, that's $22,500-45,000 in fees. The question: does the guaranteed income base growth justify this cost?
Scenario 1: Markets are strong
Your account value might outgrow the income base anyway. The rider was wasted money.
Scenario 2: Markets are weak
Your account value stagnates but income base grows at 6% guaranteed. The rider saved you.
Scenario 3: Markets are average
Probably a wash—the rider provided peace of mind but didn't dramatically change outcomes.
The rider is insurance. You're paying for certainty, not necessarily better outcomes.
⚠️ Critical Understanding: The income base is NOT money you can access as a lump sum. It's only a calculation for income payments. If you see "$500,000 income base" in year 15, you can't withdraw $500,000. You can only take the annual percentage (say 5% = $25,000/year). Your actual account value might be $250,000.
1. Buy a SPIA when ready
Wait until you actually need income, then convert funds to an immediate annuity. Higher payout, no years of rider fees.
2. Ladder annuities
Buy annuities at different times as you need income, rather than committing everything upfront with a rider.
3. Use FIA/RILA without rider
Let it grow, then do a 1035 exchange to a SPIA when ready. More flexibility, no ongoing fees.
Income riders are about predictability and peace of mind, not maximizing income. You're paying 0.75-1.5% annually for the certainty that—no matter what markets do—you'll have a guaranteed income stream calculated from a guaranteed growth rate.
If certainty is worth more to you than squeezing every dollar of income, riders make sense. If you want maximum income and can handle some uncertainty about timing, skip the rider and buy a SPIA when you're ready.