Annuity Payouts - What are My Options?

By: Ryan O Donnell

When it comes to laying the financial foundation for retirement, many people choose to use a combination of stocks, bonds annuities and mutual funds to build the assets they'll need to have a comfortable and successful retirement. If you've chosen to use annuities, you've likely already spoken at length with a financial planner and have chosen an annuity that fits your lifestyle and income. You already know that you can protect your principal and have a steady income for the rest of your life. Annuities are a vital component of a well-balanced retirement plan.

While annuities are certainly not the only option when planning retirement, they do offer some flexibility and guarantees that other investment methods do not. If you have chosen to go the annuity route to retirement, you should familiarize yourself with not only the initial purchase and investment, but also how you receive funds when you're ready for them.

When the time comes and you are ready to begin receiving your annuity payouts, the accumulated value of the annuity will facilitate the payment to you. It may not seem as though it is of paramount importance when you purchase the annuity, but making yourself familiar with how the annuity payments actually work is not something to be left for the future. Here are some of your annuity payout options and a brief explanation of each method.

First, there are essentially three main options to choose from when receiving an annuity payment.

The first option is Income for Life. This option is more or less exactly as the name would lead you to believe: a guaranteed and set income for the duration of your life wherein payments will cease upon your death. This option carries a not dismissible amount of risk since you of course have no idea of when exactly you will die. In the event that you should die before the annuity has been completely paid out to you, the insurance company, and not your beneficiaries (in example-your family members), will receive the remainder of the annuity funds. Again, this option does carry potential risks but may be applicable to your lifestyle and circumstances.

The second annuity payout option is Income for Life with a Guaranteed Period, also known as a Period Certain Annuity. This second option is more generally more appealing than the Income for Life option because it provides the exact same coverage, but if you die before the prearranged guarantee period reaches expiration, any of your beneficiaries will continue to receive regular payments until the guarantee period ends. If family is a consideration for you, this is likely the better option of the two.

A third option is known as the Joint and Survivor option. This particular annuity type is very popular amongst married couples. This payout option guarantees regular payments to you and another person, typically a spouse, until such time as both of you dies. In some variations of this plan, the payment amount is reduced after the first death. A period certain (*see above) may also be available with this option.

Annuity payout options are completely flexible and any of these options can likely be combined to fit your individual needs.

Also of interest is that Annuities can also be used to fund your 401k, (and 403b, and Individual Retirement/IRA). Some financial planners would advise against this course of action and tell you that you should not use your annuity for this purpose. There are two reasons for this: penalties and contribution limitations.

The US Federal Government requires that you begin receiving regular payments by age 70 1/2. If you have used your annuity to fund your 401k, there is an automatic 10% penalty for early withdrawal if you take funds before age 59 1/2. The amount you can contribute to your 401k is governed by IRS rules; you can consult their website for full details and particulars.

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