Options for Converting Annuities to Income

You can put off finalizing your options until you begin drawing income from the annuity.
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Some time after you graduate from "Nester" to "empty-nester," you'll reach retirement age. It's an arbitrary line, and you can draw retirement income wherever your inclination and your retirement savings coincide. Part of that process is deciding how you're going to receive your retirement money. The options vary depending on the type of investment. With an IRA or 401(k), you have to take at least the required minimum distribution, starting no later than age 70 1/2. Annuities are different, and offer a variety of income options depending on the type of annuity and when it was purchased.

Annuities 101

If you're unfamiliar with annuities, they're one of the insurance industry's retirement-planning options. They're kind of like a life insurance policy turned inside out: You give the company a bunch of money, then they make regular payments to you. For young investors, annuities are most useful as a way to grow more money tax-free than you can fit in your 401(k) or IRA. Their costs can be high, and sometimes outweigh the tax benefits, but a carefully-selected annuity can be a useful way to invest a financial windfall or a higher than normal income. You can choose to pay into an annuity long term, or buy it with a lump-sum payment.


Eventually, you'll want to convert that investment into an income. This is referred to as "annuitization," with annuities. With annuities issued before 2011, annuitization was a one-shot deal: you made your choice, and you lived with it. However, annuity contracts beginning in 2011 could offer partial annuitization. This means you can take an income from part of the fund and leave the rest to grow. Before 2011, achieving that kind of flexibility meant having to split your investment between multiple annuities. You choose your payout option at the time you annuitize, so you likely have a few decades to consider your options.

Payment Frequency

One option when you annuitize is to withdraw the funds in one lump sum. That's seldom the best option, because the tax man will take away a pretty serious chunk of your nest egg. It's more common to take a periodic payment. In most cases you can choose weekly, monthly, quarterly or annual checks, whichever makes the most sense for you. Ideally the combination of your annuity and Social Security should provide enough of a cushion to protect your lifestyle if your other investments take a temporary downturn.

Payout Period

Another set of options revolves around the payout period. You could choose to receive payments for a set period of years, a handy option if your main retirement income begins at a given age. Another option pays as long as you live, but gives nothing to your heirs if you die. A hybrid of those two will pay you for life, but also pays out to your heirs if you die within a given interval. For couples, a "joint and last survivor" payout can be useful. The payments are lower, but they'll keep coming as long as either of you remains alive.

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