How to Choose the Right Annuity Payout Option for Retirement

When approaching retirement, it is essential that you incorporate strategies that will keep your retirement income flowing in. And, with medical technology and new medicines helping to keep people alive longer these days, it is even more essential that your retirement income stretches well into the future.

One way to accomplish this is by purchasing an annuity. Annuities have been said to offer investors “an income that they cannot outlive.” It is a great concept; however, today there are numerous types of annuities to choose from and you need to be careful about the options you pick. So, which one is the best option for you and your financial needs?  (see Annuities 101 for an overview of how these financial products work)

Other than the cost and fees associated with the annuity, the most important decision to make when choosing an annuity is which payout option to go with. Because there are a number of choices, you need to understand what each one means, and how it could affect your retirement income both now and in the future.

Lifetime Option

One type of payout option offered to annuity holders is the lifetime option. Here, you will receive income benefits from the annuity for as long as you live. This is a great feature, especially if you live a long life. However, there is a downside as well in that if you only live one or two years after your annuity begins, the remaining funds in that annuity are lost to you and your heirs.

Period Certain Option

The period certain option offers you income benefits from the annuity that are received for a specific period of time, such as 10 or 15 years. In this case, if you were to pass away during this time frame, your heirs would still receive income from the annuity for the remainder of the term.

This is comforting in that you and / or your beneficiaries know exactly how long you can depend upon income from the annuity to come in. One of the downsides to this option, however, is that if you were to live past the predetermined period of time, your income payments from the annuity still cease at the end of the time period.

Life With Period Certain Option

Using the life with period certain option, you can help to alleviate some of the stresses that your heirs could face if you pass away within a short time of receiving your annuity income benefits. This is because with this option, annuity payments are received as long as you live, however, if you were to pass away during the predetermined time period, your annuity’s income benefits would still be paid out to your beneficiaries for the remaining term of the annuity contract.

Joint Life Option

This annuity income payment option allows you to continue your income stream for your spouse upon your death. This is great because you are ensured that both you and your spouse will receive income from the annuity as long as you both shall live.

The trade-off with this option is that the monthly payment that is received from the annuity is based on two lives – yours and your spouse’s – rather than just one, essentially making the payment amount smaller than if it were to be based on just one life.

Lump Sum Option

Along with the monthly payment options offered on annuities, you also have the ability to withdraw your entire account value in one lump sum. Although this windfall could come in handy in paying off large expenses such as your mortgage, it is not often recommended. This is because ordinary income taxes will be due on the entire amount of the gain in your investment in the year that you withdraw the funds. This could account for a pretty hefty chunk, depending upon how large your account value has grown over time.

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