What is an Immediate Annuity?

Immediate annuities provide dependable financial security: a reliable stream of income payments guaranteed to continue for the rest of your life or for whatever length of time you select. If you are about to retire, an immediate annuity can be a great place to put a large lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert a 401K or your deferred annuity into an immediate annuity to start receiving income payments.

You can purchase an immediate annuity by making a one-time payment. Your distributions then start within a month. Immediate annuities can be fixed or variable, just like deferred annuities. The income payments you receive from fixed immediate annuities are based on the amount you put in, your age and the interest rate situation at the time of purchase. The payments to you will not change. The payments from variable immediate annuities rise and fall based on the performance of the investments you choose. Although payments may go up or down, variable annuities are designed to produce income that can rise over time to help you keep up with inflation.

The principal in an immediate annuity is not easy to get to. If you need more money than the income provided by the immediate annuity, you can minimize this downside by keeping a portion of your retirement funds in a liquid account, such as a savings account or money market fund. There also is a possibility you could lose some of your principal. If you choose an income for life option with no refund guarantee, and you die before your principal is completely paid out, the balance of your principal and any earnings will go to the insurance company rather than to your heirs. Fortunately, when you buy annuities you can choose from quite a few different guaranteed payout options.

Keep inflation in mind when choosing the investment options for your immediate annuity. You want to balance safety with investments that will keep pace with inflation. Variable annuities can let you participate in stock market growth, historically shown to be one of the best ways to combat inflation over the long term. On the other hand, the disadvantage is that payments can drop if the market drops. Not only is this unsettling, but clearly it will make it harder for you to budget. If you still want the possibility of higher payments, think about dividing your retirement savings between fixed and variable options to provide fixed payments, in addition to growth potential.

Why Should You Buy an Immediate Annuity?

Some of the key reasons to consider an immediate annuity are the following:

• An immediate annuity is a financial instrument that can provide guaranteed income for life.
• The income payments you receive can enhance your other income sources, such as Social Security and pension payments, which may not provide adequate income by themselves.
• You choose how frequently to receive your income payments. Whether monthly, quarterly, semi-annually or annually, there's a payout plan to fit your needs.
• You only pay income taxes as you receive your payments. When you receive income payments, you are taxed on the portion of the payments that is earnings. The portion that is principal, which represents your initial deposit made with funds that had already been taxed, is not taxable.
• You may reduce your financial concerns. Financial management can encumber you in your retirement years. Because you don't know how long you'll live, it's hard to be sure your assets will last as long as you need them. If you withdraw too much of your nest egg, your future income can suffer or you may run out of money entirely. If you are too thrifty when it comes to spending your nest egg, your level of living may suffer. Immediate annuities can remove some of these concerns by providing you with well defined fixed payments for life, so you can focus on enjoying your well deserved retirement.
   

Payout Options with Guarantees

You can select from a number of options for receiving income from an annuity.

• Lifetime Income for You. You can choose income for the rest of your life guaranteed by the insurance company. Payments end upon your death.
• Lifetime Income with a Guaranteed Period. You can receive income for life. If you die before the guarantee period is over, your beneficiaries will receive the remaining payments.
• Lifetime Income for Two. You can choose income guaranteed for the rest of your life and the life of another person, such as your spouse. Guaranteed income for two people is known as a joint and survivor option, which guarantees that income payments will keep on for the life of the primary owner and a second person. The guarantee is provided by the insurance company issuing the annuity.

There are many other options which can be explained to you by a financial advisor or insurance representative. These options can often be mixed and matched to provide an ideal income plan customized to your needs. For example, say you and your spouse retire at age 65 with 10 years left on your mortgage. You could choose the option to have income for two people with a 10-year guaranteed period, so that if you both die before the guarantee expires, the payments would continue until the end of the 10-year period to pay off the mortgage for your heirs.