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Immediate Annuity Income

There's nothing like an instant return to provide a sense of security
Immediate annuities offer something no other retirement plans do: the opportunity to start getting income right away. That's why they're sometimes described as payout annuities. Since you buy an immediate annuity by paying a single premium, this type of annuity can be a smart choice if you get a one-time pension payout, sell a business, inherit money, or receive an insurance benefit and want to convert these assets to a source of regular future income. With most contracts, you begin to receive the income right away. What's more, you can purchase an immediate annuity and convert your cash to income at a time that suits you. Typically, you can buy a contract as late as age 90, though eligibility is determined by the state where you live and the insurance company offering the contract.


You can set up your immediate annuity to receive income monthly, quarterly, semi-annually, or annually. That can be a big advantage over other income-producing investments such as bonds, which typically pay on a fixed, semi-annual schedule. And remember that immediate annuities provide an additional benefit, since part of each income payment is return of principal on which you owe no tax.


A fixed immediate annuity promises a steady, reliable stream of income for your lifetime, for two lifetimes (usually yours and your spouse's), or for a certain period of time. As with other annuities, the amount you get depends on the size of the premium, your age (or joint ages), the interest rate and the number of guarantees that are provided and the claims-paying ability of the company providing the contract. For example, a payout guaranteed to last as long as you and your spouse are alive will provide a smaller payment than one based solely on your life.

One issue with this type of annuity is that the fixed income is vulnerable to inflation, since the cost of living will most likely increase over your lifetime, but the money you receive from the annuity will not. For some people, though, being assured that a specific amount will arrive on a regular basis is more appealing than having to take responsibility for allocating assets or worry about getting smaller payments in some periods. For example, a surviving spouse who inherits a substantial sum can avoid having to make investment decisions by converting the money to steady annuity income. Remember that the older you are when you purchase an immediate annuity, the higher the payment amount will be. That's because more of the principal is repaid each time because you have a shorter life expectancy.


Variable immediate annuities combine the assurance of regular income with the advantage of continuing participation in equity markets through the separate account funds offered through the contract. That means the amount of income you receive has the potential to increase over time, so that you're in a better position to keep pace with or exceed the rate of inflation. Of course, the amount you receive can also decrease at any time if investment performance declines. Historically, however, the equity markets have been a good way to beat inflation over the long haul. If you have a long retirement, your investment choices will have an extended period in which to accumulate earnings and provide income. Most variable immediate annuities offer the same types and varieties of separate account funds that deferred contracts provide. Most also allow you to choose the benchmark rate by which your portfolio's performance will be measured. When you buy an immediate annuity, you may be able to elect continuing payments to your beneficiaries for a specified number of years or a cash refund of the unpaid contract value remaining at your death. These assurances offset the concern that the issuing company might not pay out all you have invested if you die sooner than expected.


An immediate fixed or variable annuity typically works best as part of a package that includes income from Social Security, your qualified retirement plans, individual retirement arrangements (IRAs), and your other investments. Although you should never count on just a single source of income, annuity income can be an important part of your total retirement income package because an annuity is designed to provide a stream of income that you cannot outlive.

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FPAs can supplement income from Social Security, qualified retirement plans, and IRAs at retirement.

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