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Pros and Cons of an Immediate Annuity


An immediate annuity is the most basic type of annuity: You can buy this insurance contract with a single lump sum payment in exchange for a stream of income that is guaranteed over a specific period of time. However, when developing the strategy for your retirement plan, you should compare the advantages and disadvantages before buying one. Working with a financial advisor can help you evaluate whether an immediate annuity is a good fit for your needs.

How an Immediate Annuity Works

An immediate annuity is a basic insurance contract that can be bought with a single payment in exchange for a series of payouts that are based on a chosen frequency: monthly, quarterly, semi-annually or annually. 

As an example, if you have an immediate annuity with monthly payouts, the payout process can begin immediately after the annuity contract is purchased and continues until your death. This is the main reason why people buy annuities: You can get guaranteed payments for the rest of your life.

An immediate annuity differs from a deferred annuity where you’ll receive payments at a future date, or a fixed annuity that is structured over a specific period of time. 

Advantages of an Immediate Annuity

Immediate annuities can offer a unique set of advantages. Here are four common benefits for your retirement plan:

Immediate income stream: Immediate annuities provide an almost instant income stream. After you make a lump-sum payment to the insurance company, you can start receiving regular payments immediately, often within a month. This can be highly beneficial for retirees who need a consistent and dependable source of income to cover living expenses, especially when other sources of income may be limited.

Protection against market volatility: Immediate annuities shield you from market fluctuations and investment risk. Unlike other retirement investments like stocks or bonds, your income from an immediate annuity is not tied to the performance of financial markets. This provides peace of mind, particularly for individuals who want to avoid the uncertainty and potential losses associated with market investments.

Longevity protection: Immediate annuities offer protection against outliving your savings. With a guaranteed source of income for life, you can minimize the risk of depleting your savings in your later years. And this can also be particularly valuable as life expectancies increase, allowing you to maintain a comfortable standard of living throughout retirement.

Simplicity and predictability: Immediate annuities are straightforward and easy to understand. With a lump sum you will get regularly scheduled payments. This simplicity can make financial planning and budgeting more manageable, as you know exactly how much income you’ll receive each month, quarter, biannually or annually.

Disadvantages of an Immediate Annuity

A notepad and a calculator on a table to help compare the pros and cons of an immediate annuity.

As with other financial products, immediate annuities also bear some downsides. Here are three common things to consider before buying one:

Lack of liquidity: When you buy an immediate annuity, you typically give up access to the lump sum that is used in the purchase. This means that you can’t access that principal for other financial needs or emergencies. So, if you need a significant amount of money for unexpected expenses, you’ll have to turn to another source or build out an emergency fund.

Fixed payments: The payments from an immediate annuity are usually fixed, so they won’t adjust for inflation over time. As a result, the purchasing power of your annuity payments may decrease during the length of the insurance contract due to rising costs of living. To address this issue, you can opt for an inflation-adjusted annuity, but this will typically result in lower initial payments.

Low interest rates: Immediate annuities can have relatively lower interest rates when compared with other sources of retirement income, such as stocks or bonds. The income generated by immediate annuities is typically based on prevailing interest rates at the time of purchase, and in periods of low interest rates, the initial payments from the annuity may be relatively modest.

Bottom Line

A financial advisor discussing the pros and cons of an immediate annuity with a client.

Immediate annuities can make sense for retirees who value the security of guaranteed income and want to minimize the risk of outliving their savings. Make sure you carefully assess your financial goals, risk tolerance and the specific terms of your annuity contract to ensure that it aligns with your retirement strategy. 

Tips for Retirement Planning

  • A financial advisor can help you create a financial plan for your retirement needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • Not sure how much you need for retirement? Consider using SmartAsset’s free retirement calculator to get an estimate. 

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