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Annuity Payout Options

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You can choose how you will receive your annuity’s eventual payouts to better fit your plans for retirement.The four main payout methods are:

 

Lifetime Payments

This option provides guaranteed income during your lifetime. However, your heirs will not receive anything in case you pass away. The payouts can be fixed or variable, and will be calculated depending on your investment and life expectancy.

 

Income for Guaranteed Period

Also called period certain annuity, this option guarantees a specific amount paid out over a specific period of time, typically 5 to 30 years. If you die before this period ends, your beneficiary receives the rest of your payouts.

 

Lifetime Income with Guaranteed Period Certain Benefit

Also called life with period certain annuity, this combines the above-mentioned methods. The annuity guarantees lifetime payments but also includes a period certain phase. If you pass away before the end of the period certain phase, your beneficiary receives your payouts for the rest of the remaining time.

For instance, if your annuity account has a period certain phase of 15 years and you pass away on the 10th year of receiving payouts, your beneficiaries will continue to receive payments for the remaining five years.

 

Joint and Survivor Annuity

Similar to lifetime payments, this option also provides income for the rest of your life. Once you pass away, it will continue paying out to your survivor for as long as he or she lives. This option is popular among couples.

Payouts from a joint annuity are typically lower than the lifetime payments option because payments are calculated based on two life expectancies.

 

Other Options

Aside from the four main payout options, there are other ways to receive payments from your annuity account.

  • Systematic Withdrawal Schedule – This option allows you to schedule payouts and select the amount of monthly payments you will receive.

However, the issuer cannot guarantee that you will not outlive your payouts because monthly payments will automatically stop once your account runs out of money.

  • Lump-sum payment –You can choose to receive your annuity payment in one lump-sum amount. However, this option is not usually advisable if you want to minimize your taxes. If you choose to receive your payout this way, you must pay income taxes on the entire investment growth of your annuity account on the same year that you receive the lump-sum amount.

 

How Annuity Payouts are Calculated

Annuity payouts are calculated based on several factors such as age, gender, and the type of annuity account.

Issuers primarily look at the age and gender of a person when computing for payouts because these affect a person’s life expectancy. To ensure that people don’t outlive their annuities or run out of money before a guaranteed period ends, issuers provide lower payouts to those who have longer life expectancies. Likewise, women typically get lower annuity income payments because they tend to live longer than men.

The type of annuity you have also affects the amount of payouts you will get. Fixed annuities provide guaranteed payments, while payouts from a variable annuity depend on the performance of your investments.

 

Now that you have a better idea of how annuities work, you need to weigh their pros and cons before considering your potential investment.

 

Additional Resources:

Annuities Basics – Ultimate Guide to Retirement, CNN Money

Add an Annuity to Your Retirement-Income Mix, Kiplinger