An annuity can provide lifetime income in two main ways. You can turn a lump sum into a stream of guaranteed payments, called annuitizing, or you can add an income rider that lets you withdraw a set amount each year for life while keeping an account value. In both cases the insurance company takes on the risk that you live a long time.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center · Last reviewed
An insurance company issues many annuities. Some owners live shorter lives and some live much longer. By pooling that risk, the insurer can promise every owner income for life. That is something an individual savings account cannot do on its own.
With an immediate annuity, or by annuitizing a deferred annuity, you give the insurer a lump sum and receive payments for life or for a set period. Payout choices usually include:
Some deferred annuities offer an optional income rider. You keep an account value you can see, and the rider guarantees a yearly withdrawal for life. This keeps some flexibility, usually in exchange for a rider fee.
Illustration only. Actual payment amounts depend on age, interest rates, the insurer and the options chosen.
Money turned into guaranteed payments usually cannot be taken back as a lump sum. Deferred annuities often have surrender charges. Payment guarantees depend on the insurer's financial strength and claims-paying ability. Part of each annuity payment may be taxable depending on how the annuity was funded.
| Annuitization | Income rider | |
|---|---|---|
| Access to lump sum | Usually given up | Account value stays available |
| Extra fee | Usually none | Often a yearly rider fee |
| Payment start | Soon or at a set date | When you turn on withdrawals |
Illustrative; contract terms control.
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Often at least in part. Payments from an annuity bought with pre-tax money are generally fully taxable. Payments from a non-qualified annuity are usually partly a tax-free return of what you paid in. Check with a tax professional.
It depends on the payout option or contract. Life-only payments stop at death. Joint, period-certain and refund options, or remaining account value in a deferred annuity, can pass to a spouse or beneficiaries.
Fixed and fixed indexed annuities are insurance products regulated by state insurance departments. Variable and registered index-linked annuities are also regulated as securities.
Common approaches include planned withdrawals from savings, buying an income annuity, or using an annuity with a lifetime income rider. Many retirees combine methods so essential bills are covered by steady income. Each option trades off flexibility, access to money and guarantees differently.
It varies with your age when payments start, whether income covers one or two lives, interest rates at purchase and the contract features you choose. Quotes change over time and differ between insurers. A current written quote for your age is the only reliable number.
It is an annuity that keeps paying after the first spouse dies, either the full amount or a set percentage to the survivor. The monthly payment is usually lower than a single-life payment. Payments are subject to the claims-paying ability of the issuing insurance company.
Partial annuitization means using only part of your savings to buy lifetime income and keeping the rest available. It can cover essential bills while keeping flexibility for emergencies and other goals. How much to use depends on your income gap and needs.
Often only in limited ways. Many immediate income annuities give up access to the lump sum in exchange for payments, while deferred annuities may allow free withdrawals with surrender charges on larger amounts. Keeping separate savings for emergencies is common.
An immediate annuity starts payments soon after purchase, usually within a year. A deferred annuity waits and may credit interest before income begins, sometimes using an income rider. Each has different access, fees and tax rules.
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.