What is Annuity Income?
Annuity income has become a hot topic, particularly over the past decade or so. One reason for this is because employer-sponsored defined benefit pension plans have all but disappeared. This has left many individuals to fend for themselves when it comes to a steady, reliable stream of income in retirement.
With an annuity, you can set up an income stream to start right away (or within 12 months of purchase), or alternatively to begin many years in the future. This income can continue to flow in for a certain amount of time, such as 10 or 20 years, or even for the rest of your lifetime, regardless of how long that may be.
But with many different types of annuities, it is important to first have a good understanding of which type is right for you. This can help you to avoid any potentially costly surprises and prevent you from getting locked into a product that doesn’t suit your particular objectives. One of the best ways to see which type of an annuity may work for you is by taking our 30 second annuity quiz.
Different Types of Annuities
Income can be generated from all types of annuities, including:
- Fixed Annuities – Fixed annuities offer a set amount of interest that is credited on an annual basis. This rate is declared by the insurance company offering the annuity. One of the primary benefits of fixed annuities is the safety of principal that they provide, as well as the reliable stream of income they can generate.
- Variable Annuities – Variable annuities generate their return based on the performance of underlying investments like mutual funds. (Money is not invested directly into the investments, though, but rather is held in the insurance company’s sub-accounts.) While variable annuities come with market risk, they can also allow you to obtain a higher, market-based return if the underlying investments perform well.
- Indexed Annuities – Indexed annuities base their performance on underlying market indexes, such as the S&P 500. (These types of annuities also typically have a fixed account available where investors can place some – or even all – of their funds). When the tracked index performs well, a return is credited, typically up to a maximum, or “cap.” However, if the underlying index performs poorly in a given period, the annuity’s account is credited with a 0% rather than a loss.
Fixed, variable, and indexed annuities all offer the opportunity to convert, or “annuitize”, and generate a stream of income for a set time period, or even for the remainder of your lifetime.
When you initially purchase an annuity, funds may be contributed in a number of ways, depending on whether the annuity is immediate or deferred. For instance, with an immediate annuity, a single lump sum contribution is usually made. Income will then begin paying out right away (or at some point within the next 12 months).
With a deferred annuity, you can make just one contribution, or instead you can make numerous contributions over a period of time. You can then annuitize and start receiving income at a time in the future.
If you’re still wondering “What is annuity income, and what are my options?”... read on!
Income Options with an Annuity
While not all annuities are exactly alike, these financial vehicles will all typically offer several different options for receiving an income stream. These can include:
- Period Certain – With the period certain annuity income payout option, you will receive a regular income payment for a set amount of time or number of years. Once this time period has elapsed, no further payments will be received from the annuity. If you should pass away before the set time period has elapsed, the remaining income payments from the annuity can be paid to a named beneficiary for the remainder of the period.
- Lifetime Income – If you choose the lifetime income annuity payout option, you will continue to receive an ongoing income payment for the rest of your life – regardless of how long that may be. The lifetime income option usually offers you the largest amount of total income received. This is particularly true for those who live a nice long life.
- Life with Period Certain – The life with period certain option essentially “combines” the period certain with the lifetime payment alternatives. So, in this case, you can receive payments for the rest of your lifetime. However, if you should pass away within a certain period of time, a beneficiary will continue to receive the annuity income for the remainder of the set time period.
- Joint and Survivor – With the joint and survivor option, the annuity will pay an income stream for the remainder of two peoples’ lives. This is oftentimes used with married couples or partners who want to ensure that each of the individuals is able to rely on an income stream throughout their lifetimes.
- Lump Sum – You may also opt to withdraw a lump sum – or even take out the entire amount of the annuity’s account value – at a time in the future. If you go this route, though, it is important to understand that you can owe tax on all of the gain, which will have to be paid for the year of the withdrawal.
Some annuities may also provide you with additional income options, or riders, that offer certain types of guarantees. Depending on the type of annuity, these may include a:
- Guaranteed Minimum Income Benefit (GMIB) – This particular rider can guarantee a minimum payout in the future, regardless of market performance. Therefore, no matter how the underlying investment or funds perform in the annuity’s account, the GMIB rider ensures that you receive a set amount of income going forward.
- Guaranteed Minimum Accumulation Benefit (GMAB) – The GMAB rider guarantees that the value of the annuity’s income will be at least equal to a minimum percentage of the amount of money that you’ve contributed to the annuity over a certain period of time.
- Guaranteed Minimum Withdrawal Benefit (GMWB) – This rider can help to guarantee that a certain percentage of the amount that you’ve put into the annuity can be fully recovered, no matter what the actual performance is.
