How much income will your annuity contract pay you? The answer depends on what age you start collecting income from your annuity.
If you start income at age 70-75, you will receive higher payouts. If you begin your annuity income in your mid-50s, it will be less than what you would receive in your 60s or later.
Annuities therefore resemble Social Security in that their payouts will increase the longer you wait to take them. But annuities with qualified money, or pre-tax dollars, in them have required minimum distributions that must be taken by age 72.
Why is this? Since the insurance company is on the hook for paying you guaranteed income for a certain period or life, it manages its risk based on the age of when you start that guaranteed income stream.
The insurance company also builds estimates of statistically how long it believes you will live into every single one of its income payments. These estimates are based on life expectancy and mortality data.
How Age Affects the Income Your Annuity Will Pay You
The older someone is, the closer they are to their life expectancy age.
Hence the insurance company has a smaller window of time for which it must pay you guaranteed income. Therefore, its income payments to you will be larger because of the shorter timespan.
When you receive guaranteed income from an annuity in your 50s or 60s, the insurance company is beholden to its promises to you, statistically speaking, for a few decades longer. Hence its income payments will be smaller if you start your income at those points.
You can put the insurance company on the hook for paying you guaranteed income for either a set period, such as 5 to 20 years. Or you can receive income from your annuity contract for the rest of your life.
Because of this unique benefit, most annuity contracts won’t let you actually start receiving income until you are in your mid-50s or in your 60s at the earliest.
Other factors such as interest rates also play a key role in how much you can get from your annuity contract.
For example, one major insurance carrier was able to pay out almost twice as much per month as it can now (interest rates were at around 6% in the mid-1980s.)
How Can You Receive Income from an Annuity?
There are four basic ways that you can withdraw money from an annuity in the form of an income stream:
Annuity free withdrawals are by far the simplest way to get a stream of income out of an annuity. In this scenario, you will simply begin taking systematic withdrawals that you can stop and start at any time.
However, you do not get the guaranteed lifetime stream of income that you would get if you annuitized your contract. If your money runs out during retirement, then monthly payments would stop.
Lifetime Withdrawals with a Rider Benefit
The lifetime withdrawal benefit rider is the newest option for those who would like a guaranteed income without surrendering control of their contracts. This is also known as a lifetime income rider in some annuity contracts.
It kind of represents a happy medium between systematic withdrawals and annuitizing the contract.
In exchange for this flexibility with a lifetime income rider, many annuity contracts will have an annual fee for this benefit. For instance, some fixed indexed annuities charge 0.95% for their lifetime income rider (which is an add-on to the base contract).
The upside is you still receive a guaranteed income for life but have some liquidity and access to your money, should you need it. And some annuity contracts also have their benefit built into their contract designs. So, you may have that benefit without having to pay a fee for it.
Your financial professional can walk you through the specific details of any annuity contract you hold or are considering.
It’s also good to know that taking money from your contract might affect your rider benefit, so ask your financial professional about that.
If you wait for the back-end sales charge schedule to expire, then you can take a lump-sum distribution of the entire contract value without penalty.
You won’t have pay a penny in any surrender penalties. However, you will have to pay taxes at ordinary income rates on the entire amount that is distributed.
Annuitization of an annuity contract is by far the least popular option for annuity holders. Annuitization is a one-time, irrevocable event that converts the accumulation units in the contract into annuity units. Then the contract will start paying out according to the annuitant’s instructions.
Payout options include single life, joint life, joint life with rights of survivorship, and period certain. But once payouts begin, annuities resemble pension plans in that their payout options are irrevocable.
Once you annuitize your contract, then you effectively forfeit all control of the money in it. This is why less than 4% of all annuity owners choose this path.
If the annuitant opted for the straight life option, then they will receive the highest possible monthly payout among the choices available. However, there is a downside to this, too.
If they passed away suddenly, say like in an accident six months later, then the insurance carrier gets to keep the rest of the contract balance for itself. Again, this is the disadvantage of when a policyholder chooses the straight life option.
A Monopoly on Guaranteed Lifetime Income
Annuities are still the only type of financial vehicle available that can provide a guaranteed stream of income that you can’t outlive.
You can enjoy this benefit as long as you choose to either annuitize your contract or use a lifetime withdrawal rider (sometimes referred to as a living benefit).
The latter option is much more popular among annuity owners. Why? Because it allows them to turn the rider on and off at will, depending upon what their financial needs are.
If they need to access the principal in their contract, then they can simply notify the insurance carrier of their need. Thereafter, payments would stop so that they could make the withdrawal. Then they could notify the insurance company to start the rider up again.
The rider would resume its lifetime income payment schedule, albeit at a reduced rate, corresponding to the amount of principal that was withdrawn.
How Are Your Annuity Income Payments Treated for Tax Purposes?
As mentioned previously, with traditional IRAs and 401(k) plans, all funds that are withdrawn are taxed as ordinary income. Annuities are no different.
They have required minimum distributions starting at age 72. And anyone who tries to withdraw money from an annuity to which they aren’t listed as a beneficiary will be prosecuted to the fullest extent of the law.
Is an Annuity Right for Your Income Goals?
There are ultimately many factors that determine how much income an annuity can pay out to its annuitants.
Income taxes, life expectancies, contract ownership, and the type of chosen annuity payout are all relevant. They will all combine to determine the exact dollar amount that you will receive every month.
Consult your tax advisor or financial advisor for more information about annuities and how they can benefit you. You can also download Pub. 575 from the IRS website, which addresses pension and annuity income.
If you are considering an annuity as part of your income plan, you can also reach out to a financial professional for personalized guidance.
Our “Find a Financial Professional” section has many financial professionals who are accessible with just a few clicks of your mouse. Should you need a personal referral, please feel free to call us at 877.476.9723. We appreciate the opportunity to serve you and help you reach your goals.