Is it better to take monthly installments or once a year?
Many retirees use annuities to simplify their income stream in retirement but that doesn’t mean annuities are simple. In addition to choosing which type of annuity to purchase — immediate versus deferred and fixed, indexed or variable, you’ll also need to consider how you’ll receive annuity payments.
You can get a lump sum from your annuity, a life option that pays out over your lifetime and, if you choose, a spouse, other survivors or estate, or a systematic stream of fixed payments that you receive annually, semi-annually, quarterly or monthly.
While a systematic withdrawal approach gives you the kind of reliable cash flow you can coordinate with your other monthly or periodic expenses, the insurance company that pays the annuity can’t promise that you won’t out of pocket. Another question is how often you will take your payments, and whether there are any particular advantages to any one approach.
a financial consultant It can help you choose an appropriate strategy for your annuity.
Whether you take your payments monthly, annually, or on another schedule, you will face the same tax liability. If the annuity is purchased with pre-tax dollars, all payments are taxable no matter how often you receive them. For annuities purchased with after-tax dollars, only the portion of the payment that represents gains is taxable, while the principal portion that is returned is not taxable.
Either way, if you withdraw money from the annuity before age 59-1/2, you will likely face a 10% tax penalty. In exchange for this illiquidity, the trade-off is that your annuity otherwise grows tax-deferred.
This is the most common default option with many annuities, and allows the retiree to schedule payments with their monthly bills. If you also collect monthly Social Security or pension payments and take cash from an IRA or other retirement account, you may want to use that money to cover your monthly expenses and allow your annuity investments to grow a little longer by taking a premium annuity.
Talk to a financial advisor About the pros and cons of monthly, annual and lump sum payments.
By paying once a year, the beneficiary can deposit money into an interest-bearing account and make smaller quarterly or monthly withdrawals as he or she needs the cash, leaving the rest of the annual funds to generate interest for more months to come. One safe way is to put the annual payment on file High-interest money market accountWhich provides the security of deposit insurance with the flexibility of writing a limited number of checks each month while leaving the remaining deposit to generate interest.
Payment cut-off considerations
If your annuity does not pay a survivor benefit, payments will stop when the annuity holder dies, resulting in reduced household income for the surviving spouse. If the annuity payments are monthly, the survivor will forfeit any remaining payments for that year beginning the month following the beneficiary’s death. However, if payments are made annually in January of each year, the annuity income will actually be received for the entire year, saving even more cash.
If you need help with estate planning considerations, consider this Talk to a financial advisor.
Change the payment schedule
Although you generally can’t change your payment method once your annuity withdrawals begin, you may be able to change the frequency of payments on a regular payment schedule, depending on the type of annuity you purchased. Depending on how your annuity payments are calculated, your payment may be reduced if you increase the frequency of your payments.
Determining how to structure your retirement income cash flow is an important consideration in designing your retirement resources, especially when it comes to annuities.
The right type of annuity can be a good addition to your retirement plan, as well Social securityand pension payments and withdrawals from investment and retirement accounts. A knowledgeable financial advisor can help you determine how to structure and coordinate these payments throughout your retirement.
Finding a financial advisor is not difficult. Free SmartAsset tool Matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to determine which advisor is right for you.
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