An immediate annuity provides payments starting shortly after purchase. According to the Insurance Information Institute, payments can begin as soon as a month after buying the annuity. This differs from deferred or fixed annuities, where you typically contribute over time before receiving payments.
Immediate annuities can help retirees by offering a guaranteed income stream almost immediately, providing financial security without the risk of outliving or losing money.
How Does an Immediate Annuity Work?
When you purchase an immediate annuity, there is no accumulation period. You convert a lump sum of money into the annuity, which starts paying out right away. This means you need a significant amount of cash on hand to buy an immediate annuity.
It’s crucial not to convert all your liquid cash into an immediate annuity. Once you start receiving payments, accessing the initial lump sum can be costly or even impossible, which can pose problems if unexpected expenses arise.
Qualified vs. Non-Qualified Immediate Annuities
The tax status of your immediate annuity depends on whether the money used to purchase it is qualified or non-qualified.
- Qualified Immediate Annuity: Purchased with pre-tax money, such as from a 401(k) or IRA. Taxes are due on payments as they are received.
- Non-Qualified Immediate Annuity: Purchased with after-tax money. The payments are only partially taxed, with the remaining portion considered a return of principal.
Immediate Annuity Payout Options
Immediate annuities offer several payout options to suit different needs and circumstances.
- Single Life Annuity: Provides payments for the rest of your life. Payments cease upon your death.
- Joint Life Annuity: Payments continue to a spouse or beneficiary after your death, typically resulting in lower monthly payouts due to the extended payment period.
- Life and Period-Certain Annuity: Pays out for a specified period, such as 10 or 20 years. If you die before the period ends, your beneficiary continues receiving payments for the remainder of the term.
Pros and Cons of Immediate Annuities
Immediate annuities come with both benefits and drawbacks, and it’s essential to determine if they are right for your financial situation.
Pros of Immediate Annuities
- Immediate Payouts: Payments begin shortly after purchase, providing immediate income without a waiting period.
- Reliability and Simplicity: Immediate annuities are straightforward, with predictable payments that simplify financial planning.
Cons of Immediate Annuities
- Upfront Investment Required: You need a significant lump sum to purchase an immediate annuity, which can be a barrier if you don’t have enough savings.
- Lack of Liquidity: Once purchased, accessing the initial lump sum is difficult or impossible, which can be problematic if you encounter large, unexpected expenses.
Features of Income Annuities by Type
Frequently Asked Questions About Immediate Annuities
When does an immediate annuity begin making payments?
Payments typically start very soon after purchase, sometimes as early as a month later.
How long is the accumulation period for immediate annuities?
There is no accumulation period; you convert a lump sum directly into an income stream.
What happens to the principal after the immediate annuity expires?
It depends on the annuity type. Payments may stop after your death, or they may continue to a beneficiary if it’s a joint life or period-certain annuity.
What is the minimum amount for purchasing an immediate annuity?
The minimum amount varies by provider but typically requires a significant lump sum, often tens of thousands of dollars.
Understanding immediate annuities and their pros and cons can help you make informed decisions about incorporating them into your retirement strategy. Always consider consulting a financial advisor to evaluate if an immediate annuity aligns with your financial goals and retirement needs.
For tailored guidance, speak with a financial specialist. Visit our “Connect with a Financial Professional” section to find the right expert for your needs. For a personal referral to a licensed, independent advisor, call us at 877-476-9723 or reach out here to book your initial consultation.
🧑‍💼Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here
