When Will My Annuity Start Paying Me? Understanding Income Payouts
Imagine you’re planting a seed in your financial garden. That seed could be money you save for the future. An annuity is like nurturing that seed so it grows into a tree that provides fruit – regular income – later on. But when exactly does this tree start bearing fruit, or in financial terms, when do annuities start paying out income? The answer isn’t a single date, but rather depends on the type of annuity you choose and when you decide to start receiving payments.
Think of annuities in two main categories based on when they begin paying you: immediate annuities and deferred annuities. The key difference is the timeframe between when you purchase the annuity and when you start receiving income.
Immediate Annuities: Income Starts Sooner Rather Than Later
As the name suggests, an immediate annuity is designed to start paying you income relatively quickly, often within a month or even as soon as the next payment period after you buy it. It’s like buying a fruit-bearing tree that is already mature and ready to produce.
You typically purchase an immediate annuity with a lump sum of money. In exchange for this lump sum, the insurance company providing the annuity promises to pay you a stream of income payments. These payments can be for a specific period, like 10 or 20 years, or for your entire lifetime, or even for the lifetimes of you and your spouse.
People often choose immediate annuities when they need income to begin soon, perhaps because they are retiring or need a reliable income stream to cover living expenses right away. For example, if you just retired and want to convert a portion of your savings into a guaranteed monthly income to supplement Social Security and pensions, an immediate annuity could be a suitable option. You give a lump sum, and shortly after, the income checks start arriving.
Deferred Annuities: Income Starts Later, After a Period of Growth
Deferred annuities are different. They are designed to grow your money over time before you start receiving income. Think of this like planting a sapling. It needs time to grow and mature before it can produce fruit. With a deferred annuity, your money has a period to potentially grow tax-deferred. “Tax-deferred” means you don’t pay taxes on the earnings until you withdraw the money, which is a significant advantage for long-term savings.
You can fund a deferred annuity with a lump sum, or you can make a series of payments over time, similar to making regular contributions to a retirement account. The “deferral period” is the time between when you start paying into the annuity and when you decide to begin taking income. This period can last for years, even decades.
During the deferral period, your money can grow in different ways, depending on the type of deferred annuity you choose. Some deferred annuities offer a fixed interest rate, providing predictable growth. Others are linked to the performance of market indexes, like the S&P 500, offering the potential for higher returns but also carrying market risk. Variable annuities are another type where you can invest in subaccounts that are similar to mutual funds, again with market risk and potential for greater growth.
When you are ready to start receiving income from a deferred annuity, you “annuitize” it. This means you convert the accumulated value in your annuity into a stream of income payments. You choose when to annuitize, which gives you control over when your income begins. This flexibility is a key advantage of deferred annuities. You might choose to start income payments when you retire, or when you anticipate needing additional income in the future.
Choosing When to Start Income: It’s Up to You (Within Limits)
Ultimately, the decision of when your annuity starts paying income is largely in your hands, especially with deferred annuities. You decide when to annuitize based on your financial needs and retirement goals. With immediate annuities, the income begins very shortly after purchase, offering immediate financial benefits. Understanding these two primary types of annuities and their payout timelines is crucial in determining if an annuity fits into your overall financial plan. It’s all about aligning the “fruit-bearing” time of your financial tree with when you need to harvest the income.