What Does It Mean to Annuitize?

Converting Assets to a Stream of Income

Couple counting money at a table at home
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Annuitizing is the process of establishing a stream of regular income payments from an annuity. You convert your savings from assets that grow to something that provides income, either by making additions to the account or by letting the earnings build up.

Annuitization isn't the same as simply making a withdrawal. You'll set up a systematic payment plan when you annuitize. The plan might include lifetime income guarantees. The decision is often irrevocable. It may be very hard if not impossible to reverse this process.

Key Takeaways

  • Annuitizing involves setting up a stream of regular income payments from an annuity.
  • You have a few options, from lifetime payments, life with period certain, joint and last survivor, and period certain.
  • The process is often a permanent decision. You may not be able to go back after you make the choice.

What Happens When You Annuitize?

You tell the insurance company to begin paying you when you make the choice to annuitize. This is often done by submitting an agreement. You decide how you’d like to structure the payments. Your options might include fixed amounts, a fixed period, and a death benefit.

You often have the option to choose from many programs. Read your annuity contracts to decide which is best for you.

You annuitize from the beginning when your annuity is immediate.

Maybe you’re a 65-year-old woman with $100,000 in savings. The insurer might pay you $443 per month (or $5,316 per year) for the rest of your life if you buy an annuity and you annuitize. This amounts to a 5.3% starting withdrawal rate. But your number may not be the same, depending on some options.

Lifetime Payments

The simplest option for annuitization is a straight lifetime payment. The insurer continues to make payments for as long as you live. They last until the annuitant dies. This might be the same person as the annuity owner. But that’s not always the case.

Death might occur one year after annuitizing, or many years later. The longer the annuitant lives, the better this option works. There's no refund of your principal under a basic lifetime payment option if death occurs shortly after annuitization.

Life With Period Certain

You can add a "period certain" to guard against the risk of losing all your money if the annuitant dies soon after starting a lifetime payment option. The insurer will make payments for either the life of the annuitant or the period that you choose in this case, whichever is longer. 

You might use a 10-year period certain. Payments would continue for at least 10 years no matter when the annuitant dies. They'll continue for as long as they're alive, even if that's much longer than 10 years. You're reducing your risk of financial loss due to an early death, so your monthly or annual payments will often be smaller when compared to a straight lifetime payment.

Joint and Last Survivor

Some annuity owners want to provide income not just for themselves, but for somebody else as well, such as a spouse. A joint and last survivor payment option provides income as long as either of the people you choose remains alive. Again, this often results in a smaller payment than a single lifetime payment. There's a greater chance that at least one of these people will live for many years.

Period Certain

You don't have to use someone's lifetime when you annuitize. You can instruct the insurer to pay you for a set number of years if you simply want to receive income for that length of time or until a certain deadline, such as when your Social Security or pension benefits kick in. A shorter period results in larger payments.

Options can vary by insurer. Speak with your agent to learn about any other options that might be offered.

Which Option Is Best? 

The right choice depends on what you want to achieve. Annuitizing with a single lifetime payment should provide the largest payment if you're only taking care of yourself and have no dependents who will have to rely on the assets. But you should always think about what will happen if you or the annuitant should die. How will that impact others? Do you want your beneficiaries to receive anything after your death?

Annuitizing is often a permanent decision. It may be very hard or even impossible to go back after you make a choice. Insurers take steps to manage their risk and to keep up their end of the bargain. It's hard to unwind the complex transactions that make this possible.

Choosing to Annuitize

Annuitizing is just an option. Most annuity holders never exercise that option. People tend to use annuities for accumulation. Then they move their money elsewhere, maybe cashing out, transferring to another account, or just taking lump sum withdrawals as the need arises.

It's key to keep in mind that the main reason to annuitize is to get a guarantee of payments for a certain amount of time from the insurer. There's no government guarantee.