Knowing how much income you can generate from an annuity can allow you more certainty in retirement. It is estimated that Social Security replaces about 40% of an average wage-earner’s pre-retirement income. And, with so many businesses ceasing the defined benefit pension plan, it has become the responsibility of the individual to put together a viable income plan. Annuities can help to accomplish that.
When Do Annuities Begin to Pay Out Income?
Depending on the type of annuity you have, you can either receive income right away, or you could wait for 30 or more years. (With many annuities, you are not required to generate an income stream at all).
There are two primary categories of annuities – immediate and deferred. Immediate annuities start to pay out income within 12 months of purchasing them. Many retirees will “rollover” funds from employer-sponsored retirement plans like the 401(k) and/or personal plans like the IRA (Individual Retirement Account).
Deferred annuities can also pay out a stream of income. This cash flow can start at a time in the future – and in some cases, it could even be as far out as 30 or 40 years before this payout begins.
How the Amount of Annuity Income is Determined
There are several factors that go into determining how much income is paid out from an annuity. These can include the following:
- Interval between the withdrawals or payments
- Amount of beginning principal
- Annual growth rate of return
- Length of the annuity
One of the key parameters regarding how much income is paid out from an annuity is the interval between the payments. These options typically include monthly, quarterly, or yearly. Another factor is the amount of the principal in the account. More principal can result in higher income payments. Likewise, a higher rate of growth or return can also lead to higher annuity payments.
Most annuities will usually offer several different alternatives for how long the income will be paid out. These may include:
- Period Certain – The period certain income payout pays for a set time such as 10 or 20 years. If the annuitant (income recipient) dies before the time frame has elapsed, income will continue until the end of the preset time.
- Lifetime Income – The lifetime income option will continue for the remainder of your lifetime – no matter how long that is.
- Life with Period Certain – This income option will continue for the rest of your life. However, if the income recipient dies before a specific period of time, the income will continue being paid to a beneficiary until the time frame elapses.
- Joint and Survivor – The joint and survivor income alternative pays until a second income recipient has died. Many couples opt for this payout because it provides certainty that cash flow will continue coming in for the life of both individuals.
Is an Annuity Right for You?
If you’re ready to buy an annuity and you still have questions or concerns, feel free to contact us and chat with one of our annuity specialists. At Annuity Gator, it is our primary focus to educate consumers (as well as financial advisors) about how annuities work, and how to choose an annuity for your specific needs.