Annuities are financial products that guarantee a stream of income, primarily during retirement. The way you receive this income depends on the annuity payout option you select at the start of payments, known as “annuitization.” These options directly impact the amount you receive, how often payments occur, for how long, and whether survivors or beneficiaries continue to receive payments after your death.
Background and Purpose
Annuities date back to ancient times, with roots in Roman financial practices designed for steady income. Modern annuities evolved as retirement income tools to reduce the risk of outliving your savings, known as longevity risk. The variety of payout options available today provides retirees with flexibility to choose income plans suited to their health, financial goals, and estate considerations.
Common Annuity Payout Options
When you purchase an annuity—either through a lump sum or periodic premiums—your funds grow tax-deferred until payments begin. At annuitization, you’ll select from several payout options:
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Life Only (Single Life Annuity): Provides payments for your lifetime only. Payments stop upon death, and no funds remain for heirs. This option generally offers the highest monthly payment because it does not guarantee payments beyond your lifespan.
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Life with Period Certain: Guarantees payments for life, but also ensures a minimum payout period (such as 10 or 20 years). If you die before the period ends, your beneficiary receives payments for the remainder.
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Joint and Survivor Annuity: Covers two people, typically spouses. Payments continue as long as one person is alive. After the primary annuitant dies, the survivor receives a specified percentage of the payment (often 50% to 100%). This option offers lower initial payments but continued survivor income.
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Fixed Period (Period Certain) Annuity: Provides payments for a set number of years regardless of survival. Once the term ends, payments stop, and no benefits pass to heirs.
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Lump Sum Payment: Instead of periodic payments, the annuity amount is paid out all at once. This option suits those who want immediate access to funds or prefer managing their own investments.
Example Scenario
Consider Mary, 65, with a $200,000 annuity:
- Life Only pays her $1,000 monthly for life, ceasing at death without leftover funds.
- Life with 15-Year Period Certain pays $900 monthly but continues payments to her beneficiary if she dies before 15 years.
Mary chooses the latter to provide financial support to her heirs while still receiving income for life.
Eligibility and Considerations
Anyone owning an annuity contract faces payout decisions when starting withdrawals, typically at retirement. Your choice should weigh factors like personal life expectancy, financial needs, desire to leave an inheritance, and overall retirement strategy.
Strategies for Selecting a Payout Option
- Assess Health and Longevity: Longer life expectancy favors lifetime income for smooth financial planning.
- Protect Dependents: Joint and survivor options ensure continuing income for spouses or loved ones.
- Balance Payment vs. Legacy: Higher monthly payouts often mean no remaining funds for heirs.
- Plan for Inflation: Fixed payments can lose value; consider inflation-adjusted or variable options.
- Seek Professional Advice: Financial advisors can clarify complex terms and tailor choices to your circumstances.
Common Mistakes
- Believing lifetime payments last regardless of contract conditions; most stop at death.
- Assuming higher payments are always better; they might limit flexibility or survivor benefits.
- Ignoring tax implications; annuity income is typically taxable and affects net returns.
Comparison Table
| Payout Option | Payment Duration | Guarantees Payments to Heirs | Typical Monthly Payment | Best For |
|---|---|---|---|---|
| Life Only | For your lifetime only | No | Highest | Maximizing lifetime income |
| Life with Period Certain | Lifetime plus minimum term | Yes | Medium | Providing for heirs and yourself |
| Joint and Survivor | Lifetime of two people | Yes (survivor) | Lower | Spouses or partners needing survivor income |
| Fixed Period | Fixed number of years | Yes | Varies | Fixed-term income needs |
| Lump Sum | One-time payment | N/A | N/A | Immediate liquidity preference |
Frequently Asked Questions
Can I change my annuity payout option after starting payments? Usually not. Most contracts lock in your choice at annuitization.
Are annuity payments taxable? Yes, typically taxed as ordinary income per IRS rules (see IRS Annuities Guidelines).
Do annuities protect against outliving savings? Yes, lifetime annuities are designed to provide income for life, mitigating longevity risk.
Related Topics on FinHelp
Explore related terms such as Annuity, Annuity Tax, and Longevity Risk in Retirement to deepen your understanding.
References
- Investopedia, “Annuity Definition and Payout Options“
- FINRA, “Annuity Payout Options“
- Kiplinger, “Annuities Explained: Payout Options and How They Work“
- IRS, “Retirement Topics – Annuities“