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Financial Learning Center


Distributions from Your Retirement Plan

Annuity Form of Payout

An annuity payout from your retirement plan basically provides a fixed income to you over your lifetime or a fixed period of years. Here are the most common annuity payouts:

  • A single life annuity pays you a fixed monthly income for one life. It is commonly described as "income you cannot outlive." Because the payments will cease the day you die rather than continue to a beneficiary, this option will provide you with the largest monthly benefit.
  • A joint and survivor annuity allows for payments to continue to a beneficiary (or beneficiaries) at your death. If you're married, federal law requires you to elect this form of annuity payout unless your spouse signs an official notarized statement waiving his or her rights to your pension. Since your monthly benefit may extend beyond your lifetime, the amount of your monthly fixed income while you're alive will be reduced depending on the percentage of joint and survivor annuity you elect.

IMPORTANT NOTE: Keep in mind that an annuity based on your life expectancy ceases when you die. For example, assume you are single, have a lump-sum equivalent of $200,000 in a qualified retirement plan, and use it to purchase a single life annuity. You receive payments for one year (say $21,000) and die. Your annuity payments cease, even though you have received only $21,000 of the value of your accrued benefit. Your heirs will receive no further monies. On the other hand, if you outlive your life expectancy, you'll come out ahead, because you will have received more than the $200,000 lump-sum equivalent. Similarly, if you elect a joint and survivor annuity and both you and your beneficiary die, your heirs will receive no further monies.

  • A period certain and life annuity is a reduced monthly benefit you receive for life; if you die, the benefit is paid to your beneficiary for the remainder of the specified period. While the ten-year period certain and life annuity is the most common, period certain payout terms can range from five to twenty years.

Example: Suppose you retire and choose a ten-year period certain and life annuity. You collect $911 a month (see table below) for three years and then die. Your beneficiary will then collect $911 a month for seven additional years (the remainder of the original ten-year period). However, if you live beyond the ten-year certain period, you will continue to collect the $911 a month annuity for as long as you live. Then at your death, your beneficiary will not receive any payments, since you outlived the ten-year certain period.

If you are eligible for benefits from a defined benefit plan, your employer may offer you a Social Security leveling option. Say you are over age 55, have enough years of service to qualify for pension benefits, and you'd like to retire before age 62. You'll need the income from both Social Security and your pension to make it possible, but Social Security benefits can't start before age 62.

If you elect this leveling option, your monthly fixed income from your employer plan will include the projected benefit from Social Security. Once Social Security payments begin at age 62, your monthly pension benefit from your employer plan is reduced by the amount of the Social Security payment. The end result is you have a level income for your lifetime. But the level payment will be less (perhaps much less) than if you waited to age 65 or later to retire. You may be able to choose this option in combination with any of the above mentioned annuity forms.

Look at the table below to see how the various options compare*:

Form of Payment

Plan Benefit*

Single Life Annuity

$1,000

Joint and Survivor:

 

50%

$ 896

66 2/3%

$ 866

75%

$ 851

100%

$ 811

Period Certain and Life:

 

5-Year

$ 973

10-Year

$ 911

15-Year

$ 842

20-Year

$ 780

Social Security Leveling Benefits Paid from Your Employer's Plan:

 

Pre-62

$1,519**

Post-62

$ 619

* Assumes the employee is age 65 and spouse is age 62 when annuity payments commence. Payments under your plan in your personal circumstance may be more or less.

** Assumes a Social Security benefit of $900 per month payable beginning at age 62.

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