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Income Strategies

You need a plan to help ensure your income meets your needs.

Making the leap from deciding to take retirement income to actually putting those decisions into action can be nerve-wracking. That's because the choices you make can mean a major difference in the way you live—sometimes for 30 years or more. And putting off decisions often seems easier than making them. Deep down, lots of people hope that things will just work out.

Realistically, though, you get the best results when you determine the income you'll need, weigh various strategies for providing it, and select the one that you believe will best meet your needs.

WHAT THE ISSUES ARETo make strategic decisions about the best way to use the immediate annuity you have purchased or the assets in your deferred annuity to provide a secure retirement, you need to know:

Your plans for the money
The right time to start getting the income
The tax consequences of various ways of receiving income

Experts say that you may need more income early in your retirement than you will later on. And you may be more comfortable spending money on travel, for example, if you've deliberately created a stream of income designed to pay for it.

To be sure you have the money you want when you want it, you might ask your annuity provider about personalized payout plans or innovative programs for allocating your income.

MAKE A PLAN FOR THE MONEY
In choosing a payout strategy, the way you intend to use the income makes a big impact on your decision.

If you own a deferred annuity and plan to make a large, one-time investment, a lump sum can provide that money.

If you own a deferred annuity and want extra income to supplement your budget or cover extraordinary expenses before you retire, periodic or systematic withdrawals can provide it while giving your assets more time to grow.

If you're counting on lifetime income to be a part of your regular living-expense budget, pay for the extras that make life fun, or provide a source of cash you can use to create an emergency fund, annuity payments from your immediate annuity or annuitized deferred annuity are designed to provide it.

PICK THE RIGHT TIME
If your deferred annuity is part of a qualified plan or an IRA, you generally have to make your choice by the time you reach age 70½. With nonqualified annuities, sometimes called flexible premium annuities, you've usually got another fifteen years or more before you must make a decision. While there are advantages in that flexibility, the drawback can be a tendency to procrastinate.

You can make an argument for postponing taking income until the last minute, especially if you seem to be managing without it. Then, when you do start, the amount you get will be larger. For example, in some circumstances a person who begins taking income at age 85 might receive almost twice the amount in the initial payment as someone who began at age 62, assuming their account values were the same at the time they annuitized.

But there are often reasons for timing annuity payouts to begin when you retire, or even somewhat earlier. Since juggling various streams of income can be a major challenge, having a period of time to get accustomed to allocating your resources can be smart.

THE TAX CONSEQUENCES
If you take a lump sum or periodic payments, you pay tax at your regular tax rate on the full amount of your earnings, which the tax law assumes are withdrawn first. That could reduce the amount you actually have to spend by up to 45% (in the highest federal and state brackets). In contrast, if you annuitize a nonqualified annuity contract, part of each payment is a tax-free return of principal.

CREATING A REVENUE STREAM If you decide that the promise of income for life and the advantages of a regular return of nontaxable premiums as part of each income payment make sense for you, it's time for the next round of choices. The order in which you deal with them may vary, but these are the things you have to consider:

Is the growth potential of variable income more important to your long-term plan than the predictability of stable fixed income? Or would you prefer to have some variable income and some fixed income?
If you choose variable income, which benchmark rate of return should you select (provided your annuity company provides a choice of rates)?

FIVE-YEAR PLANS
Since there's no way to be sure how long you'll live and need income, you might consider making plans for five-year segments. That's long enough to see the effect of taking income from various sources during changing economic cycles. But it's short enough to catch potential problems and make adjustments in your spending style. This approach works well if you have the security of lifetime income for your basic needs.

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If having a steady revenue stream at retirement sounds appealing, consider a Traditional IRA, Roth IRA or FPA.