Many retirement investors use annuities for guaranteed income. But some find their annuity payout options to be confusing. There are a variety of methods to receive annuity income payments. With so many choices, it can be hard to decide what’s right for you.
People tend to feel more confident in their decisions when they are well-informed. So, this article will take a look at some common annuity payout options and how they are defined.
Before going into basic details, it’s important to recognize that your payout choices will differ among insurance companies. Some carriers may not provide the same annuity payout options you have with another carrier. Or the specific conditions and details of the payout options might vary. Keep this in mind as you choose how you want your future income payments to be calculated.
Annuity Payout Options
You may choose from a few methods of how you will get annuity payouts. Nowadays, the two most common are annuitization and a systematic withdrawal schedule.
With annuitization, you convert the money in your contract into a permanent stream of income payments that is irreversible. Once done, you can’t take it back. The benefit is you receive guaranteed monthly income, but on the flip-side, you lose control over access to your money.
Under a systematic withdrawal schedule, you enjoy total control over the timing of your income payouts. Usually this is done with a lifetime income rider.
While you have more freedom with this method, the income rider comes at additional annual cost, and you may outlive the lump-sum value of your annuity. The rider can provide you with lifelong income payouts, though.
Your Options with Annuitization
The annuitization method comes with a variety of options. As you read through these, keep in mind that they differ whether you have an immediate or a deferred annuity contract. With that said, your annuity payout options can include:
This option gives you income payments for life. Generally, it gives you the highest payout because payment calculations are based only on the annuitant’s life expectancy. While it can give the highest amount, once the annuitant passes away, the insurance company keeps the remaining balance in the contract.
Period Certain Only
This option guarantees income for a fixed number of years. It usually starts at 5 years and can go up to 20 years. Should death occur before the period certain ends, the payouts would go to a stated beneficiary.
Life and Period Certain
Under this option, you receive income payouts for life, with a guaranteed payment period lasting for a fixed number of years. In many contracts, the guaranteed period starts at 5 years and goes as far as 20 years. If death occurred during the guaranteed period, a named beneficiary would receive the payments until the end of the period.
Should you live past the end of the guaranteed period, you would receive income payments for life.
Joint and Survivor
Under this option, the insurance carrier pays out income as long as either someone or their named beneficiary, often a spouse, lives. When one partner passes away, the surviving spouse continues to receive payments for their lifetime. Since this survivorship feature is an added benefit, each income payout is smaller than what people might get with a life-only payout option.
With this option, income is payable for a lifetime. Once death occurs, a named beneficiary continues to take the annuity payouts until all payments are equal to the initial premium paid into the contract.
This option provides someone with payments over their lifetime. Upon death, a named beneficiary gets a lump-sum payment equal to the initial premium paid into the contract, less the amount of total income that has already been paid out.
Flexibility with Systematic Withdrawal Schedule
With this method, you may choose the payout amount you receive each month. You can also select how many payments you want to receive. In some annuity contracts with an income rider, you may be able to turn income payments “on” and “off,” but certain conditions and terms will apply.
If your payout strategy was a managed withdrawal schedule using an income rider, the rider benefit would come at additional cost. This would be an annual fee you pay, and while it can vary among insurance carriers, some contracts specify a rider fee of 0.95%.
Another trade-off is you might outlive the lump-sum value of your contract over time. This can be an important factor to consider for those who might have legacy or estate planning goals for their money.
Consumer Annuity Payout Choices Vary by Annuity Type
Payout options can vary with the type of annuity you have. For instance, a systematic withdrawal schedule, using a lifetime income rider, generally arises with a fixed index annuity.
With that said, most people don’t choose annuitization with longer-term contracts than immediate annuities, like fixed index annuities.
Ruark Consulting has found that annuitization rates have been staying at or below 2% since 2014. While this was a finding among variable annuities, it does illustrate what people are choosing for income payouts.
Instead of annuitization, many people with deferred annuities choose a systematic withdrawal schedule or a lump sum value.
Choosing a Lump-Sum Value
Not everyone chooses one of these methods for income payouts. Some people opt for a lump sum. For people considering this option, it’s important to consider potential tax consequences. Taking a lump-sum payment can drastically boost your taxable income for the year.
However, it may be possible to roll over annuity money into an IRA or another tax-deferred retirement account, without triggering tax liability. Check with qualified financial and tax professionals for guidance with your personal situation.
Choosing Not to Receive Payments
In other cases, some Americans elect to keep their money in the annuity. They may not need the income. If you find this the case, you will want to be sure that your beneficiary designation is named correctly.
Depending on how you paid for the annuity, you may face future tax obligations with required minimum distributions, once you reach age 70.5. That’s important to note, as neglecting RMDs can result in a 50% excise tax on the required amount to be withdrawn.
Final Thoughts on Navigating Annuity Payout Options
While this is a good overview of different annuity payout options, it’s not exhaustive. Working through the different choices takes careful due diligence and consideration. It’s not an easy decision, but you will want to consider your goals, how much income you will need each month, and for how long you might need the income. A qualified financial professional can help you answer these questions and decide what might make sense for you.