How Annuities Pay Out

Annuities are designed to create dependable income during retirement. When your payments start depends on whether you choose an immediate or deferred annuity.

Immediate Annuity

An immediate annuity starts paying income within the first year of purchase. It’s ideal for retirees who want guaranteed income right away to cover living expenses.

• Payments start: Within 12 months
• Best for: Retirees who need income now
• Considerations: Payments are fixed at purchase, leaving less time for growth

Deferred Annuity

A deferred annuity delays payments until a future date, usually retirement, allowing your balance to grow tax-deferred.

• Payments start: Years later, often at retirement
• Best for: Savers building long-term income
• Considerations: Growth depends on interest rates or market performance; fees vary by product

You can tailor how long income continues, whether it’s for a set period, your lifetime, or your spouse’s lifetime. The right option depends on your financial goals and family needs.

Let’s say Steve, who’s 70, and Jan, who’s 65, each decide to invest $100,000 in a single premium immediate annuity to start generating guaranteed income. The chart below illustrates how their payout amounts vary based on age and payout type.

Insight:
Choosing between higher personal income or longer-term family security is one of the most important annuity decisions. Age, gender, and payout structure all shape your results.

Your annuity payout is unique to you. It’s based on when you start income, how long you want it to last, and even personal details like your age and health. Knowing how these factors work together can help you plan for the income you’ll rely on in retirement.

The following factors help determine your payout amount:

• Start date: Payments increase the longer you defer income.
• Life expectancy: Women typically receive slightly smaller monthly payouts due to longer lifespans.
• Premium amount: Larger premiums generate higher payments.
• Payout type: Life-only options pay more than those with guarantees or survivor benefits.

Annuities can include a death benefit that helps protect your loved ones after you’re gone. This feature determines how any remaining funds are distributed to your beneficiaries.

Qualified Annuities

If your annuity is part of a retirement account, beneficiaries typically must withdraw the full balance within 10 years. These withdrawals are taxed as income, so timing distributions carefully can help reduce the tax burden.

Nonqualified Annuities

Funded with after-tax dollars, nonqualified annuities often provide more flexibility. Beneficiaries may receive a lump-sum payout or take scheduled withdrawals over five years or their life expectancy to spread out taxes.

If No Beneficiary Is Named

Without a listed beneficiary, the contract’s value usually goes to your estate, which can delay access through probate. Naming beneficiaries directly helps your loved ones receive the money faster.

Example: Carol’s Story

Carol, age 62, bought a deferred annuity with a 10-year period certain option. It guarantees her lifetime income and ensures her children continue to receive payments if she passes within that period.

Takeaway: Adding a period-certain or survivor option can reduce your income slightly, but it provides financial stability for your loved ones.

Purchasing an annuity is a big decision. Consider your priorities, the amount of money you need each month in retirement and how long you want payments to last.

You should also determine if it’s important for a beneficiary to receive money from the annuity if you unexpectedly pass away.

Annuities are complex financial products. It’s best to speak with a professional financial advisor first. An experienced advisor can give you guidance on the costs and benefits of purchasing an annuity.