If you're about to retire and own an annuity, you might be considering whether to convert your investment into a series of periodic payments. The process is called annuitization, and depending on which payment option you select, it is possible to receive payments up until you die—eve🎃n if total payments exceed the value of the contract. But there are pitfalls as well.🥃 It's essential to understand annuitization and its long-term consequences.

How Annuitization Works

Several decades ago, life insurance carriers began offering packaged 澳洲幸运5官方开奖结果体彩网:annuity products to retirement savers as a form of insurance against outliving their income. Now some employers are including annuity options in their 澳洲幸运5官方开奖结果体彩网:401(k) plans, after provisions in the Settingಞ Every Community Up 🅷for Retirement Enhancement (SECURE) Act made it easier to offer annuities through employer-sponsored retirement plans.

One of the critical benefits annuities offer is the ability to provide a guaranteed monthly payment to the 澳洲幸运5官方开奖结果体彩网:annuitant until death, even if the total payout exceeds the value of the contract. To obtain this guarantee, however, the contract must be annuitized.

Annuitization is a single, one-time event that occurs between the 澳洲幸运5官方开奖结果体彩网:accumulation and 澳洲幸运5官方开奖结果体彩网:payout phases in an annuity. When the contract owner is ready to begin receiving annuity payments, the insurance carrier converts the 澳洲幸运5官方开奖结果体彩网:accumulation units in the contract into 澳洲幸运5官方开奖结果体彩网:annuity units and computes a monthly mathematical payout based upon several factors, including the value of the contract, the projected longevity of the annuitant, and the 澳洲幸运5官方开奖结果体彩网:type of payout selected.

To decide if an🐼nuitization is the right move for you, consider the followin꧂g:

1. Are Annuities Right for Your Retirement?

The reason to choose 澳洲幸运5官方开奖结果体彩网:annuitization is for the payout to be a source of monthly income. Wealthy investors who use annuities as 澳洲幸运5官方开奖结果体彩网:tax shelters will typically opt for other forms of distribution. Many annuity owners typꦦically choose either a straight systemat🧸ic withdrawal or say they don't expect to withdraw funds unless an emergency arises.

A key factor to consider here is how much money you have saved in assets outside the 澳洲幸运5官方开奖结果体彩网:annuity contract. If, for example, you have another $100,000 in liquid savin⛎gs elsewhere, annuitization may be an appropriate choice because you have other assets to draw upon in the event of an emergency🍸.

It is not wise to convert all your savings into an irrevocable cash flow, even if doing so would provide the greatest possible 澳洲幸运5官方开奖结果体彩网:return on investment. For this reason, most annuity carriers will only allow clients to put 60% to 80% of their assets into annuities.

However, those applying for Medicaid could benefit from an irrevocable payout because this wil♏l prevent the contract's accumulation value from being included in their assets during the spend-down process. The rules for this exclusion are complex and vary from one state and insurance carrier to another.

2. Your Life Expectancy

Annuitization offers different options, allowing you to figure in your estimated lifespan and whether the annuity needs to provide for your heirs.

Let's say you choose a straight life payout of some sort with no period certain clause. If you opt for that straight life payout, you will forfeit the unpaid portion of your contract back to the carrier if there is any 澳洲幸运5官方开奖结果体彩网:principal left when 🗹you die. Had you chosen a contract with a p🎃eriod certain clause, that option would have guaranteed payouts for a specific term and would have continued to pay your heirs had you died before the payout period ended.

On the other hand, retirees who chose not to annuitize their contracts and make it past their life expectancy may 澳洲幸运5官方开奖结果体彩网:outlive their savings.

You cꦉan improve your odds of making the right decision by researching your projected statistica🧔l longevity and comparing this with your estimate based on such factors, including your family’s medical history and your current health and lifestyle.

Annuitization is very beneficial for those who substantially exceed their projected lifespans. Married couples who want a higher payout without the risk of forfeiture may come out ahead by taking a straight 澳洲幸运5官方开奖结果体彩网:joint-life payout with no period cer🐈tain of any kind, and then purchasing a joint first-to-die term insurance policy that will pay out a tax-free death benefit to the survivor. Work through the cost implications of the choices you are considering before making a final decision.

An Example of Deciding to Annuitize

Let's look at a hypothetical example of a married couple and what they would need to consider to decide whether or not to take the annuitization route.

Malcolm and Lucia are married. They both retired last month. Malcolm is 68 years old, and Lucia is 65. They purchase a $100,000 澳洲幸运5官方开奖结果体彩网:indexed annuity contract that will be♔gin paying them immediate income. Now🍷 they have to choose the payment option.

• Suppose they choose to use an income-benefit rider for protection. In that case, they will receive a $5,000 per year minimum guaranteed payout as long as one of them is living—even after the accumulation value in the contract has been exhausted. Their payout may be 澳洲幸运5官方开奖结ꦕ果体彩网:slightly higher ifꦚ the markets perform well.
• If they go for a joint-life payout with a 20-year period certain that requires annuitization, the best quote they get is $5,746 per year, which would guarantee total payments of at least $114,920 ($5,746 x 20 years).

The annuitized joint-life contract would have paid them the highest monthly amount. However, this payout would have been irrevocable. On the other hand, the income-benefit-rider option will allow them to withdraw any remaining accumulation value in the contract at no charge once the 澳洲幸运5官方开奖结果体彩网:surrender charge schedule expires.

This example illustrates the trade-off between payout and 澳洲幸运5官方开奖结果体彩网:liquidity. They will need to analyze carefully the likelihood that they might need to access the 澳洲幸运5官方开奖结果体彩网:accumulated value in the contract at some point in theꦬ future, such as to pay for medical expenses.🍸

The Bottom Line

Annuity owners have several factors to consider if they are contemplating whether to annuitize their contract. Current health and projected longevity must be analyzeꦰd al♔ong with their financial circumstances, risk tolerance, and investment objectives—for example, the need for liquidity. Some annuity carriers also offer a measure of flexibility for withdrawing from annuitized contracts, such as allowing the distribution of future payments within the period certain.