Immediate Annuities

One vital strategy involving retirement planning income is including immediate annuities.  Often called an income or payout annuity, these retirement income streams are a mirror image of a life insurance policy.  As a life insurance policy pays a lump-sum amount upon death after regular monthly payments are given from the insured to the insurer, an immediate annuity does the opposite.  A lump sum is paid from the owner and regular income payments are paid in several different ways.  

There are several options for repayment:  a specified period of time such as 10 or 20 years, regular payments to an insurer until death, and even continued payments to a surviving spouse.  Since benefits are received immediately, these types of annuities are often purchased by people already enjoying retirement.    

Having enough retirement income is a critical goal of retirement.  There are many benefits in the growth of funds using annuities:  tax advantages, hedges against inflation, safety and security, and elimination of market volatility risk.

In addition to the many benefits pertaining to overall growth, the ability to turn on the income funnel at retirement is an important factor of an immediate annuity.  With the ability to greatly enhance the amount of lifetime income available on a monthly basis, an income annuity also has the added benefit of tax favorable status and insure a better yield than a bank certificate of deposit (CD) or pass book savings account.

Providing a lifelong income for a surviving spouse, a properly structured immediate annuity also brings peace of mind to couples worried about the income from an annuity ending.  To guard against inflation, another benefit that can be structured into the annuity is an inflation rider that “rides along” with the contract and creates a yearly increase in the monthly payments keep up with the loss from inflation.  Even for those who may live past 100 years old, an immediate annuity can be coupled with the remainder of a portfolio for additional growth.

Two Immediate Annuity Formulas

Typically, there are two formulas for using immediate annuities:  a predetermined term certain annuity and a lifetime income annuity.  These different formulas can be turned on immediately or later as part of a long-term strategic plan.

Term Certain Annuity

A term certain annuity can be structured to provide an income stream for 5 or 10 years.  This income is a combination of principal and interest accrual which is predetermined from the beginning.  By earning a rate of return on the principal over time, the basic arbitrage strategy is being employed.  When the term of the annuity ends, the distributions end and the focus shifts to the lifetime income stage of the strategy.

Lifetime Income Annuity

By taking a retirees age and the contribution amount into consideration, an insurance carrier comes up with a formula that determines the annual income amount and the amount that will be carried forward for a surviving spouse’s lifetime.  For those who already have a deferred annuity, it can be converted into an immediate annuity.  These types of annuities can prevent a retiree from outliving their life savings.

Fixed Immediate Annuity

A fixed immediate annuity allows for a guaranteed income stream to be locked in for the entire life of the annuity owner or a specific number of years depending on how the retiree chooses to receive the money.  Payments from a fixed immediate annuity can give a sense of relief for retirees who no longer have to worry about having the money to pay the bills each month.  In addition, the payments will probably be higher than if a person decides to invest their nest egg in a “safe” certificate of deposit or savings account.

Variable Immediate Annuity

A variable immediate annuity gives a retiree the potential of keeping the purchasing power of their money ahead of inflation or high fees.  For example, if a fixed annuity is structured to last for a person’s lifetime, the monthly payments that were first received at age 65 might seem inadequate 40 years later.  As there are more and more centenarians surviving around the world, it is not out of the realm of reason to think about living past 100.

With a variable immediate annuity, payments change from month to month depending on the performance of the underlying investments.  These changes can go up or down and can actually drop dramatically in the short term depending on market swings.  This can make budgeting very tricky.

For peace of mind and the assurance that money will come in regardless of how long a person lives, an immediate annuity can be a perfect supplement to any retirement portfolio.  By covering basic living expenses, the worry about outliving money or assets is basically eliminated.  The higher level of concern a person has of outliving their nest egg, the more assets they should deem to an immediate annuity.

However, not all assets should be converted to immediate annuities.  Unexpected expenses, the occasional splurge, and an inheritance for heirs should also be budgeted.  Talking with an experienced financial advisor is a wise way to learn even more about the perfect balance of immediate annuities and other retirement structures that will make a person’s golden years truly golden.  

Hybrid Income Annuities

Part fixed and part variable, hybrid income annuities can provide a fixed amount of income and an income stream that has the potential to rise quickly if the market is favorable.  Since these complex structures are not for the novice, it is advisable to talk with a qualified professional who knows the ins and outs of annuity structuring for retirement.

Also, when deciding on what type of annuity to purchase, also look closely at the insurance company.  Choosing an insurance company that is financially strong will ensure that the income will be available many years down the road.

Retirement should be a time of enjoyment and celebration of a life well lived and well planned.  Make sure that retirement can continue to be enjoyed by structuring retirement income with the proper tools.  

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