Running out of income is a primary concern for most retirees. Immediate annuities offer a
financial alternative to help meet retirement income needs by providing a steady stream of
income designed to last through retirement.
What is an immediate annuity?
An immediate annuity is a contract between you and an annuity issuer (an insurance company)
to which you pay a single lump sum of money in exchange for the issuer’s promise to make
payments to you for a fixed period of time or for the rest of your life. Immediate annuities may
appeal to you if you are looking for an income you cannot outlive.
Characteristics of immediate annuities
How does an immediate annuity work?
As the name implies, an immediate annuity begins to pay you a stream of income immediately. The amount of income you
receive is based on a number of factors, including your age at the time of purchase, your gender, whether payments will be
made to only you or to you and another person, and whether payments will be made for a fixed period of time or for the rest of
What are your payment options?
Most immediate annuities include a number of payment options that can affect the amount of the
payment you receive. The more common payment choices are:
The payment option selected affects the amount of each payment. For example, life only payments will be larger than
payments for life with a period certain. But life with a period certain payments will be less than payments for a fixed period
Example: A 60-year-old man who invests $100,000 in an immediate annuity may receive annual
payments of $7,260 for the rest of his life, or $6,696 per year for life with a minimum of 20 years, or
$7,920 per year if he chooses payments for a fixed period of 20 years. (This example is for illustration
purposes only and does not reflect actual insurance products or performance, nor is it intended to
promote a specific company or product.)
Other factors to consider
An immediate annuity can offer a measure of relief from retirement income concerns by providing a dependable payment for
the rest of your life. However, as with most investments, there are other factors to consider before deciding if investing in an
immediate annuity is the right choice for you.
First, be sure that the payment option you select will address your income needs. For instance, if you are in poor health and
have others who depend on you for financial support, selecting a life only payment option may not be appropriate because
payments stop at your death, removing a valuable source of income from your survivors.
Second, if you are considering a life only payment option, be aware that it may take many years before
you receive at least the return of your investment from the immediate annuity. A 70-year-old man who
invests $100,000 and selects a life only option (generating annual payments of $7,260) will have to live
about 14 years to receive the return of his $100,000.
Third, consider whether there are better alternatives for providing income. For example, the interest or
dividend from investments such as bonds, dividend-producing stock, and money-market mutual funds
could produce more income than you could get from an immediate annuity over the same period of time
based on the same investment amount. In addition, these types of investments usually are more liquid
than immediate annuities, giving you the opportunity to increase your withdrawals if you need more
money. On the other hand, an immediate annuity provides a guaranteed stream of income regardless
of changing interest rates or investment returns. Of course, guarantees are subject to the claims-paying
ability of the annuity issuer.
Should you consider an immediate annuity?
An immediate annuity can be a useful financial tool. You may want to consider the purchase of an immediate annuity if: