A 71-Year-Old, a Ten-Year Surrender Charge, and $1,500 a Month
Rosa is 71 and has just retired. She rolled $350,000 from a 403(b) into an IRA and needs about $1,500 a month of dependable income starting now, on top of Social Security. A producer recommends a fixed indexed annuity with a 10-year declining surrender charge, a 7-year wait before the guaranteed lifetime withdrawal rider can be activated, and a 1.25% annual rider fee. He emphasizes that the rider's benefit base grows at 6% a year and that the contract has a free-look period. Rosa has $40,000 in a savings account, no other retirement assets, and no pension.
1. Evaluate suitability. What specific features make this recommendation questionable?
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The timeline does not fit the need. Rosa needs income now; the rider cannot be switched on for seven years, and every dollar she withdraws before then is either within a small free-withdrawal band or exposed to surrender charges.
The surrender period outlasts the planning horizon. A 10-year declining schedule from age 71 runs to age 81. Illiquidity of this length for someone whose only other asset is $40,000 is a serious concern.
The benefit base is not the account value. A 6% roll-up on the base is not a 6% return on her money, and the 1.25% fee is charged against the account value every year whether or not she ever turns the rider on. That fee plus surrender charges plus the contract's caps and participation rates is what she is actually buying.
Concentration. One illiquid contract holding 100% of her retirement assets, with the rest in a savings account, fails a reasonable-basis analysis on liquidity, financial time horizon, and existing assets. Under the annuity suitability/best-interest standard the producer must weigh age, liquidity needs, risk tolerance, and alternatives, and document it - the free look is a safety net, not a substitute for suitability.
2. When must she begin required minimum distributions, and how does the income rider interact with them?
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Timing: under SECURE 2.0 her required beginning date is April 1 of the year after she attains age 73. She has time, but not unlimited time, and the first distribution is easy to miss.
Base: the RMD is calculated on the account value the insurer reports - not the income rider's benefit base. A 6% roll-up on the benefit base does not raise her RMD, but the 1.25% fee reduces the account value while the applicable RMD percentage climbs each year. That is a squeeze: the required percentage goes up while the balance it is applied to is being eaten by charges.
Source: withdrawals taken from the IRA contract count toward the RMD. If she instead annuitizes inside the IRA, the annuity payments must satisfy the §401(a)(9) rules.
Penalty: failing to take an RMD triggers an excise tax (25%, reduced to 10% if corrected promptly). A client who is sold a product on the strength of 6% growth projections and never told about RMD mechanics is a complaint waiting to happen.
3. What should Rosa do before signing? Give her a concrete comparison plan.
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Ask for three documents in writing: the full surrender-charge schedule year by year, guaranteed (not projected) lifetime income figures, and total annual cost including the rider fee.
Then compare against two alternatives:
- A split approach: place roughly $150,000–$180,000 in an immediate annuity with a lifetime payout and either a period certain or cash refund feature, which starts income now, carries no surrender charge, and cannot be outlived - at the cost of being irrevocable. Leave the remainder in a liquid or laddered position for emergencies and inflation.
- A short-deferral income annuity, deferring one or two years rather than seven, if she wants more income per dollar later.
Inflation is the missing variable. A level $1,500 a month for 20 years loses substantial purchasing power; ask what a 2% cost-of-living adjustment would cost her in starting income.
Finally: mark the free-look deadline on the calendar in her handwriting, and note that returning the contract during the free look gets the premium back without surrender charges.