You can control the flow of retirement income.
If using annuity payments to provide lifetime income is the strategy that seems to make the most sense to you, you can select a payout plan that suits your individual situation. The alternatives you’ll want to consider include whether the income should last for one lifetime or two and whether you should include a period certain to guarantee at least a minimum number of payments.
The fixed alternative
There are circumstances when knowing exactly what you can count on each month may seem more appealing than the potential for growth.
You can get fixed income from your variable annuity by using either part or all of the accumulated value of your contract. The way it works is that the assets in your investment accounts are liquidated and deposited into the annuity provider’s general account. The company then takes on the responsibility for making regular income payments.
With some contracts, you may also be able to choose a fixed payout that increases in increments of 1%, 2%, or 3%, reflecting increases in the cost of living. With this feature, your payments may initially be smaller than if you had not chosen increasing payments.
Who will receive the money?
Should the payout be life only or joint and survivor? For many people, wanting to provide lifelong income for a spouse or other person is the driving force in choosing a joint and survivor payout. Each individual payment amount is less than with a single life annuity, but the total over two lifetimes can be more, sometimes much more.
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When isn’t a joint and survivor policy the wiser decision? Among the factors to consider are how much income each of you has from other sources and how healthy you are. For example, if you own an annuity and your spouse has a good defined benefit plan, taking a single life annuity might make sense. It would provide more income than a joint and survivor payout, and your spouse is already guaranteed lifetime income. Similarly, if your spouse is ill, and unlikely to outlive you, a single life annuity might be the wiser choice.
What percentage should the survivor get?
50% or 100%
How much income should the survivor receive? The follow-up decision to choosing a joint and survivor payout is what percentage of the income that you receive while you’re both alive should be paid to the surviving partner. There are usually several choices, with the least being 50% and the most 100%.
The decision involves trade-offs, as so many things do. If the surviving partner gets 100% of the income, the amount you get while you are both alive will be less. But the goal in choosing that alternative is that the survivor will have as much income as he or she needs.
On the other hand, a variable annuity paying the survivor 50% may provide sufficient income, since the living expenses of one person should be less than for two. Additionally, the variable annuity paying the survivor 50% may be able to provide enough growth to make up the difference over time if the investment funds you’ve chosen produce strong returns.
In one hypothetical example, a surviving spouse might receive an initial 50% payment of $228 following the annuitant’s death. Some years later, the amount might climb back to $414, only $42 less than they had been receiving together. Of course, there is the equivalent potential for payments to decrease if the investment funds you’ve chosen do not produce strong returns.
How long will you get the money?
Should you choose a life annuity that guarantees a certain number of payments? One reason people give for choosing not to annuitize is that they’re afraid if they die shortly after they begin receiving payments, they will forfeit a large portion of the amount they spent to purchase the annuity. To avoid that situation, some people choose a period certain payout guaranteeing that they or their beneficiaries will receive income for at least a minimum period, typically 5, 10, or 20 years.
You can choose a period certain payout whether you take a single life or joint and survivor option. Although the guarantee reduces the amount you get somewhat, its appeal is that it provides added peace of mind.
Should you take a payout that guarantees life income?
You may choose a guaranteed lifetime withdrawal benefit (GLWB) rider that promises you can take lifetime income based on what’s known as your income base or total withdrawal base and your age when you start taking the income. For example, if you’re 75 and have a single life rider, you might be able to withdraw 5% of your income base each year, depending on the contract issuer.
There’s the potential for added income if your investment account — which is different from your income withdrawal base — increases in value because investment markets go up. But there’s also the assurance of at least the minimum withdrawal if the investment account value goes down — provided you don’t withdraw more in any year from your investment account than the maximum percentage your contract sets.
Complexity and cost, which can equal or exceed the fees you’re already paying for your variable annuity, are the two chief drawbacks of this approach.
If you want to receive more income each month than annuitization would provide, and won’t be dependent on annuity income to cover long-term expenses, you may want to choose a fixed-term payout, such as ten years. When you select this option, you may also have the opportunity to commute, or cash in, your annuity for a lump sum rather than stretch out the income.
Annuitization Strategies Review. How To Get Max Income? by Inna Rosputnia
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