How Variable Annuity Payouts Work and What It Means for Your Retirement
Annuity units are a key component of variable annuities, determining how much income you receive in retirement. Unlike fixed annuities, where payments are predetermined, variable annuities rely on market performance to calculate payouts. If you don’t understand how annuity units work, you might be surprised by how much—or how little—you receive when you retire. Helpful Tip: This page defines variable annuity accounting metrics. If you are instead searching for independent financial strength scores and insurer stability reports, review our complete directory of annuity ratings before selecting a carrier.
Scenario: Clyde’s Variable Annuity Decision
Clyde invested in a variable annuity for retirement. When he annuitized his contract, he received 100 annuity units in an equity subaccount. Shortly after, the market dropped, reducing the value of his annuity units. Even though he still owned 100 units, his monthly payout shrank due to lower unit values. Clyde didn’t realize his income could fluctuate this much, and now he must adjust his retirement budget.
What You Need to Know About Annuity Units
- Annuity Units Determine Payouts
When you annuitize a variable annuity, your accumulation units convert into a fixed number of annuity units. Each unit’s value fluctuates with market performance, meaning your retirement income can increase or decrease over time. - Accumulation Units vs. Annuity Units
Accumulation units track contributions and investment growth before annuitization. Once annuitized, they convert into annuity units, which remain fixed in number but vary in value based on the performance of your chosen subaccounts. - Payouts Are Not Guaranteed
Unlike fixed annuities, variable annuity payouts fluctuate with the market. This means retirees relying on these payments must be prepared for potential income volatility. - Unit Refund Life Annuities Provide a Safety Net
If you pass away before receiving your full investment back, a unit refund life annuity ensures your beneficiaries receive the remaining balance. - Who Should Consider Variable Annuities?
- Investors seeking market-driven retirement income
- Those comfortable with fluctuations in payouts
- Individuals looking for tax-deferred growth
- Who Should Avoid Variable Annuities?
- Retirees needing a consistent, predictable income
- Conservative investors who want to avoid market risk
- Anyone uncomfortable with fluctuating payouts
- Alternative Retirement Income Solutions
If you’re concerned about variable annuity risks, consider:- Fixed Index Annuities (FIAs): Offer market-linked growth with downside protection.
- Guaranteed Lifetime Withdrawal Benefits (GLWB): Provide predictable lifetime income while allowing market participation.
- Immediate or Deferred Fixed Annuities: Offer guaranteed payments without market risk.
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Questions From Our Readers
What is an annuity unit?
An annuity unit refers to a measurement used to determine an individual’s share in an annuity investment fund. It represents the value of the investment at a specific point in time. The number of annuity units owned by an individual is directly proportional to their investment amount, and the value of each unit fluctuates based on market conditions.
What are the benefits of investing in an annuity unit?
The main benefit of investing in an annuity unit is that it can provide a steady income stream during retirement. Another benefit is that some funds could pass on estate-tax free depending on how you structure the annuity and any additional riders you purchase. Also, an annuity unit can offer protection from market volatility and the potential for growth over time.
Are there any fees associated with investing in an annuity unit?
There may be associated fees depending on your annuity contract. These could include administrative fees, mortality risk charges, surrender charges, and investment management fees. It is important to review the terms of your annuity contract and understand all associated fees before investing.
How do I know when it is time to start redeeming my annuity units?
Generally speaking, you can begin receiving income payments from a variable annuity once you reach age 59 1/2. However, it is important to speak with a financial advisor to determine the best time for you to start redeeming your annuity units based on your situation.