Annuity distributions are categorized in two ways: withdrawals or annuitization (guaranteed income stream). The annuity contract itself explains the annuitization payout options available to you, including when they begin, whether the amount can be fixed or variable, and how long the payouts will last.
Note: Guarantees are subject to the claims-paying ability of the issuing insurance company. Annuities are not FDIC insured.
When the money starts rolling in
Annuity payouts may begin immediately or may begin many years after you purchase an annuity. This is the difference between deferred and immediate annuities. Deferred annuities allow premium payments to grow with tax-deferred investment earnings. Later (often after retirement), the annuity proceeds are distributed as either withdrawals or annuitization payouts. Immediate annuities, on the other hand, are funded with a single, lump-sum payment. As the name implies, payouts begin within a year under an annuitization payout option. Immediate annuities are used to convert a lump sum of cash to an income stream.
Same old story. sometimes
Annuity payouts may be fixed or variable, depending on the type of annuity contract. The amount of each payment will depend on how much money is in the annuity and how long payouts are expected to continue. If the payout is fixed, the payment will be the same each payment period (e.g., monthly, annually). If the payout is variable, the amount will fluctuate depending on the performance of the underlying investment portfolio. Some annuity contracts may guarantee a minimum fixed payout, with the possibility of an additional variable component if the underlying investments perform well during a given period.
A note about variable annuities
Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk including the possibility of loss of principal. Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders.
Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity, or from your financial professional. You should read the prospectus carefully before you invest.
Certain riders and options relating to immediate annuities may be available for an additional fee or charge, depending on the issuer. Read the annuity’s prospectus or contract for a description of the available options and associated fees and charges, if any.
Payouts for life? More or less
Most annuities provide the option of receiving payouts for life. However, it’s possible to get an annuity with payouts that last for a shorter or longer period of time. If an annuity’s payout period is “certain,” it provides payouts for as long as you live, but includes a minimum payout period (e.g., 10, 15, or 20 years) even if you don’t live that long. If you die during the “period certain,” payments will continue to be made to your beneficiary for the remainder of the guaranteed period. You can also choose a payout option that distributes all of your annuity value over a fixed period or one that pays a fixed amount each period for as long as there is money in the annuity.
Whose life is it, anyway?
It’s possible to set up an annuity so that it provides income over the life of two individuals. This is known as a joint and survivor annuity. Joint and survivor annuities are designed to provide income based on the life expectancy of two people. When one person dies, the annuity provides income for life for a second named individual. In some cases, the payments on the second life may be less than the payments on the first life. In most cases, however, payments made on the life expectancy of two people will be less than payments made on a single life.
Take what you’re given, or take what you want
In addition to all of these annuitization payout methods, you may choose simply to withdraw money from your annuity when needed. Once the policy has been in force for a certain number of years, most annuity issuers will allow withdrawals without paying a surrender charge. However, these payments are subject to income tax, and if taken before age 59½, the portion of withdrawals attributable to earnings is also subject to a 10 percent early withdrawal tax (unless you meet one of the exceptions allowed by the IRS).
Annuities may be subject to early surrender charges which can reduce the amount of your withdrawal.