If you are in your 20s and are considering a payout from a deferred, fixed annuity, the annuity was probably not a good choice for your short-term savings. Annuities are designed to provide income in your retirement years. However, if you're helping someone else with an annuity payout decision or working on your long-term financial plans, an understanding of the ways to get money from an annuity will provide clarity in the decision process.
Annuity for Retirement Savings
An annuity contract is a retirement savings or income product sold by a life insurance company. In the deferred stage, a fixed annuity earns a set rate of interest to increase the value of the money set aside for retirement. "Deferred," in this case, has the dual meaning of both the deferral of income from a contract and a deferral of any taxes on the interest earned on the annuity value. You can let a deferred annuity grow for as long as you want before taking withdrawals or annuity payments. Annuity withdrawals before age 59 1/2 are subject to a 10-percent tax penalty on top of regular taxes on any deferred interest that is taken out.
Random or regular withdrawals — like taking money from a bank account — are one way to get money out of a deferred annuity. A new annuity will have surrender fees for typically a five- to seven-year period after it is purchased. Most contracts allow a 10 to 15 percent annual, penalty-free withdrawal during the surrender fee period. After the surrender fees have expired, it's possible to set up any type of withdrawal schedule that fits your financial plans. Withdrawals may consist of interest earnings or a combination of interest and principal. Check the fine print on a specific annuity for any withdrawal restrictions.
Payout for Fixed Period
A deferred annuity can be "annuitized" to turn the account value into a guaranteed income stream. The annuitizing process turns the lump-sum value into guaranteed monthly payments. There will no longer be an accumulated value to the annuity. One annuity payout option is for a fixed period of time, such as monthly payments for 20 years. The insurance company pays a specific amount every month for the selected period, and, at the end of the term, there is no money left in the annuity. The total amount of payments will be a combination of the annuity's value before annuitization and interest.
Lifetime Annuity Payments
Another fixed annuity payout option is a lifetime annuity. This means the insurance company makes a guaranteed monthly payment for as long as the recipient — in insurance jargon, the "annuitant" — lives. The standard single-life annuity lasts as long as the annuitant, and then ceases. The insurance company also offers alternative life annuity choices that include a minimum guaranteed payout if the annuitant dies early. A joint-and-survivor annuity pays until the second person — as with a husband and wife — dies, providing a guaranteed income for a couple. Each different lifetime annuity option comes with its own monthly payment amount.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.