Clients often receive detailed advice about strategies for maximizing their retirement savings during the accumulation phase of life. Once the client reaches the point where they are able to begin taking distributions from their accounts, however, they're often in the dark about the various options that may be available during this "decumulation" phase of life.
Clients understand that they must eventually begin taking required minimum distributions (RMDs), but they may not know that there are structured ways to draw down their account balance to provide a steady income and stability during retirement. Annuities and qualified plan periodic payments are two such options — but it's important for clients to understand the difference between these two similar options before deciding which is right for them.
Annuity Basics
An annuity is a contract with a life insurance company. Under the contract, the client's plan assets are transferred to the insurance contract in exchange for regular payments once the client has annuitized the contract.
Annuities offer a variety of options. For example, the client may choose to receive a specified sum at regular intervals for life, or opt to purchase a contract that continues to pay a spouse once the client has died.
The price of the annuity contract will depend on the specific terms of the contract. Annuities that continue to provide payments to a spouse after the participant's death tend to be more expensive. However, they offer the benefit of stability for a surviving spouse. A plan participant can also choose to purchase an annuity that benefits a spouse if the participant dies before beginning annuity payments.
Periodic Payments
Periodic payments are similar in that they provide payments from the retirement account at regular intervals. The specific terms of the retirement plan will dictate the participant's options when it comes to periodic payments.
Participants can typically choose to receive payments on a monthly basis, quarterly or even annually. The plan will typically allow the plan participant to elect to receive a fixed number of payments. The amount of these payments will be expressed as a percentage of the value of the account at the time of the payment. Therefore, each payment will fluctuate slightly from the one before.
Participants can also often elect to receive a specified dollar amount in each installment until the account balance has been depleted.
Weighing the Options
Annuities and periodic payments may be similar, but they aren't exactly the same. The participant should examine all of the angles before choosing one over the other.
