An annuity can be an appropriate addition to a sound financial plan. But, it's important to understand how they work and, more importantly, the payout options. Whether you choose an annuitized method, systematic withdrawals, or a lump sum depends entirely on different factors, including your goals and projected financial needs along with your gender and life expectancy.

What Is an Annuity?

An annuity is an insurance contract that provides retirement income. There are two phases: the accumulation phase and the payout or 澳洲幸运5官方开奖结果体彩网:annuitization phase. During the accumulation phase, you can add funds to your annuity contract by depositing cash, converting life insurance cash values, and doing a 澳洲幸运5官方开奖结果体彩网:1035 exchange from another annuity.

If you follow the annuity rules, your annuity will accumulate earnings on a tax-deferred basis until you begin to make withdrawals, which are often paid through 澳洲幸运5官方开奖结果体彩网:ACH transfers.

Once you turn 59½, you can begin to ꦡwithdraw money from an annuity without pe𝕴nalty.

Annuity Payout Methods

There are a few different methods for taking annuity payouts. The most common methods are:

• The annuitization method
• The systematic withdrawal schedule
• The lump-sum payment
  

Annuitization Methods

The 澳洲幸运5官方开奖结果体彩网:annuitization method gives you guaranteed monthly income for a determined period or the rest of your life by converting the money invested into regular payments. This can boost what you're getting from other investments, 澳洲幸运5官方开奖结果体彩网:Social Security, and any other💦 sources of income during retirement, so if you want additional income and have a low tolerance for risk, this may be the option for you.

There are different categories, which are explained in the table below:

Systematic Withdrawals Option

Under the 澳洲幸运5官方开奖结果体彩网:systematic withdrawal schedule, you select thꦉe payment you want to receive each month and how many payments you want to receive overall. What you receive and how many months you receꦫive payments depends on how much you have in the account.

Under this option, you have complete control over the timing of 澳洲幸运5官方开奖结果体彩网:distributions but no protection against outliving annuity assets. Put simply,🏅 this is a flexible option but doesn't guarantee income for life. While you can access the funds in your annuity, you run the risk of exhausting your funds.

Since the insurance company won’t guarantee that you won’t outlive your income payments, the burden of 澳洲幸运5官方开奖结果体彩网:life expectancy risk is on your shoulders.

Lump-Sum Payment Option

The 澳洲幸运5官方开奖结果体彩网:lump-sum payment option distributes 🐬funds from your annuity all at once. This means you get immediate access to the funds and don't need to wait for a monthly payment to get the full benefit of your annuity amount.

It's typically not a good idea to withdraw a lump sum payment from your annuity because you'll need to pay 澳洲幸运5官方开奖结果体彩网:ordinary income taxes all at once, right away.

How Your Monthly Payments Are Calculated

Two common factors used to calculate your monthly payments are gender and age—both of which affect your life expectancy. For instance, women typically live longer than men, so their payments are typically lower. Insurance companies also make higher payments to a 75-year-old man with the life option than a 65-year-old man with the same optio🥂n.

Your payment option is another major factor that affects how much you receive. For example, if you select the jointꦏ-life option, your monthly payout will probably be lower, as the payment continues to your spouse after your death.

The size of your monthly payout also depends on the insurance company and its expected 澳洲幸运5官方开奖结果体彩网:investment returns. However, the increase in your payment when returns are higher depends on w♊hether you select a fixed monthly pay🙈out or a variable monthly payout from your annuity:

• If you select the fixed amount, your payout will not change, and the insurance company assumes all investment risk.
• Under the variable payout, the size of the monthly payout fluctuates based on market conditions, so you assume the 澳洲幸运5官方开奖结果体彩网:market risk.

The details can get complex, though, so be sure to read the fine print.

Don't Forget the Annuity Payout Tax

Once you select your payout method, you should ask for your 澳洲幸运5官方开奖结果体彩网:exclusion ratio, which tells you how much of your payment is excluded from being taxed. If your exclusion ratio is 80% on a $1,000 monthly payout, then $800 is🌸 excluded from income tax, and $200 is subject to taxation.

Any withdrawal before you turn 59½ is considered a 澳洲幸运5官方开奖结果体彩网:premature distribution and is subject to a 10% tax penalty, plus income tax on what you withdraw as earnings — and earnings typically come out first. (This is the case for annuities purchased after Aug. 14, 1982.)

Credit Quality Concerns

A final factor to consider is the credit quality of the insurance company. Remember that just because you have accumulated your annuity at one insurance company😼 over the past 20 years, you do not nec🅰essarily need to start your payouts with it.

The insurance companies have employees who will provide you with an estimated payout for each option. Make them earn the 澳洲幸运5官方开奖结果体彩网:fees that they charge. Have multiple quality insurance companies give you a quote on the current value of your annuity with multiple payout options.

The Bottom Line

Deciding the best payout method for your annuity is not easy. Consider your priorities, the amount you need each month, and how long you think you will need these payments. Some people elect to take no payments at all but others don't need income from the funds accumulated in their annuity. If the same is true for you, determine whether your beneficiary designation is correct, as some annuities can be transferred to your beneficiary after your death.