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Managing Retirement Income | Lifetime Annuity Income
Being confident of your income can make retirement easier.
Annuities offer you something no other individual retirement plan can, guaranteed income for life. That’s one reason they’re sometimes referred to as personal pensions. All you have to do is buy an immediate annuity or annuitize your deferred annuity, and choose one of the lifetime payout plans offered by your annuity contract. What’s more, you can choose a variable payout that will increase your income over time, provided the value of your investment portfolios continues to grow.

As an added plus, each annuitized payment in a non-qualified contract is partially tax free, since you’re getting back some of your principal each time. That means you’ll have a larger amount to spend than if your payments were fully taxable.

With a deferred annuity, the income you receive when you annuitize is produced by the assets in your annuity, also known as its contract value. That includes the premiums you’ve paid and what you’ve earned during the accumulation period. If you buy an immediate annuity, there is no accumulation period and the initial payment is based on the premium.

All in the Timing
When you’re ready to start receiving income from a deferred annuity, all you have to do is ask. You let the annuity company know that you want to convert your contract from accumulation to payout, which is called annuitizing your contract. You’ll have to indicate the payout option you’ve chosen, whether you want a fixed or variable stream of income (or some of each), and the date you want to receive the first income payment.

If you have a tax-deferred annuity (TDA), an annuity in a qualified retirement plan, or an annuity in an IRA, the federal government requires you to start taking income by April 1 of the year after you turn 701/2.

With non-qualified plans, you have much more flexibility over when to start. You can make the choice at almost any time while the contract is in effect—for example, as early as age 45, at the time you retire, or later. The only deadlines are those imposed by state law or the terms of your contract.

Choosing Fixed Income
The appeal of choosing fixed income is that you know exactly how much you’ll be getting, and the payment is guaranteed. For people concerned about decreasing payments, that can be a comforting thought. On the other hand, the income amount won’t increase either, which means your buying power will shrink as a result of inflation.

Another appealing feature of fixed income may be that it’s easy to understand how the amount you’re receiving is calculated. It is based on:
  • The dollar value of the contract when income payments start
  • Interest earnings guaranteed in the contract
  • Annuity tables that project your life expectancy based on your age

As a rule of thumb, the larger your contract value and the older you are when you begin to receive income, the larger each payment will be.

Choosing Growth
If you choose variable, or combined fixed and variable income, you’re taking the risk that the amount of income you receive in any payment can be less than in the previous one if the value of the investment portfolios you have chosen declines. But many experts agree that the risk is offset by the likelihood that over time equity investments will increase rather than decrease in value. That growth potential is the reason why a variable payout gives you the opportunity for increasing income in the future and the ability to offset the impact of inflation. It’s also one of the reasons you chose a variable annuity to accumulate assets.

The amount you receive in each payment will reflect the performance of your investment portfolios. If your investment return after expenses is greater than the benchmark growth rate—called the assumed interest rate (AIR)—that is in effect with your contract, your payment will increase. If your return is less than the AIR, your payment will decrease. With many contracts you are asked to choose between two or more benchmark growth rates, 3% and 6%, for example, or 3.5% and 5%. With other contracts, the benchmark is set either by the contract issuer or by state law.

Set the Time
Your non-qualified deferred annuity contract will stipulate a maturity date by which you must begin collecting income. Typically it’s in the year you reach the age set either by the state in which you live or by the company issuing the policy. Generally it’s 85 or older though in some states, it's currently 90. But maturity dates are rarely an issue, since there are usually good reasons to start income payments earlier.

Income Choices
The income you get from your annuity depends on a number of factors. The most important are the premium (for immediate annuities) or the total accumulated value of the contract (for deferred annuities), your age when you begin taking annuity payments, the payout option you choose, and whether the income is fixed or variable.

FIXED
If you have a fixed annuity, the payout amount is traditionally fixed. For example, if you receive $500 in your first payment, you’ll get $500 in your last one—and every payment in between. Some newer contracts, though, build in the potential for periodic increases of 1%, 2% or 3% to account for increases in the cost of living.

VARIABLE
If you have a variable annuity, you can choose the way your income amount will be figured. You can generally select variable income, which fluctuates depending on the performance of your investment portfolios. Or, with many contracts, you can also choose fixed income or a combination of fixed and variable income to provide both stability and the potential for growth.

