The world of annuities can be confusing, but they can also be an integral part of a solid financial plan. To help you better understand the different type of annuities, we offer you the next post in our Types of Annuities series, Immediate Annuities.
Immediate Annuities vs. Deferred Annuities
There are two basic annuities – deferred and immediate.
A deferred annuity allows you to build your retirement savings over a period of years. What you are deferring into the future, is the time at which you begin to receive income. In the period between signing the agreement and when you begin receiving payments, your assets are accumulating additional value.
Unlike an immediate annuity which requires you to purchase with a lump sum, you can build your deferred annuity account with a lump sum, a series of payments over time, or both.
There are no federally imposed annual limits to the amount of money you can contribute to a deferred annuity you purchase. You can contribute more when you have more cash available – bonus, inheritance, or windfall. An added advantage to a deferred annuity is access to your money until it is converted into payments. You can make limited annual withdrawals or surrender the agreement entirely, getting back its current value minus any surrender fees.
With an immediate annuity, you can begin receiving income right away, and with a deferred annuity you can build your account value over time and convert it into an income stream at a future date.
When you buy an immediate annuity, you make a single lump-sum payment and set the starting date for the payout sometime within the next 13 months but it can also be set to begin within 30 days. The period you are covered and the amount you will receive are explained in the annuity agreement.
Immediate Annuities in Your Retirement Portfolio
Immediate annuities can be important parts of your retirement portfolio, particularly if you do not have a pension, or have a pension or 401(k) that is underfunded for what your needs are likely to be in the future. Investors that fear they will outlive their savings can look to annuities to beef up their workplace retirement plans. Annuities are helpful for retirement portfolios because they build tax-deferred savings and protect the money that you have already saved while generating a steady stream of income during your retirement.
How Are Immediate Annuities Different From Other Annuities?
With immediate annuities, you pay the insurance company for the face value as a lump sum and start receiving payments almost immediately. These annuities are designed to pay out money, not to accumulate it. An important note about annuities is that they are protected from creditors in almost all jurisdictions.
With deferred annuities, you are investing over a period of time until you want to start taking withdrawals. Deferred annuities accumulate value over time and can be converted into immediate annuities when the owner wants to start receiving payments.
Pros and Cons of Immediate Annuities
While annuities, including immediate annuities, get plenty of bad press, they are a viable option to consider for your retirement and other financial portfolios. Annuities are basically insurance products that offer an income guarantee, but there is some confusion about the potential drawbacks of annuities that can leave people misinformed. For this reason, it is important to know all the ins and outs of the immediate annuity you are purchasing.
Immediate annuities are often referred to as income annuities, and the basic concept is pretty simple to grasp. In return for a lump sum payment, the insurance company will send you a check monthly for the rest of your life. The basic reason that many financial advisors recommend income annuities for retirees is that they will not outlive their income.
On the flip side, advisors warn retirees not to put all their money in annuities as it makes for an unbalanced retirement plan and that payments typically stop upon death and their heirs get nothing. Of course, that is an over-generalization, and you are able to choose between a number of payout options. These include payments to you and a spouse or another beneficiary, as well as setting up payments that are guaranteed to your heirs for a certain term. Also, it is important to be aware that you will have limited access to your principal. Additionally, the more special features that you want in your annuity, the higher the fees will be, and the lower the amount of payments will be to you.
Why Might an Immediate Annuity be Right for You?
While the average Social Security benefit as of 2016 was $1,345 per month or about $16,000 per year, that might not seem like enough to live on. If that is the case in your particular situation, you should be planning and building additional income streams. An annuity can supplement Social Security to ensure that essential costs such as housing and supplemental healthcare are covered in retirement.
An immediate annuity can be a good stream to consider among the many annuity types. Current interest rates guide how much insurers will be willing to pay you, and today’s rates are very low. Still, even with today’s low rates, an immediate annuity offers a guaranteed check every month, without worrying about how the stock market is doing.
What About Variable Immediate Annuities?
Variable annuities are those that invest your account contributions in mutual funds. Because they are tied to the stock market, the balance can rise and fall due to these investments. Still, after a period of time, the money is used to provide periodic annuity payments for your lifetime. While these annuities grow tax-deferred, they also have more risks involved than a standard immediate annuity would. The hope, of course, is that the market would out-perform the insurance company’s rate of payout. Carefully consider this type of annuity, and all immediate annuities, as you plan for your future.
Immediate annuities are fairly straightforward, but there are details to be worked out to insure that you receive the best value for your savings, and that the program is setup to work best for your situation and your current and future needs. If you have questions or want to learn more about immediate annuities, talk to a trusted advisor today.