# Annuitization Explained: Turning Annuities Into Steady Income

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## What Is Annuitization?

Annuitization is the process of converting an annuity investment into regular income payments, playing a central role in financial planning by providing a steady cash flow. Annuities can be annuitized for a set period or the [annuitant's](https://www.investopedia.com/terms/a/annuitant.asp) lifetime.

Depending on the [annuity contract](https://www.investopedia.com/terms/a/annuitycontract.asp), payments may go solely to the annuitant or extend to a surviving spouse in a [joint life arrangement](https://www.investopedia.com/terms/j/joint-life-payout.asp), and [beneficiaries](https://www.investopedia.com/terms/b/beneficiary.asp) can often receive a portion of the remaining balance upon the annuitant's death. Personal financial goals and risk tolerance are important factors to consider when choosing annuitization options.

### Key Takeaways

*   Annuitization transforms an annuity investment into regular income payments over a specified period or the annuitant's lifetime.
*   The annuity payout is based on factors like the annuitant's age, life expectancy, and projected interest rate.
*   Single-life annuity payments stop upon the annuitant's death, while joint-life payments continue until the second annuitant's death.
*   The SECURE Act enhances annuity portability in retirement plans but also removes the stretch provision for inherited IRAs.
*   Annuitization guarantees income but involves high fees and rigid terms, requiring careful consideration of personal financial goals.

## How Annuitization Works: A Detailed Breakdown

The concept of annuitization dates back centuries, but [life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp) companies formalized it into a contract offered to the public in the 1800s.

When drawing up the annuity contract, the insurer makes calculations to determine the annuity [payout](https://www.investopedia.com/terms/p/payout.asp) amount. The key factors used in the calculation are the annuitant's current age, [life expectancy](https://www.investopedia.com/terms/l/lifeexpectancy.asp), and the projected [interest rate the insurer will credit to the annuity balance](https://www.investopedia.com/terms/a/assumedinterestrate.asp). The resulting payout rate establishes the amount of income that the insurer will pay. By the end of the payment period, the insurer will have returned the entire annuity balance plus interest to the annuitant.

The payment period may be a specified period or the life expectancy of the investor. If the insurer determines that the investor’s life expectancy is 25 years, then that becomes the payment period. The significant difference between using a specified period versus a lifetime period is that, if the annuitant lives beyond their life expectancy, the life insurer must continue the payments until the annuitant's death. This is the insurance aspect of an annuity in which the life insurer assumes the risk of extended longevity.

## Navigating Single-Life Annuity Payments

Single-life annuity payments stop when the annuitant dies, and the insurer keeps the remainder. When payments are based on joint lives, the payments continue until the death of the second annuitant. When an insurer covers joint lives, the amount of the annuity payment is reduced to cover the [longevity risk](https://www.investopedia.com/terms/l/longevityrisk.asp) of the additional life.

Annuitants can choose a beneficiary to get the annuity balance via a refund option. Annuitants can choose refund periods during which, if they die, the beneficiary gets the proceeds. For instance, if an annuitant selects a refund option for a [period certain](https://www.investopedia.com/terms/p/periodcertain.asp) of 10 years, death must occur within that 10-year period for the insurer to pay the refund to the beneficiary. An annuitant may select a lifetime refund option, but the length of the refund period will affect the payout rate. The longer the refund period is, the lower the payout rate.

## Adjusting to Annuity Changes in Retirement Plans

In 2019, Congress passed the SECURE Act to make retirement plans, including annuities, more portable. If you change jobs, your old 401(k) annuity can roll over to your new job's 401(k) plan.

The law makes it harder for account holders to sue retirement plans if they fail to pay annuities, such as in bankruptcy. Note that a [safe harbor](https://www.investopedia.com/terms/s/safeharbor.asp) provision of the SECURE Act prevents retirement plans (and not annuity providers) from being sued.

## What Is the Stretch Rule for Inherited IRAs?

The SECURE Act eliminated the stretch provision for beneficiaries who [inherit an individual retirement account (IRA)](https://www.investopedia.com/terms/i/inherited_ira.asp). In years past, a beneficiary of an [IRA](https://www.investopedia.com/terms/i/ira.asp) could stretch out the [required minimum distributions](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) from the IRA over their lifetime, which helped to stretch out the tax burden. With the new ruling, non-spousal beneficiaries must withdraw all of the funds from the inherited IRA within 10 years of the death of the owner.

## At What Age Can You Annuitize?

You can sign an annuity contract as long as you're over 18 or older. There is no age limit.

## Is It a Good Idea to Annuitize?

This depends on your goals and [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp). If you are determined to find a way to receive a guaranteed income stream for retirement, especially if you believe you will outlive your life expectancy, then an annuity may be for you. However, there are often high fees and strict rules involved. You might want to consider other options before settling on an annuity.

## The Bottom Line

Annuitization converts an annuity into a steady stream of income, offering flexibility through payout options like fixed periods, lifetime payments, or joint life arrangements for a surviving spouse. Payout amounts depend on factors such as age, life expectancy, and interest rates.

While annuization provides guaranteed income, it can come with high fees and strict terms. Legislation like the SECURE Act has improved annuity portability and strengthened retirement plan protections.

> **Article Sources**
>
> 1.  Congress.gov. "[H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019](https://www.congress.gov/bill/116th-congress/house-bill/1994/text)."
>     
> 2.  Society for Human Resource Management. "[SECURE Act Alters 401(k) Compliance Landscape](https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/secure-act-alters-401k-compliance-landscape.aspx)."