Annuitization vs. Systematic Withdrawal

Annuitization Systematic WithdrawalBy Toma Franklin, Staff Writer

Variable annuities typically offer a variety of payout options, ranging from highly flexible systematic withdrawals to pure life annuities which guarantee lifetime income payments. Between these opposites lie a wide range of payout strategies which combine extended payments with a minimum amount, or period, guarantee. A systematic withdrawal strategy fulfills your requirements while preserving and stretching the principal as far as possible.

Of late, this kind of drip strategy has become slightly less feasible because monthly income and expenditure are going in opposite directions, vertically. When you add the additional savings required by retirees to meet increased life expectancy levels, the current averages of investments in retirement plans are simply insufficient to meet the requirements of an entire post retirement lifetime. This is where annuities, and annuitization, provide a win-win situation. What exactly does annuitization offer?

Fixed annuitization, you know exactly how much money you are going to get, and for how long. It could also be for the span of your entire remaining lifetime. For a retiree with no other source of income, a fixed annuity providing a guaranteed steady stream of income for life is an irresistible contract.

Variable annuities offer an opportunity for the investor to build up the cash value in the savings phase, and increase the resulting income payments in the distribution phase. Insurers have been quick to spotlight the differences between variable annuities and mutual funds, which include tax deferral, death benefits and other benefits normally associated with insurance products. And, as a further incentive, variable annuity issuing companies offer a minimum guaranteed payout, to mitigate risk and reassure annuity buyers. Thus, annuitized returns from a variable annuity will reflect the state of the market and offer protection to retirees against inflation by means of increasing returns in times of greater inflation.

The annuitized payment of an annuity which is not held inside a qualified retirement plan or IRA has its own tax benefits. Each annuitized payment includes a part of the principal, while the rest is made up of earnings, or gains. When not inside a qualified plan, only the earnings part of the payment is taxable. Whereas a lump sum withdrawal is subject to tax on the combined total of principle and gains.

Lastly, annuitizing the contract sometimes has additional benefits, such as qualification for Medicaid benefits. Even for an investor who does not need the annuity payments, annuitization can result in significant savings in capital gains and estate taxes. Suffice it to say that a well planned and timed annuity contract will offer the returns of a high performing mutual fund investment, the security of a traditional retirement plan and tax benefits that beat all other investment plans.

Please note that a large number of insurance companies offer annuities, and each company has different types of annuities. Each of these has its own advantages while being most suitable for specific kinds of investments. To find out which type of annuity is best for you, you are advised to consult a financial planner.