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What are immediate annuities and how do they work?

If you and your financial professional are considering strategies for converting your retirement savings into a lifetime of reliable income payments, a single premium immediate annuity (SPIA) may be worth considering. When incorporated strategically into the rest of your financial plan, this type of annuity can help supplement your existing retirement income sources. Here are some key things to know about purchasing an immediate annuity.

What is an immediate annuity?

An immediate annuity is a contract that enables you to convert a lump-sum payment into guaranteed lifetime income. It can be funded with tax-deferred retirement savings, like your 401(k) or IRA, or after-tax dollars. The major benefit of an immediate annuity is that payments can begin almost right away, often as early as 30 days after the contract is purchased. 

The purpose of an immediate annuity is to take your retirement savings and turn it into secure, reliable, guaranteed income payments. Depending on the payment option selected, you may be able to receive income for life鈥攎eaning you will never outlive your income stream. However, other payment options allow you to receive guaranteed payments over a defined period of time, say 10 or 20 years.

How does an immediate annuity work?

An immediate annuity is funded with a lump-sum payment, often once you鈥檙e fast-approaching or already in retirement. Once the annuity contract is created, you can begin receiving income quickly. Typically, you must begin annuity income payments within one year. 

The annuity rate, meaning how much you receive in payments, depends on a few factors. Your initial premium is a key determinant, as well as your age and life expectancy, gender, frequency of the payments, and the terms of the contract. 

What are the key things to know about an immediate annuity?

An immediate annuity comes with several potential advantages. First and foremost, it can help protect against the risk of outliving your savings by providing guaranteed retirement income. Because there鈥檚 no accumulation period, an immediate annuity is also an effective way to help bring stability and security to your retirement quickly.

Single premium immediate annuities (SPIA) also can help you enjoy predictable income. This can help make it easier to strategize the rest of your retirement income needs, as well as plan for the potential tax implications of your income plan.

Who should consider an immediate annuity?

An immediate annuity may make sense for those who have a lump sum of savings and want to begin receiving income immediately (within the year). If you are approaching or already in retirement and want to help supplement your other retirement income sources like Social Security, an immediate annuity may be worth considering.

Depending on the terms of the annuity, it may even enable you to provide income to your loved ones after your passing鈥攎aking it worth considering as part of your estate plan as well.

How does an immediate annuity fit into a financial plan?

Determining how or if an immediate annuity fits into your financial plan will depend greatly on the rest of your financial picture鈥攊ncluding your other sources of income and retirement readiness. 

Because you cannot typically add more money into your immediate annuity after the initial lump-sum purchase has been made, review your retirement savings carefully before making any final decisions. We recommend consulting a financial professional when developing your retirement income strategy, as they can help you approach annuities with tailored insights.

Achieve more with 狼窝导航 

Immediate annuities can be an effective resource for those in or near retirement looking to help bring stability and predictability to their retirement income strategy. Review your options carefully to determine which specific annuity product may be best for supporting your retirement planning goals.

狼窝导航 is committed to helping you live retirement to the fullest, while feeling confident and secure along the way.

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