Those planning for retirement have a considerable number of financial vehicles to consider. Many people take advantage of a company’s 401(k), others prefer using a Roth IRA. Some people opt for a simple savings account or a brokerage account.
No matter what your approach, an immediate annuity can be included into your retirement plan. Here’s what you need to know about how immediate annuities work, including when you can expect to start receiving payments.
What Is an Immediate Annuity?
An immediate annuity is just one of a variety of types of annuities. In general, annuities require upfront funding, after which they will pay out on a set schedule. In most cases this is once per month, though some contracts allow you to stipulate other payout terms including annually, bimonthly, quarterly and more.
Once you start receiving payments, you can rest assured that those payments will continue, because annuities are not tied to the market. You will know how much you will receive in each payment and for exactly how long those payments last. In many cases, people choose annuities that are guaranteed for the rest of their lives, and some annuities allow joint ownership so that the money continues for as long as both parties are living.
When Does an Immediate Annuity Begin Making Payments?
True to its name, an immediate annuity begins paying out right away. These annuities are funded in a single lump sum, after which the money immediately starts coming back out in the form of payments. Some immediate annuities have more flexible terms that allow for payments to start as late as 12 months after the origination of the annuity, but no matter which type you choose, you can expect that you will be receiving payments very soon.
This operates in contrast to deferred annuities, which can be funded over time and then begin to pay out after a certain period or on a certain date. Thus, immediate annuities are more suitable for those closer to retirement, while deferred annuities work better for those still planning to work for a few more years.
The Many Advantages of Immediate Annuities
Immediate annuities are a popular product, and for good reason. If you choose to rely on an immediate annuity, you can enjoy such benefits as:
- Quick turnaround on retirement savings – Because immediate annuities start paying out right away, you can quickly convert your nest egg into actionable payments without the need to wait.
- Bridging the gap – Immediate annuities do not have age requirements, so if you need a steady source of income from the point you retire to the age at which you plan to start taking social security, an annuity can help.
- Deferred taxes – Immediate annuities defer taxes, which means that you will not be taxed on the entire amount that you contribute. Instead, you will only pay taxes on the payments that you receive within that calendar year.
- No need for monitoring – Immediate annuities are reliable; you never have to worry about adjusting your holdings or changing your strategy according to the market. The annuity will continue to pay out the same way.
Potential Disadvantages of Immediate Annuities
Although immediate annuities are a powerful product, they may not be for everyone. If you are still not sure if an immediate annuity is right for you, remember:
- No accumulation – Money can grow in value over time if you invest it into an account that gains interest, but immediate annuities start paying out right away. That means that you have much less growth potential, especially compared to a deferred annuity.
- Less liquidity – Annuities are very rigid; once the money is contributed, that is where it stays. If you think you may need access to the money in your annuity beyond your normal monthly payments, expect to face wait times, high fees and substantial penalties. Annuities are not intended to be used as savings accounts.
- No inheritance – Annuities do not automatically pass the balance of their value onto heirs when you pass away. Instead, the insurance company keeps the remainder. Some riders may allow you to disburse this money to family, but this feature is not usually built in.
Choose the Annuity That Is Right for You
Whether you think that an immediate annuity, deferred annuity or something else may be the right fit for your retirement plans, no one knows your financial situation and goals as well as you do. Pillar Life Insurance offers an online portal where you can be in charge of your own finances without the need for consultations or calls with experts. Use the online portal to choose the annuity that best suits your goals.
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Try our annuity calculator and see how Pillar Life can grow your investment to meet your long-range financial goals.