What is an immediate annuity? As the name suggests, an immediate annuity is one that starts paying you right away. With other types of annuities, there is a deferral period where the money you put in may earn interest. After that time period, usually at least 12 months from the issue date, the annuity starts the payout or income period. With an immediate annuity, there is no deferral period. Once the contract is issued, the payments start—you guessed it: immediately.
How does it work?
Immediate annuities are the simplest form of annuities. You pay an up-front lump sum, and then, based on interest rates, the insurance company gives you a set dollar amount that you will receive at regular intervals, starting immediately.
Benefits and risks of immediate annuities
The benefit of an immediate annuity in retirement is that it allows you to increase the amount of guaranteed income you’re receiving (in addition to Social Security, etc.), which gives you the peace of mind that you’ll receive regular payments for as long as you choose. It also makes planning and controlling your budget much easier—two important benefits to consider in the context of retirement income planning.
The risk is that you’ll no longer have access to the premium (the initial amount of money put into the annuity). Once your stream of income begins, your payout is locked and cannot be changed.
For most people who are planning ahead for retirement, immediate annuities may not make sense. However, if you’re already retired, they might be a product that could assist you in meeting your retirement income objectives.