Immediate Annuities- Are They Right For You?
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Early this week, The Wall Street Journal published a story on fixed immediate annuities gaining popularity in light of the lower interest rates currently being offered to retirees by traditional fixed income investments such as bonds, CDs and money market accounts. Here is a quick oveview of immediate annuities:
Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for a period you select. If you are about to retire, an immediate annuity may be a good place to put a large lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert your deferred annuity into an immediate annuity to start receiving income.
To purchase an immediate annuity, you make a one-time payment, and distributions typically begin within a month. Immediate annuities can be fixed or variable, just like deferred annuities. The income payments you receive from fixed immediate annuities are based on the amount you contribute, your age and the interest rate environment at the time of purchase. The payments to you will not change. The payments from variable immediate annuities fluctuate based on the performance of the investment options you choose. Although payments may go up or down, variable annuities are designed to provide income that can rise over time to help you keep pace with inflation.
The principal in an immediate annuity is not readily accessible. If you need more money than the income provided by the immediate annuity, you can minimize this drawback by keeping some of your retirement funds in a liquid account, such as a savings account or money market fund. There also is a chance you may lose some of your principal. If you choose an income for life option with no refund guarantee, and you should die before your principal is all paid out, the balance of your principal and any earnings will go to the insurance company rather than to your heirs. Fortunately, annuities offer several guaranteed payout options.
An immediate annuity is most appropriate for people who want to:
- Retire in the very near future, or are already retired
- Begin drawing an income from a lump sum of money that they currently have
- Derive an immediate return on their investment
- Receive a steady monthly check for the rest of their live
Remember that a fixed annuity guarantees you a set payment for a long period of time – possibly the rest of your life. But you might live longer than you think. Those payments you started getting when you first retired won’t change at all- so you loose purchasing power if the is inflation. Also, be sure to understand what happens to the annuity payments when you die. If the annuitant opts for a ‘life income’ option, the insurance company will be under an obligation to pay income for the rest of his life. However, if he dies within a month of buying an immediate annuity plan, the insurance company will pocket the entire contribution and his heirs will not get a single dime. Be sure to fully understand all the terms and conditions of an immediate annuity before signing on the “dotted” line.
