Few variable annuities actually are annuitized–they seldom are converted to a lifelong stream of cash flow. Instead, owners of variable annuities who want retirement income usually take withdrawals.
Say John Smith has $200,000 in a variable annuity. If John withdraws $10,000 he’ll still have $190,000 in the account. That $190,000 might get back to $200,000 or higher, if the investment accounts in the variable annuity perform well.
* Benefits of withdrawals: Taking money from a variable annuity this way gives investors more flexibility, compared with annuitization. You can take out more or less each year. In addition, using withdrawals generally provides a death benefit to a beneficiary.
* Drawbacks of withdrawals: There may be a surrender charge for withdrawals that exceed certain limits. If a variable annuity comes with guaranteed income, large withdrawals may reduce guaranteed benefits. Moreover, withdrawals often are fully taxable, from a taxable account, while annuitization generates cash flow that is partially tax-sheltered as a return of principal.