Annuities and the Payout Process
Planning for retirement requires making strategic financial moves now in order to pave a smooth road ahead for your future income needs. Purchasing an annuity is a great way to grow your money without getting taxed on the interest earnings as your annuity account value increases. With a non-qualified annuity, your earnings are only taxed when they are withdrawn from the policy.
If you are already considering the purchase of an annuity, you should understand the various payout methods that are available to you and how they will affect your stream of income during your retirement. When it’s time to withdraw funds from your annuity (remember, that’s at least age 59.5 to avoid a tax penalty), you should consider the following payout options:
With the lifetime payments option, you will receive a monthly income stream for life. The benefits of this are that you won’t outlive your income and it usually has the highest payout, as the monthly payment is solely calculated based on the single life expectancy of the annuitant. However, there is no survivor benefit and payments stop at the time of death.
The joint-life annuity allows for your monthly retirement income to continue to your spouse upon your death. The payout tends to be lower than the lifetime option as payments are calculated based on the life expectancy of both spouses. This is a popular option among married couples.
The period certain option requires you to define a period of time for payout (such as 10, 15 or 20 years). If you die before your completed payout, your beneficiary will continue to receive payments for the remainder of the period certain term.
Life with Guaranteed Term
Similar to the lifetime payments option, the life with guaranteed term provides you with a monthly income stream for life. However, it also allows you to choose a guaranteed term (or defined period of time) for which your annuity must pay your beneficiaries, in the event you die before the guaranteed term ends. For instance, if you select a 10-year guaranteed term and die 3 years after you begin receiving payments, your beneficiaries will continue to collect for 7 more years.
Systematic Withdrawal Schedule
If you choose this method, you may decide how often and how much you would like to withdraw from your annuity account value, however there is the risk that you may outlive your retirement income. Your income will stop once you have fully liquidated the value of your annuity account.
Optional Income Riders
Many annuities are now available with optional income riders that can be added to your policy at issue. If you choose to add an income rider to your annuity, there is typically a small annual cost charged to your account each year for this option. The benefit of an income rider is that income can be guaranteed for life without annuitization, giving you more control over your funds and eliminating the need to irrevocably sacrifice your principal to the insurance company. Income riders come in many different configurations, so this is an option you will want to fully explore with the assistance of a qualified annuity specialist.
You always have the option to cash out your annuity in one lump sum; however ordinary income taxes will be due on the accumulated interest earnings the year that you withdraw, so this method is typically discouraged. If you are considering incorporating an annuity into your retirement plan, make sure you investigate the various payout methods described above in order to choose the plan that’s best for you and your family. Your future self will thank you for it!
Investopedia: Selecting The Payout On Your Annuity http://www.investopedia.com/articles/retirement/05/071105.asp
CNN Money: Ultimate Guide to Retirement http://money.cnn.com/retirement/guide/annuities_basics.moneymag/index3.htm?iid=EL
CNN Money: Ultimate Guide to Retirement http://money.cnn.com/retirement/guide/annuities_basics.moneymag/index8.htm