During your working years, you’re accustomed to living on an income from your job. When you retire, the income from employment ends. Social Security provides a steady income, but it probably isn’t enough to meet your retirement income needs. An annuity is an option that can provide a stream of income during retirement.
With most annuities, there are usually two choices available to generate a steady income: annuitization and lifetime withdrawals from a guaranteed lifetime withdrawal benefit. Here’s how each option works.
Annuitization
This is a fancy word to describe converting funds in an annuity into a stream of income for a fixed period or a lifetime. Often, once the annuity is annuitized, it can’t be changed, reversed, or revoked — you’re pretty much locked into the payments for the duration of time chosen.
The amount of annuitization payments is based on several factors, including the duration of the annuity payments (either a fixed period or lifetime), the cash value of the annuity, current interest rates applied by the annuity issuer, and the age of the person (referred to as the “annuitant”) over whose life the payments are based. With annuitization payments from nonqualified annuities (i.e., annuities funded with after-tax dollars), each distribution consists of two components: principal (a return of the money paid into the annuity) and earnings. The percentages of principal and earnings for each distribution will depend on the annuitization option chosen.
Guaranteed Lifetime Withdrawal Benefit
A guaranteed lifetime withdrawal benefit (GLWB) enables the annuity owner to receive payments without having to annuitize the annuity or give up access to remaining cash value in the annuity. Typically, an annual fee is charged for a GLWB.
The amount of the GLWB payment is usually determined by applying a withdrawal percentage to the annuity’s principal amount or cash value, whichever is greater at the time of election. The amount of each withdrawal is subtracted from the cash value.
Generally, the amount of the withdrawal will not decrease, even if the cash value decreases or is exhausted. Optional benefits are available for an additional fee and are subject to contractual terms, conditions and limitations as outlined in the prospectus and may not benefit all investors.
Annuitization vs. Lifetime Withdrawal
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