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Annuity Payment Options: More Than Just Lump Sums

Retirement Planning
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smiling retired couple researches different annuity payment options at home on their laptop

While annuities might seem overly expensive or complicated to fund, that's not necessarily true. And believe it or not, a guaranteed income in retirement doesn't have to be a dream.

While you may not be sure if an annuity could make sense for your financial situation, there are several annuity payment options that could work for everyone — from those just starting their retirement planning to seasoned investment experts.

Annuities 101

An annuity is a type of contract designed to make future payments to the owner, typically during retirement. Annuities have two stages: the accumulation stage and payout stage. In the accumulation stage, you build up the funds in the annuity as a single lump sum or through many small payments over time. The annuity company then invests those funds. When you're ready to start receiving distributions, you'll move into the payout stage. The annuity company will then make payments on the schedule you select and tell you how much you'll receive based on your chosen schedule.

When you set up an annuity, you aren't actually spending your money so that it's gone for good. Instead, you enter into a contract with an insurance company to set up guaranteed periodic payments of your money over time. For example, you could receive monthly payments for the next 20 years — or guaranteed payments for the rest of your life, depending on the terms of your contract. These payments could help give you financial peace of mind in retirement.

When the company invests your money, you could also potentially receive more back than you paid into the annuity. You may receive your initial investment back — and might even gain more with the investment earnings. Keep in mind that most annuities have setup fees, as well as annual fees for keeping the contract in force.

Consider Saving Over Time

If you have the cash, you could write a check to set up your annuity all at once. But for those who don't have enough in the bank, there are a few other annuity payment options that could make sense.

If you're still years away from needing the income, you could build value over time with a deferred annuity, a plan that won't start making payments for at least a year after you set it up. You could set up a deferred annuity with smaller contributions. The more you save per month, the more you would potentially receive in future payments.

If you've been saving money in a retirement account, such as a 401(k) or an individual retirement account (IRA), you could also transfer some of these savings to set up an annuity. You would continue delaying taxes on your savings with the annuity and would only owe taxes on money that comes out once you start receiving payments. However, it's important to remember that if you withdraw money from a qualified plan before the age of 59 1/2, you'll have to pay a 10 percent penalty on the amount withdrawn in addition to paying taxes on it.

If you're in retirement, you could transfer over a lump sum and set up an immediate annuity that would start making payments right away. You could also set up a deferred annuity and pay for it with regular transfers from your retirement plan.

Peace of Mind for Tomorrow

How might an annuity make sense for your retirement? One of the key benefits of an annuity is that it could help supplement some of your retirement income. You could purchase an annuity that guarantees payments for a set number of years — or even for the rest of your life, depending on the terms of your contract.

If you choose to invest your money instead of purchasing an annuity, you would then need to depend on your portfolio's ability to generate enough income for your retirement needs. If you hit a bad market stretch, your retirement income could take a severe hit. With an annuity, however, you could receive steady income no matter how poorly the market performs.

People are also living longer, and it's not uncommon to reach age 90 — or even age 100. If you rely solely on your savings, it could be challenging to make your budget last 20, 30, 40 years (or more). With an annuity, you could help ensure you won't outlive your retirement income. Because of these benefits, the Treasury Department has made it easier for annuities to be purchased through retirement plans, stating: "As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement."

Once you develop an understanding of the annuity payment options available, you could then consider whether one could fit into your plans for tomorrow. Annuities could be a valuable part of your retirement plans, and may even help give you peace of mind for tomorrow.

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IMPORTANT DISCLOSURES
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies ("the Company") does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.