© 1999/2000 NAVA, National Association for Variable Annuities. All rights reserved.
Terms and Conditions

Accumulation Period:
The period when the owner of a deferred annuity makes payments into the contract and accumulates assets.
Accumulation Phase:
The period when the owner of a deferred annuity makes payments into the contract and accumulates assets.
Accumulation Units:
The shares of ownership you have in a variable annuity investment portfolio during the period you are saving for retirement. As you pay additional premiums, you buy additional units.
Accumulation Value:
The sum of permiums and earnings, minus charges under the contract and any withdrawals.
Annual Contract Fee:
An annual fee, typically $30 or $40, paid to the insurance comapny for administering the contract. The fee often is waived for contracts with higher account values.
Annuitant:
The person who receives income from an annuity. The annuitant’s life expectancy is used to figure the initial income amount the annuity pays.
Annuitization:
The election to start receiving regular payments from annuity. The annuity is said to be annuitized.
Annuitize:
To convert the accumulated value of an annuity into a stream of income, either for one or more lifetimes or a specific period of time.
Annuity:
A series of periodic payments.
Annuity Commencement Date:
The date income payments start. Also known as the annuity starting date and the maturity date.
Annuity Contract:
A legal agreement between you and an insurance company, sometimes called an annuity company.
Annuity Income Payments:
(or payouts) The regular payments received as a result of the election to annuitize an annuity contract.
Annuity Units:
The number of units you own in a variable annuity investment portfolio during the period you are taking income. The number of your annuity units is fixed, and does not change.
Assumed Interest Rate:
(AIR) The rate of interest an annuity provider uses in determining the amount of each variable annuity income payment. Also known as the benchmark rate or the hurdle rate.
Annuity Purchase Rate:
The cost of an annuity based on insurance company tables, which take into account various factors such as your age and gender.
Asset Allocation Programs:
Variable annuity asset allocation programs make recommendations as to which subaccounts to invest in, given a scontract owner's financial goals and the prevailing market conditions. Purchase payments are then allocated to the subaccounts in selected percentages. Portfolio rebalancing programs 'rebalance' the amount of money allocated to each subaccount as the target percentages move out of alignment over time because some subaccounts grow faster than others. Some asset allocation programs regularly review an investor's financial goals and market conditions and make correspnding changes in the subaccounts the owner invests in. Other programs may do so only when the owner experiences a major change in his or her financial situation.
Beneficiary:
The person typically designated under the contract to receive any payments that may be due upon the death of the owner or the annuitant.
Cash-Refund Annuity:
If the annuitant dies before the total of annuity payments received equals the premiums paid for the annuity, a lump sum equal to the difference between the premiums and the sum of the annuity payments already made is paid to the beneficiary.
Cash-Surrender Value:
The amount that can be withdrawn from the contract after deduction of any surrender charge. It is equal to the contract value minus any surrender charge. Also known as cas value.
Commutable Contract:
An annuity contract that allows you to terminate an annuitization agreement that is paying you income on a fixed period or fixed percentage basis.
Commutation:
A process provided under some term certain annuities that allows the annuitant to take some or all of the value of the undistributed annuity payments.
Contract Date:
Date contract becomes effective.
Contract Owner:
The person or couple who pays premiums under the contract and has the rights under the contract, such as making withdrawals, surrendering the contract, and changing the beneficiary or other terms of the contract.
Contract Value:
The combined total of your principal and portfolio earnings in a variable annuity, up to and including the date on which you annuitize. Also known as accumulated value.
Death Benefit:
Payment made to beneficiary upon death of contract owner and/or annuitant.
Deferred Annuity:
An annuity contract that you purchase either with a single premium or with periodic payments to help save for retirement. With a deferred annuity, you can choose the point at which you convert the accumulated principal and earnings in your contract to a stream of income.
Dollar-Cost Averaging:
Investing a fixed amount of money at set intervals with the goal of purchasing more units under a contractat low values and fewer units at high values. Variable annuity dollar-cost averaging programs involve allocating a purchase payment to one investment option, such as the money market fund or fixed option, and then having that payment periodically transferred out of that account to other subaccounts.
Enhanced Death Benefit:
A death benefit that goes beyond the guaranteed minimum death benefit by locking in investment gains every few years or every year, or paying a minimum stated interest rate on purchase payments.
Equity Indexed Annuity:
Annuity with payout based on a market index. Also known as an indexed annuity.
