Choosing the Payout on Your Annuity
An annuity can be an appropriate and appealing aspect of a financial plan that is sound. It works well for some investors but not for all investors. One of the features of annuities that many individuals do not comprehend completely is payout options. Here we look at the various payout options, as well as how they are calculated. Read on.
The Two Phases of an Annuity
The life of an annuity is broken down into two different phases. There is the accumulation phase and the payout phase (which is also sometimes referred to as the annuitization phase). The accumulation phase comes first. While this phase is taking place the investor can add funds to their annuity account by depositing cash into it. You can also do so by doing a 1035 exchange from another annuity account you already have or by converting the cash values of your life insurance.
As long as you follow the rules that govern annuities the annuity you create will accumulate earnings as you contribute to it. The annuity will grow and be tax deferred until the point at which you begin to make withdrawals from it. Once you reach the age of 59.5 years you are permitted to start to withdraw money from your annuity without having to pay any penalty charges.
Payout Options for an Annuity
The payout phase, which is when you start to withdraw funds from the account, comes next. There is more than one way to take annuity payouts. The two most commonly used methods for receiving cash payouts include the annuitization method and the systematic withdrawal schedule. Yet another method is that of taking a lump-sum payment which is a payment of a large amount that is received all at once.
The annuitization method is such that you are guaranteed a source of income on a monthly basis for a certain length of time. There is a systematic withdrawal schedule set up that allows you control over the distribution of your money. However you are not guaranteed any protection in terms of outliving your annuity assets.
Let us look now at the options that are available to you when it comes to the annuitization method. There is the life option, the joint-life option, the period certain and the life with guaranteed term.
Life Option
The life option is the one that more often than not offers the highest payout. The reason for this is because the monthly payment is calculated on the annuitant’s life and that is all. The life option offers an income stream for life. The best thing about this is that it is there for you if you outlive the income from your retirement.
Joint-Life Option
The joint-life option is favored by many people. This is a smart option if you are married. In this instance your retirement income will continue to go to your husband or wife after your death. The monthly payment for this option is less than that of the life option due to the fact that it is calculated based on the life expectancy of both spouses, as opposed to just one.
Period Certain
Period certain is yet another option. In this case the annuity’s value is paid out over a span of time of your choosing. Common time periods include 10 years, 15 years or 20 years. If you decide to take a 15 year period certain for your annuity and then you die after 10 years the annuity contract is guaranteed to pay the money out to your beneficiary for the five years that remain in the contract.
Life with Guaranteed Term
If you choose to go with the life option then you are guaranteed income for the remainder of your life. This is comforting for many people. Unfortunately the down side to this is that if you die in the near future then the money ends with your passing. The life with guaranteed term is similar to the life option in that you continue to receive payments for the duration of your life. However with this option you can also choose a guaranteed period, such as 10 years or 15 years. When you do this then the annuity must be paid out your estate or your beneficiary even if something claims your life before the guaranteed period draws to a close.
Systematic Withdrawal Method
The systematic withdrawal method is yet under method worth familiarizing yourself with. In this case you choose the payment amount that you would like to receive on a monthly basis and also how much money you would like to receive. The amount you will receive and the number of months you will receive money is dependent upon how much money you have in your annuity account. The insurance company you deal with is not able to guarantee that you will not outlive the payments you will receive. With the systematic withdrawal schedule the burden that rests with the life-expectancy risk falls on your shoulders.
Lump Sum Payment
Some people choose to take the money out of their annuity account in one lump sum payment. Withdrawing all of your assets in this manner is not recommended. This is because you will be required to pay taxes on all of the money you withdraw at once. If tax minimization matters to you then a lump sum payment is not wise or recommended.
Some people find that when the time comes that they are permitted to withdraw funds from their annuity account they do not require the money as a source of income. If this describes you then make sure that your beneficiary designation is correct and there are no errors. This means that upon your death the annuity will be transferred to the beneficiary without any problems arising.
Monthly Payments and the Insurance Company
Insurance companies take into consideration a variety of factors when it comes time to calculate how much an annuitant should be receiving in monthly payments. Two of the factors that are most often taken into consideration are age and gender. The reason for this is because both factors are related to life expectancy. Females have longer life expectancies than males. What this means in terms of an annuity is that women will receive less money than men. As well the older a person is the lower their life expectancy is and therefore the higher will be their monthly payout. From a common sense point of view this is easy to understand. The older you are the fewer years you are likely to have left to live in relation to a younger individual. For example, a 76 year old man who has chosen the life option annuity will receive more money on a monthly basis than will a 66 year old man.
Another factor that the insurance provider looks at is the type of payout option that the individual chooses. This will affect your monthly payout size as well as the length of time that your payments will remain in effect. To give an example of this, the joint-life option will provide you with lower payouts on a monthly basis than the life option because the payments are transferred to your spouse and continue after your death.
Still another factor that comes into play in terms of your monthly payout is the insurance provider you choose to go with as well as the company’s expected investment returns on your funds. The higher the returns the company can make on your money, the higher will your payments be. For instance, if the insurance provider can make a return of five percent on your money instead of three percent then you will reap the benefits just as they will as well.
This also has to do with whether you choose a variable monthly payout or a fixed monthly payout. If you choose the variable payout then the amount of money you receive on a monthly basis comes with market risk and will fluctuate according to the conditions of the financial market. On the other hand, a fixed payout is such that all of the investment risk is absorbed by the insurance provider and your payout remains the same regardless of what market conditions are.
