How does an annuity payout work?

There are many ways to get money out of an annuity, from monthly income payments for life to a simple lump sum. Whether you are trying to decide the best way to handle an existing annuity or you are shopping for the best product for you, here’s what you need to know.

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What is an annuity?

Annuities are a type of insurance contract that can often work like a retirement account or pension in some aspects. They can help you save for retirement and ensure steady income for a predetermined amount of time, often for life. If you’re trying to understand an annuity that you currently have, the best path is to speak with your financial professional or an agent. If you are shopping for a new annuity, be sure to ask specific questions—like how your payments will work—to ensure that the annuity meets your time frame and needs. There are a few different types of annuities, and they have many options. The most common are immediate and deferred annuities (see below).

How do immediate annuities work?

With an immediate annuity, you purchase it with a lump sum premium and start receiving pre-determined regular payments right away. Immediate annuities are usually funded with savings from retirement vehicles, like a 401(k), or bank accounts. There are different payout options, but most people choose lifetime income. It is important to note that immediate annuities offer little or no liquidity. Instead, you get the peace of mind that you have a stream of steady, guaranteed income*.

How do deferred annuities work?

With a deferred annuity, you can make a series of premium payments or make a lump-sum premium payment. The growth during what is called the accumulation phase is tax-deferred. Then, at a future date, usually after age 59½, you begin to receive your payments. That’s called the annuitization phase. Withdrawals may be subject to regular income tax, and if made prior to age 59 ½, may be subject to a 10% IRS penalty. In addition, surrender charges may apply.

Fixed vs. variable annuities

When you purchase a deferred annuity, you usually have to decide how you want that money to grow. A fixed annuity has a guaranteed growth rate that is set when you purchase it. A variable annuity has the opportunity to grow in the market via investments you decide upon. This means, your money is subject to market volatility and you can even lose money, as with all investments. Both have advantages and disadvantages, and which one you choose may depend on your objectives, time horizon and risk tolerance.

Understanding annuity payout options

The way you receive annuity payouts will depend on the product and the options you select when the annuity is purchased. Some annuities may offer only one type of payout. When you begin annuity payouts will matter, as well. Your monthly (or yearly) payout will be lower, for example, if you begin it when you are 62 than it will be if you wait until you are 70. It also depends on the prevailing rate environment at the time of annuitization. 

How much do annuities pay out?

That depends on many factors. The most important factor is how much money is in the annuity. A $10,000 immediate annuity will have a much lower payout than a $1 million immediate annuity. Other factors, like age and gender, could also increase or decrease the amount of your annuity payout the prevailing rate environment at the time of purchase.

What are the various annuity payout options?

Not every annuity will have all of these options. Many may have only one or two. Be sure to check that the annuity payout options you want are included in the products you’re considering. That said, here are the different ways you can get money out of various annuities:

Fixed period/period certain: You choose a specific period, like 20 years, that you want to receive payments. The amount you’ve funded in the annuity will inform how much you receive during those years.

Fixed amount: An alternative to fixed period. With this option, you select the amount you want to receive each payment period, and payments will continue until the annuity runs out of money.

Income for life: You receive payments for as long as you live. Converting some of your retirement funds into a lifetime income stream is a great way to guarantee that you will never outlive your retirement savings.

Life income with period certain: This combination annuity guarantees payments for as long as you live, and it also guarantees payments for a certain number of years. If the holder passes before those years elapse, the payments can be assigned to a beneficiary.

Joint or survivor life: This type of annuity has two people on one policy. If one passes, the second will continue to receive payments.

Lump sum: Some annuities give you the option to cash out and receive a lump sum. This is generally advised against, however. Annuity payments count as income if the annuity was purchased with pretax dollars, and taking a lump sum may cause you to pay significantly more taxes. (If the annuity was purchased with taxed dollars, you will owe taxes on the annuity’s growth, but not on your contributions.)

Pros and cons of annuities

Annuities can be a smart choice if you’re worried that you might run out of retirement funds or if you are unsure how to budget your savings. But they may not be right for everyone. Here are some things to keep in mind when considering an annuity:


  • Can provide reliable lifetime income.
  • Helps with budgeting retirement spending.
  • Offers customizable coverage and options.
  • Offers tax-deferred growth.
  • May include a death benefit.


  • Fees may be higher than with some other retirement savings products.
  • There are surrender charges and tax penalties for early withdrawals.

Is an annuity right for me?

Annuities are one of many options to help you plan for your golden years. An annuity can be a good retirement savings vehicle and makes sense in many situations. In other situations, different options may be more beneficial. If you’d like to speak to a professional, our agents and NYLIFE Securities Registered Representatives can help you look at your total retirement picture and create a strategy to get you where you want to go.

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Variable annuities are sold through NYLIFE Securities LLC (Member FINRA /SIPC), a Licensed Insurance Agency and a New York Life Company.