What is an Immediate Annuity
Immediate annuities are insurance contracts purchased in a lump sum. The annuitant begins receiving an income stream when the contract is established. You can elect to receive the payments from the contract for an established number of years or for the rest of your life. Some contracts allow you to have the payments continue for the rest of your spouse’s life, should they outlive you.
This type of annuity is usually used by someone who is already in retirement, getting ready to retire, or just came into a windfall such as an inheritance or lottery and they want to protect their money while providing an income for themselves each month.
An immediate annuity needs a large investment to be beneficial. The average age someone buys this type of annuity is usually between 65 and 70 years old. If you had a million dollars laying around and you put it into this type of annuity, you would immediately start collecting monthly payments that would total about $65,000 a year for 20 years (or life depending on the type you purchase). In this scenario, one would earn their original principal investment return in about 15 years. Each year thereafter is how your investment would pay off.
Because the annuity begins paying income immediately, the income amount may vary depending on the following:
- Interest rates at the time the annuity is purchased
- Your age or the expected payment period
- The frequency of your payments—monthly, quarterly or annual
The interest rate is often fixed. So, in a rising interest rate environment, you may not have the flexibility to move your assets to a better yielding investment. On the other hand, if interest rates decrease, you are locked in at a higher rate.
Immediate annuities are sometimes referred to as single premium immediate annuities (SPIAs). With pensions shrinking in popularity, some investors are looking for a reliable income stream to supplement Social Security. Given the relatively straightforward nature of these products, they may seem like a “safe” and appropriate supplement to Social Security.
Should You Consider Immediate Annuities?
Buying an Immediate Annuity
- The cost of inflation: In many cases, an immediate annuity’s payout is fixed and not adjusted for inflation. Since 1925, inflation has averaged about 3% per year. So, as an illustration, if you require $50,000 annually to cover your expenses today, you would need $67,000 in 10 years, over $90,000 in 20 years, and over $120,000 in 30 years. So this is an easy computation and our financial advisors will help you plan ahead.
- Illiquidity: When you invest in an annuity and there is an emergency, you may be unable to convert your investment into cash without a penalty. Our Financial Advisors will work to get the lowest percent penalty for you.
- Opportunity Cost: For immediate annuity investors, the “safety” from the volatility in the stock market may provide peace of mind and a good investment. A diversified portfolio is preached by the experts and an immediate annuity is another investment instrument to acquire.
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