What Is the Annuitization Phase?
The annuitization phase of an annuity, also known as the annuity phase, refers to the period when an annuitant starts to receive payments from his or her investment in the annuity. This period comes after the accumulation phase, in which money is invested into the annuity.
- The annuitization phase is when the annuity begins making payouts.
- There are different methods for taking payments from an annuity and include taking a lump-sum payment or structured distributions.
- Before making any decision regarding annuities, it is important to discuss all available options with a retirement professional.
Understanding the Annuitization Phase
After annuities move from the accumulation phase to the annuitization phase, they typically provide periodic payments to the annuitant. The more money was originally invested into the annuity, the more will be received when the annuity is paid out. This is the time when the method of payment comes into play: The annuitization method, the systematic withdrawal schedule, or the lump-sum payment. The annuitization payout method comes with the following considerations:
The life option typically provides the highest payout because the monthly payment is calculated based only on the life of the annuitant. This option provides an income stream for life, which is an effective hedge against outliving your retirement income.
The joint-life payment option allows you to continue the payment to your spouse upon your death. The monthly payment is lower than that of the life option because the calculation is based on the life expectancy of both spouses. The life with guaranteed term option gives you an income stream for life (like the life option), so it pays you for as long as you live.
With the period certain option, the value of your annuity is paid out over a defined period of time of your choosing—such as 10, 15, or 20 years. Should you elect a 15-year period and die within the first 10 years, the contract is guaranteed to pay your beneficiary for the remaining five years.
The systematic withdrawal schedule is a method of withdrawing funds from an annuity account in specified amounts for a specified payment frequency. The annuitant is not guaranteed lifelong payments because he or she is within the standard annuitization method. With the systematic withdrawal schedule, the annuitant chooses instead to withdraw funds from his or her account until it is emptied, bearing the risk that the funds become depleted before he or she dies.
A lump-sum payment is a one-time payment for the value of an asset such as an annuity or another retirement vehicle. A lump-sum payment is usually taken in lieu of recurring payments distributed over a specific period. The value of a lump-sum payment is generally less than the sum of all payments that you would otherwise receive because the party paying the lump-sum payment is being asked to provide more funds upfront than it otherwise would have been required to.