An immediate income annuity works with no accumulation phase, or at least a slight one. You buy it with a single payment and start getting your income stream right away. This could give your financial future some security, because it locks in a guaranteed stream of income for you. Think of it as the opposite of a life insurance policy. Instead of sending in money each month or quarter to an insurer, in expectation of a lump sum at your death, with an annuity one payment takes place up front, with periodic distributions to you until you pass away, or until a set period of time has elapsed. Because the income starts immediately, this is a common choice for people who are already in retirement.
One of the advantages of an immediate income annuity is that it can keep you from living longer than your nest egg. Knowing that you have a set income to count on each month can be a real blessing if you don’t want to have to worry about having enough cash on hand for your bills every month. Another advantage is that the payments are often higher than you would be able to get if you put your money into such safe investments as a certificate of deposit, money market or other guaranteed return vehicle.
If you are in a position to accept some risk, you can choose a variable immediate annuity. This allows you to keep the purchasing power of those payments ahead of the rise of inflation by splitting your investment up among several different portfolios that represent mutual funds.
There are a couple of disadvantages to an immediate income annuity that can catch up to you if you don’t do some comparison shopping and read the fine print carefully. First of all, if you choose fixed payments, you get that set amount until you pass away (or the set time period). But if you live longer than you anticipate, and inflation continues to eat away at your purchasing power, those payments might seem fairly small after 20, 30 or even 40 years.
While a variable immediate annuity can help with the problem of inflation, it also might not help you. Payments vary each month, either up or down, depending on how the investments perform, which can cause chaos with your budget. If the markets take a tumble, so do your payments as well.
So how can you decide whether the time is right for you to buy an immediate income annuity? If you want a regular flow of money no matter how long you stay alive, this annuity can be a helpful supplement to your portfolio of retirement expenses to help you with basic living needs.
If you feel like you are going to live to a fairly old age, and you are worried about living longer than your money, you will want to put more assets in that annuity, although you will also want other assets outside that annuity to cover unexpected costs, to pay for the occasional mad money urge or to leave something in your estate.