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You can control the flow of retirement income.
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If using
annuity payments to provide lifetime income is the strategy that seems
to make the most sense, you can select a payout plan that suits your individual
situation. All
nonqualified annuity —sometimes referred to as flexible premium
annuity— contracts offer some tax-free income until the total amount of your
premium has been repaid. All but two of them promise income for life.
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There are several key factors to consider when you weigh the
various payout options. It makes sense to review them with your financial adviser
before making up your mind.
JOINT AND SURVIVOR
Should the payout be life only or joint and survivor? For many people, wanting to provide lifelong
income for a spouse or other survivor is the driving force in choosing a joint and
survivor payout. Each individual payment amount is less than with a single life
annuity, but the total over two lifetimes can be more, sometimes much more.
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SINGLE LIFE
When isn't a joint and survivor policy the wiser decision? Among
the factors to consider are how much income each of you has from other sources and
how healthy you are. For example, if you own an annuity and your spouse has a good
defined benefits plan, taking a single life annuity might make sense. It would provide
more income than a joint and survivor payout, and your spouse is already guaranteed
lifetime income. Similarly, if your spouse is ill, and unlikely to outlive you,
a single life annuity might be the wiser choice.
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What percent of income should the survivor receive? The follow-up
decision is what percentage of the income that you receive while you're both alive
should be paid to the surviving person. There are usually several choices, with
the least being 50% and the most 100%.
The decision involves trade-offs, as so many things do. If the surviving partner
gets 100% of the income, the amount you get while you are both alive will be less.
But the goal in choosing that alternative is that the survivor continues to receive
the same amount of income that was being paid prior to death.
On the other hand, a
variable annuity paying the survivor 50% may provide sufficient
income, since the living expenses of one person could be less than for two. Additionally,
the variable annuity paying the survivor 50% can potentially provide enough growth
to make up the difference over time if the
separate account funds you've chosen
produce strong returns. Of course, there is also the possibility that the survivor's
payments will decrease if the separate account funds you've chosen don't produce
strong returns because of an extended market downturn, for example.
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Should you choose a life annuity that guarantees a certain number
of payments? One reason people give for choosing not to
annuitize is that they're afraid if they die shortly after
they begin receiving payments, they will forfeit a large portion of the amount they
spent to purchase the annuity. To avoid that situation, some people choose a life
annuity with a period certain payout guaranteeing that they or their beneficiaries
will receive income for at least a minimum period, typically 5, 10, or 20 years.
You can choose a period certain payout whether you take a single life or joint and
survivor option. Although the guarantee reduces the amount you get somewhat, you
may consider it a smart choice.
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Should you take a payout that doesn't guarantee life income?
If the reason you're annuitizing is to be able to count on income for as long as
you live, you should choose the lifetime guarantee. But there are situations when
getting a larger amount of money each month or insuring payments will last a specific
amount of time is a smart decision.
What's appealing is that these payout models may produce larger income payments
in the short term. Also, when you select this option, you typically have the opportunity
to commute, or cash in, your annuity for a lump sum rather than receive income payments
in the future.
In addition, in these plans part of your income payment is always
tax free on fixed terms or fixed amounts. With lifetime payouts, you may end up
owing tax on the entire income amount of each payout if you live long enough to
get your entire cost basis back. Of course, this is not really a negative since
it means that you're getting back more than you put in.
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THE FIXED ALTERNATIVE
There are circumstances when knowing exactly what you can count on each month may
seem more appealing than the potential for growth. And there's a way to arrange
that as well.
You can receive fixed income from your variable annuity by tapping either part or
all of the accumulated value of your contract. The way it works is that the assets
in your separate
account funds are liquidated and deposited into the annuity provider's
general account. The company then takes the responsibility for making regular income
payments.
With some contracts, you may also be able to choose a fixed payout that increases
in increments of 1%, 2%, or 3%, reflecting increases in the cost of living.
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