- Guaranteed Lifetime Withdrawal Benefit (GLWB) – The GLWB rider offers a guarantee that you’ll receive a set percentage of the account value of the annuity for as long as you live.
It is important to point out that the income rider is not a part of the annuity’s overall contract value. Nor can it be accessed as a lump sum – and this is where people tend to get a bit tripped up. So, if you see an annuity that offers a 7% or 8% “guarantee,” it is essential for you to determine whether that rate pertains to the annuity’s contract value, or just the income rider.
Annuity Benefits – Much More than a Guaranteed Retirement Income Stream
Depending on the type of annuity you are considering, there may be a multitude of other options available, too. For instance, some additional riders can help you to ensure that, even if you pass away, your loved ones will receive at least some amount of payout from the annuity.
Some of the common annuity riders that are available today can include:
- Death Benefit Rider – A potential drawback to purchasing an annuity can be the risk that the annuitant will pass away before receiving some or all of their principal back. But, with a death benefit rider, a named beneficiary (or multiple beneficiaries) will receive the remaining amount of the annuity's premium(s), and oftentimes also a specified amount of interest (depending on the annuity).
- Return of Premium Rider - There are some annuity purchasers who may opt for a return of premium rider. With this option, a named beneficiary will be guaranteed to receive back the remainder of the annuity's paid-in premium amount.
- Cost of Living / Inflation Rider - Because many people use annuities as a source of retirement income, it can be important to have the payout increase over time so as to keep pace with inflation, and in turn, ensure that you won’t lose future purchasing power. With a cost of living / inflation rider, the amount of monthly income that is paid out from the annuity will typically increase by a certain percentage every year or on a regular basis.
- Long-Term Care Rider - A long-term care rider may be offered as a benefit with fixed deferred annuity contracts. Here, if you move into a skilled nursing home facility, the rider will provide you with and additional sum of income in order to help with paying the cost of care. In some cases, the long-term care rider will simply increase the amount of the monthly income payment to the recipient. In others, it may allow the annuity owner surrender penalty-free access to a portion of the annuity's premium - possibly even up to 100 percent.
Taxation of Income from an Annuity
The taxation of income from an annuity will be dependent on what type of annuity you have – in this case, qualified or non-qualified. With a qualified annuity, your contributions have typically not been taxed. For instance, your deposit(s) may have come from a traditional IRA or 401(k) plan where money was swept into the account pre-tax.
Because the gain in an annuity is also allowed to grow without annual taxation, Uncle Sam will eventually want his money. So, in the case of a qualified annuity, 100% of your withdrawals or income payment will be taxable.
With a non-qualified annuity, though, your contributions are usually made with after-tax money. Since non-qualified annuities also allow for tax-deferred growth, a portion of your income or withdrawals from this type of annuity will be taxable, and another portion (i.e., the part that is considered a return of your premium) will be tax-free.
Annuity Income Estimator
One of the biggest reasons people purchase annuities is for the income they can provide. Knowing approximately how much income an annuity will provide can be a key component of your overall retirement planning. That way, it can more easily be coordinated with other income sources such as Social Security and / or an employer pension.
There are many annuity income calculators available online that can help you with figuring out what you can expect. These can give you a much better idea of how much your annuity payment will be, as well as how long you could receive this stream of income.
Unfortunately, many of the annuity income calculators that you may find online can be a bit cumbersome to use or may not have up-to-date annuity rates and guarantees. If you’re looking for personalized annuity guidance, feel free to send us your questions about annuities using our secure contact form here on this page — and we’ll do our best to point you in the right direction.
How You Can Receive Annuity Income for Life
With people living longer life spans today, one of the biggest concerns on the minds of retirees is running out of money while they still need it. Yet, even given a volatile stock market and a historically low interest rate environment, an annuity can still provide you with an income stream you can count on for life.
In addition, depending on the type of annuity you purchase, there are a number of other benefits you can take advantage of, too, such as tax-deferred growth and penalty-free withdrawals in certain situations.
So, if you’ve been asking yourself, “What is annuity income” or “Should I buy an annuity?” it is important that you first determine what your primary goals are. From there, you can narrow down the right annuity option for you.
Doing so can be much easier when you work with an annuity specialist who has access to information about hundreds of different options in the marketplace. At Annuity Gator, our primary mission is on educating consumers about how annuities work, and what they can anticipate with different annuity alternatives.
If you have questions about annuities, we can provide you with the answers. So, feel free to reach out to us online through our secure contact form here. Or, if you’d like to chat with an annuity expert right away, just call us, toll-free, at (888) 440-2468. We look forward to hearing from you.