Annuities exist to provide income in retirement.
Once you turn 59½ and you’re ready to start receiving income from a deferred annuity, all you have to do is let the annuity company know that you want to convert your contract from accumulation to payout.
If you own the annuity in an employer plan or IRA, you must set a date no later than April 1 of the year following the year you turn 70½.
If the annuity is nonqualified, your contract will specify a maturity date by which the payout must begin. The process is even easier with an immediate annuity. When you buy, you choose a start date sometime within the next 13 months.
Growing more flexible
The earliest deferred variable annuities offered two choices when you were ready to start receiving income. You could convert your contract to the payout phase, a process called annuitization. That generally provided income for as long as you lived but left nothing for your beneficiaries when you died. Or, rather than annuitizing, you could surrender your contract, which meant getting your premiums and earnings back in a lump sum, minus expenses, and owing tax on the earnings. Once you chose, you couldn’t change your mind.
Since then, many different annuity payout options have been added that offer greater liquidity and flexibility, even though the basic purpose continues to be to provide retirement income.
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For example, many annuity policies now offer a life annuity with a term certain that guarantees payments until the end of the term even if you die before then. And many contracts offer income that continues for a fixed period rather than as long as you live. With some commutable contracts, you may be able to accelerate your payments under certain circumstances. That means you can withdraw a lump-sum amount after annuitization begins rather than continue to receive regular payments. Though changing your mind may be possible only with certain types of payout plans, the flexibility has real advantages if your life situation changes.
When you’re ready to take income, annuity contracts typically offer a number of choices:
Income for a fixed term or period
The income you receive from your annuity depends on a number of factors. The most important are the purchase payment for an immediate annuity or the total accumulated value of a deferred annuity, your age when you begin taking income, the payout option you choose, and whether the income is fixed or variable.
If you have a fixed annuity, the payout amount is traditionally fixed as well. Some newer contracts, though, build in the potential for periodic increases of 1%, 2%, or 3% to account for increases in inflation that boosts the cost of living. If you have a variable annuity, you can choose the way you income amount will be figured. You can generally select variable income, which fluctuates depending on the performance of your investment funds.
Or, with many contracts, you can choose fixed income or a combination of fixed and variable to provide a measure of stability as well as the potential for growth.
Making Your Money Last
One of the biggest challenges you’ll face in retirement is managing your money so that it will last for the rest of your life. Here are some questions to consider as you make your plans:
- What effect will taking money out of your various retirement accounts have on their continued ability to grow and provide income for as long as you live?
- What part of your income can you count on and what part is less predictable?
- How diversified are your income sources? Are you too vulnerable to major changes in the economy, including declining interest rates?
Some variable contracts offer a guaranteed life-time withdrawal benefit (GLWB) rider. The rider, which carries an additional fee, promises protection against investment losses and the opportunity to benefit from investment gains, which increase the amount you will be eligible to withdraw. Advocates point to the added financial security a GLWB provides, while critics express concern about the cost and complexity of this protection.
Understanding Your Annuity Income by Inna Rosputnia
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