Expense Ratio:
The amount, as a percentage of your total annuity account value, that you pay annually for operating, management, and insurance expenses.
Fixed Account:
Part of the company's general account to which a variable annuity contract owner may allocate all or part of premium payments. Also known as fixed investment option.
Fixed Annuity:
An annuity contract that guarantees you will earn a stated rate of interest during the accumulation phase of a deferred annuity, and that when you annuitize, you will receive a fixed amount of income on a regular schedule.
Flexible Premium Contract:
A contract that allows payments to be made at any time after the initial purchase payment.
Free-look Period:
A certain number of days after receipt of the contract during which an annuity contract purchaser may revokde the purchase of the contract.
General Account:
All assets of the insurance company not allocated to seperate accounts.
Guaranteed Death Benefit:
The assurance that your beneficiaries will receive at least the amount you put into the annuity and typically your locked-in earnings if you die before beginning to take income. One of the insurance benefits that annuities provide.
Guaranteed Living Benefit:
Protection during the life of the owner or annuitant against investment risks under variable annuity contracts that guarantee the level of account values or annuity payments. There are two types-guaranteed minimum income benefits and guaranteed minimum account value benefits.
Guarantee Period:
Period during which the level of interest credited under a fixed annuity is guaranteed.
Guaranteed Minimum Account Value Benefit:
A benefit guarantee that promises that, at specified periods, the account value will not be less than the purchase payments, sometimes with a minimum rate of interest.
Guarantee Minimum Death Benefit:
A basic death benefit offered under virtually all variable annuity contracts. Payment is equal to the greater of (1) the contract value or (2) premium payments less prior withdrawals, and is made to the beneficiary upon the death of the owner and/or annuitant. Many variable annuity contracts now offer enhanced death benefits.
Guaranteed Minimum Income Benefit:
A benefit guarantee that ensures under certain conditions the owner may annuitize the contract based on the greater of (1) actual account value or (2) a 'payout base' equal to premiums credited with some interest rate or the maximum anniversary value of the account value prior to annuitization.
Immediate Annuity:
An annuity contract that you buy with a lump sum and begin to receive income from within a short period, always less than 13 months. An immediate annuity can be either fixed or variable.
Income Options:
The various methods of receiving annuity income that an annuity contract offers. You may choose from among them the one that suits your situation best. Typically, there are six or more choices, many guaranteeing income for life.
Installment-refund Annuity:
If the annuitant dies before the total of the annuity payents received equals the premiums paid for the annuity, the annuity payments will continue to the beneficiary until the total of the annuity payments equals the premiums.
Insurance Charges:
Cover administrative charges and the cost of the mortality and expense (M&E) risk.
Investment Management Fee:
The fee paid in connection with the professional management of the assets of the investment funds underlying variable annuities.
Issuer:
The insurance company that issues the annuity contract.
Investment Portfolio:
A collection of individual investments chosen by a professional manager to produce a clearly defined investment objective. Portfolios, which are structured the same way as open-end mutual funds, are offered in a variable annuity contract and are available to people who purchase the contract. They are also called subaccounts or investment accounts.
Joint And Survivor Annuity:
A life annuity in which there are two annuitants, known as joint annuitants. Annuity payments continue as long as either annuitant is alive.
Life Annuity:
Annuity payments distributed by the insurance com-pany for the life of the annuitant.
Life Annuity With Installments Certain:
If the annuitant dies before a certain number of payments have been made, the remaining num-ber of payments is made to the beneficiary.
Life Annuity With Period Certain:
A type of refund annuity in which if the annuitant dies before payments have been made for some minimum number of years, payments will continue until the end of the period and are received by the beneficiary.
Living Benefits:
Guarantees that provide principal protection by guaranteeing the level of account values or annuity payments.
Market Value Adjustment:
This feature, which is included in some annuity contracts, imposes an adjustment, or fee, if you surrender your fixed annuity or the fixed account of your variable annuity. The adjustment offsets any losses the insurance company might incur in liquidating assets to pay the amount due to you.
Mortality And Expense Risk Charge:
(M&E) A fee that pays for the insurance guarantees, including the death benefit; the guaranteed ability to choose a payout option that can provide an income that cannot be outlived at rates set in the contract at the time of pur-chase; and the guarantee that the insurance charges will not increase.
Non-Qualified Annuity:
An annuity contract you buy individually rather than as part of an employer-sponsored qualified retirement plan. You pay the premium with post-tax dollars. With a deferred nonqualified annuity, your principal grows tax-deferred.
No-Surrender Charge Annuity:
An annuity contract that does not have a surrender charge.
Partial Surrender:
A withdrawal of an amount less than the entire cash surrender value of the contract.
Payment Interval:
The period between annuity payments, whether a month, a calendar quarter, or a year.
Payout Phase or Payout Period:
The period during which the money accumulated in a deferred annuity contract, or the purchase payment for an immediate annuity, is paid out as income payments.
Portfolio Rebalancing:
A type of asset allocation program that periodically reallocates contract assets among fixed and variable investment options under a variable annuity contract in specified proportion.
Premiums:
The amount you pay to buy an annuity or any other insurance product. With a single premium annuity you pay just once, but with other types you pay an initial premium and then make additional premium payments.
Principal:
The amount of money you use to purchase an annuity, bond, mutual fund, stock or other investment. The principal is the base on which your earnings accumulate.
Proprietary Portfolios:
The investment portfolios offered within a variable annuity that are run by the insurance company’s investment managers. The annuity may also offer portfolios run by managers working for another financial institution, such as a mutual fund.
Purchase Rates:
The rate for converting the contract value to annuity income payments; rates are set in the contract.
Pure Life Annuity:
Annuity payments stop when the annuitant dies. Also known as a straight life annuity.
Qualified Annuity:
An annuity contract you buy with pre-tax dollars as part of an employer-sponsored qualified retirement plan.
Qualified Plan:
An annuity used in connection with a tax-deferred retirement plan such as a 401(k) plan.
Ratchet Guaranteed Minimum Death Benefit:
A type of death benefit that is equal to the greater of (a) the contract value, (b) pre-mium payments less prior withdrawals, or (c) the contract value on a specified prior date.
Rising Floor Guaranteed Minimum Death Benefit:
A type of death benefit that is equal to the greater of (a) contract value or (b) pre-mium payments less prior withdrawals increased annually at a spec-ified rate of interest.
Rollover:
An IRA or qualified retirement plan that you move from one trustee to another is known as a rollover. You can roll over any qualified plan, including a qualified annuity, into an IRA, preserving its tax-deferred status.
Separate Account:
The account established by the insurance company to hold the money you contribute to your variable annuity. It is separate from the company’s general account, where fixed annuity premiums are deposited. Money in the separate account is not available to the company’s creditors.
Single Premium Annuity:
This type of annuity contract is purchased with a one-time payment. All immediate annuities and some deferred nonqualified annuities are in this category.
Stepped-Up Death Benefit:
A death benefit that guarantees pay-ments with interest or that is increased regularly to protect invest-ment gains.
Subaccount:
The investment portfolios offered in variable annuity contracts are sometimes referred to as sub- accounts. The terms refers to their position as accounts held within the separate account of the insurance company offering the variable annuity.
Surrender Charge:
Cost to contract owner for withdrawals from the contract before the end of the surrender charge period. The surren-der charge period typically is five to seven years.
Systematic Withdrawal Plans:
Allows a variable annuity contract owner to have a check for a specified amount sent monthly or quar-terly as a partial withdrawal from the annuity contract value to the owner or another designated person prior to the annuity starting date. Many annuity contracts permit 10% or 15% of contract value to be withdrawn annually without a surrender charge. Unlike life-time annuity payments, systematic withdrawals can continue only as long as the contract cash value is not exhausted. But these programs can offer more flexibility than life annuity payments, since systemat-ic withdrawal payments can be reduced, increased, or stopped. The tax treatment of systematic withdrawals differs from that of annuity payments.
Term Certain Annuity:
Annuity with income payments over a fixed number of years.
Transfer:
The movement of assets from one subaccount to another. Transfer fee—Charge for a transfer of assets.
Underlying Investments:
The stocks, bonds, cash equivalents or other investments purchased by a variable annuity portfolio or mutual fund with the money you and other people allocate to that portfolio or fund.
Unit Value:
The dollar value of a single accumulation or annuity unit, which changes constantly to reflect the current combined total value of the underlying investments in your investment portfolios, minus expenses.
Variable Annuity:
An annuity contract that allows you to allocate your premium among a number of investment portfolios. Your contract value, which can fluctuate in the short term, reflects the performance of the underlying investments held in those portfolios, minus the contract expenses.
Withdrawal:
Distribution from an annuity other than scheduled annuity payments.
Withdrawal Fee:
An administrative fee charged on withdrawals.