What is an Immediate Annuity

by Jeff Rose on May 21, 2012

For those who want security and peace of mind for their retirement, an annuity can be exactly the nest egg to have on hand. But if you’re like the millions of other people in the world looking for an annuity, you’re likely asking, “What is an immediate annuity?” Beyond the different choices in annuities (fixed, fixed indexed, variable, etc.) there are two subcategories you can choose from, depending on your situation and how you intend to let your investment build interest, deferred and immediate.

Immediate Annuity

An immediate annuity is mostly what it sounds like, and also very different, and depending on how you spend your retirement, can be beneficial or result in you being unhappy with your choice.

Immediate annuities are usually best implemented just before you enter retirement. With one very large, lump sum payment to the company, you begin receiving payments from your annuity immediately, the amount left earning interest for every year there is money left. If your annuity is simply a supplement to another source of income during your retirement, then an immediate annuity will work perfectly to provide added income during your golden years. Payments can be made over a specified amount of time, or continue until you’ve passed on and what remains can be given to your family.

Advantages and Disadvantages

Now that you have an understanding of what is an immediate annuity, we can begin looking at the advantages and disadvantages of having one. If you have a variable immediate annuity, your investment will usually be ahead of inflation because it is divvied up among the various business and companies a mutual fund invests in. A fixed immediate annuity has a guaranteed, locked-in interest rate that can provide a steady, dependable source of income for the rest of your life. Both benefits are fantastic and can help retirees out of tough spots they find themselves in.

Unfortunately, variable immediate annuities are infamous for having substantially higher fees than other annuity options, and fixed immediate annuities often lose their purchasing power because of inflation. For fixed immediate annuities, inflation is the enemy, and with a fixed rate of pay inflation can wreak havoc on the amount you receive, after 20 years that same check just won’t cover as much as it used to. Variable immediate annuities have higher fees, but the amount you receive in each payment greatly depends on the performance of the stock market, it could be up one month and greatly decreased the next.

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