Define Immediate Annuity
An immediate annuity is generally applied during retirement planning. When a person takes advantage of an immediate annuity, that person is trading a chunk of money for a lifetime stream of income. An immediate annuity is often compared to creating your own personal pension.
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Definition
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Immediate annuities are structured annuities that do not have an accumulation phase. The person begins receiving annuity payments right after the annuity is purchased. Immediate annuities are also known as immediate payout annuities, income annuities or payout annuities.
Function
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After a person gives an insurance company a lump some of money, the company commits to sending a monthly check to that person for a specified period of time. Payments are usually mailed out until the person dies, which is called a survival benefit. A retiree who is worried that they may outlive their savings can consider using a portion of their savings toward buying an immediate annuity.
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Example
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Immediate annuity payouts have a number of influencing factors, such as age, gender and interest rates at the time of purchase. Women receive slightly lower payouts since they generally live longer than men. For example, in 2010, a 65-year old couple buys an immediate annuity with survival benefits. Each person invests $100,000. The man receives annuity payments of $725 per month, while the woman receives only $675.
Advantages
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Immediate annuities pay out immediately. Also, a variable immediate annuity means the person has the potential to keep the buying power of payments ahead of inflation. This can be done by dividing investments among various mutual-fund-like portfolios. There are many other positive aspects for immediate annuities. Immediate annuities are one steady payment for life, they're simple because the company that provides the annuity handles the investment responsibilities, they're low-risk as long as the provider is secure and they're are tax-efficient.
Disadvantages
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Disadvantages depend on whether the annuity is fixed or variable. A fixed annuity can guarantee a set payment, possibly for the remainder of your life. However, after 30 years of inflation, the amount won't change and can seem minuscule. Variable immediate annuities can keep payments from being diminished by inflation, but not always. Payments can fluctuate depending on how underlying investments perform and can make budgeting tricky, especially when the markets fall.
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References
- U.S. Securities and Exchange Commission: Variable Annuities: What You Should Know
- Kiplinger: Investors Embrace Annuities
- Bankrate.com: Immediate Annuities: Do-it-Yourself Pensions
- CNN Money.com: Ultimate Guide to Retirement- What are its advantages?
- CNN Money.com: Ultimate Guide to Retirement- What are its disadvantages?
