Immediate annuities are a type of financial product offered by insurance companies. They provide a stream of income payments to the annuitant (the person who purchases the annuity) that typically begins immediately or within a very short period after the annuity is funded. Here’s a closer look at immediate annuities:
How Immediate Annuities Work:
- Purchase: To buy an immediate annuity, you make a lump-sum payment or a series of payments to an insurance company. This payment is often called the premium.
- Payouts Start Immediately: Unlike deferred annuities, which have an accumulation phase where your money grows before you receive income, immediate annuities start paying out income almost immediately. This can be within a month of the purchase.
- Fixed or Variable Payouts: You can choose between fixed and variable immediate annuities. Fixed annuities provide a set, guaranteed income stream, while variable annuities offer payments that fluctuate based on the performance of underlying investments.
- Payout Options: You can select from various payout options, including:
- Life Annuity: Payments continue for the annuitant’s lifetime. This option provides the highest possible income but stops when the annuitant passes away.
- Joint and Survivor Annuity: Payments continue for the lifetime of two annuitants (e.g., a married couple). After one annuitant dies, the other continues to receive a reduced amount.
- Period Certain: Payments continue for a specified number of years (e.g., 10 or 20) regardless of the annuitant’s lifespan. If the annuitant dies before the period is up, the payments go to a beneficiary.
- Life with Period Certain: Combines a life annuity with a period certain option. Payments continue for life, but if the annuitant dies before the certain period is reached, payments continue to a beneficiary for the remaining period.
Benefits of Immediate Annuities:
- Guaranteed Income: Immediate annuities provide a predictable and guaranteed source of income for the annuitant’s lifetime or a specified period.
- Protection Against Longevity Risk: They help protect against the risk of outliving one’s savings, which is particularly important for retirees.
- Income Security: Immediate annuities can offer financial security, especially for retirees who want a stable income stream in retirement.
- Simplicity: They are straightforward financial products, and once purchased, there’s no need to actively manage investments.
Considerations:
- Loss of Principal: When you purchase an immediate annuity, you typically give up access to the principal you invested. You’ll receive income but won’t be able to access the lump sum you used to buy the annuity.
- Inflation Risk: Fixed immediate annuities do not provide protection against inflation. The purchasing power of your income may erode over time.
- Interest Rates: The amount of income you receive from a fixed immediate annuity is influenced by prevailing interest rates at the time of purchase. Higher interest rates can result in higher payouts.
- Lack of Liquidity: Immediate annuities lack liquidity. Once you’ve committed your funds, it can be challenging to access them for unexpected expenses or emergencies.
- Fees and Costs: Be aware of any fees or commissions associated with purchasing an immediate annuity. These can reduce the amount of income you receive.
Immediate annuities can be a valuable tool for retirees seeking a guaranteed income stream. However, it’s crucial to carefully consider your financial situation, needs, and objectives before purchasing one. Consulting with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt can help you determine if an immediate annuity is appropriate for your retirement planning.