After working hard for the better part of your youthful life saving up for your retirement, you will need to find ways in which you can manage the market risks and come up with incomes that will last. For this, immediate annuities provide a one of a kind solution. Especially if you are one of those who are looking for a continuous flow of income that you know will outlive you. In this article we will have a look at the role of immediate income annuity in retirement planning. However, it will make no sense to look at the role this annuity plays in ensuring you have a comfortable life after retirement if we do not fully understand what it is.
Well, for starters, immediate annuities, (or as they are sometimes referred to as payout or income annuities), are straight forward – basically they are similar to life insurance policies. However, the difference is that with life insurance, you pay regular premiums to an insurance company who in turn make a payment to your next of kin upon your death while with annuities you give the insurance company a large amount of money and they pay you regular amounts of income until you die. The regular income payments that are paid to you are calculated by the insurance firm based on your gender, age, the type of annuity you choose and the term you prefer. It is important to note that annuities are not a form of investment but are rather forms of insurance used to manage risks.
There are several types of immediate annuities that you can choose from depending on your preferences, whether you want to take advantage of your payments now or if you willing to receive lower payouts that are subject to rise when inflation hits. The primary types are Variable payout, inflation-adjusted and fixed payout.
With the fixed immediate annuity, you will receive payouts monthly that are fixed. They will remain the same for the full duration of your contract. Research that has been carried out shows that choosing fixed immediate annuity increases the probability of your payouts lasting as long as you if not longer. With the inflation-index immediate annuity, you will receive payouts from the insurer that will rise yearly based on the pre-determined formula (usually the Consumer Price Index). This type of annuity will provide you with higher payouts as the inflation rises. Lastly with the variable immediate annuity, the insurer does not provide a guaranteed stream of payouts. Instead, your income is dependent on the performance of stocks and bonds. Therefore, the payments you receive will fluctuate yearly. However, the variable annuities beat the purpose of having an immediate annuity plan for your retirement which is guaranteed income. You therefore cannot budget beforehand. In this light, the first two types are better.
At this point, you should understand the most fundamental role of immediate income annuity in retirement planning. However just in case you missed it; immediate annuities ensure that you have a continuous flow of income into your retirement and that you do not have to worry about not having sufficient money to pay your bills monthly.