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  • Writer's pictureAntonise De Wet

The immediate fixed annuity: Advantages and Disadvantages

The future looks bright for the next generation of retirees since we're living longer, with the number of US centenarians rising from 82,000 in 2016 to over 92,000 by 2020. According to the US Census Bureau, 134,000 Americans will have reached the age of 100 by 2030. So, what does this mean for the way we save for retirement? Annuities have features that can help you protect what is important to you as you work toward living a long and fulfilling retirement life. An immediate annuity is a type of investment that converts your current retirement savings into monthly income payments in the future. When you purchase an immediate annuity, you are guaranteed income payments for a specified number of years—or possibly for the rest of your life.

How Annuities Work:

Annuities are intended to provide people with a consistent cash flow during their retirement years and to remove the concern of outliving their assets. Because these assets may not be sufficient to maintain their level of life, some investors may seek out an annuity contract from an insurance company or other financial institution.

As a result, these financial products are appropriate for annuitants, or investors who want stable, guaranteed retirement income. Because invested cash is illiquid and subject to withdrawal penalties, this financial product is not recommended for younger people or those who require liquidity.

Any annuity contract is divided into two stages.

  • The first stage is the accumulation stage, during which you save and potentially expand your retirement funds while also increasing the cash value of your annuity.

  • The accumulating stage comes to an end when the distribution stage begins. This is the point at which you are ready to begin withdrawing funds to generate an income in retirement. With annuities, this is known as annuitization, or the process of converting your annuity into regular retirement payments.

What Is an Immediate Annuity?

An immediate annuity is meant to offer you income for a predetermined amount of time in exchange for a one-time lump sum payment. The term "instant" annuities refers to the fact that you begin receiving annuity income payments practically immediately after depositing your money.

There are numerous sorts of annuity contracts, each with its own set of features and fees. They all attempt to let investors build their own retirement paycheck, just as instant annuities. You make an initial commitment, and the annuity firm promises consistent income for the duration of the contract.

This income guarantee makes annuities appealing to some retirement investors, but it comes at a cost. There are expenses to be aware of, and withdrawing your main investment after purchasing an annuity contract can be costly. If you needed to withdraw more money than your typical annuity payout for the month or year, you could incur steep penalties.

Immediate annuities have several advantages.

Immediate annuities begin paying out immediately and can help seniors avoid outliving their nest investment. Furthermore, with a fixed instant annuity, you lock in an income stream for the rest of your life (or a specific number of years, if you choose). Knowing you can count on a steady income stream might be a lifeline for retirees who don't want to worry about whether they'll be able to pay their bills each month.

If you're nearing retirement and need a consistent income, immediate annuities are an alternative.

  • Payouts might begin right now. Payments begin one month after your annuity is issued and can be deferred for up to a year.

  • Payments continue to be steady. You are less likely to outlive your retirement assets if you receive consistent dividends.

  • Tax breaks are possible. Your annuity is still deferring taxes. Only annuity payments received during that year are taxable.

  • It is possible to set up a shared annuity. Payments can be made for as long as you and your spouse or partner live.

  • They're simple to handle. There are no more procedures or monitoring required after purchasing an instant annuity.

  • Options for flexible payout.

Immediate Annuities' Disadvantages

Depending on whether the annuity is fixed or variable, instant annuities can have a variety of disadvantages, such as loss of purchasing power due to inflation (in the case of a fixed annuity) or expensive costs (with a variable annuity). A fixed annuity, for example, guarantees you a fixed payment for a long period of time, possibly the rest of your life. However, you may live longer than you think. Those payments you began receiving when you first retired will not change, and they may appear paltry after 40 years of inflation.

While immediate annuities have many advantages, they are not for everyone.

  • Reduces the availability of cash. When you buy an annuity, you give up immediate access to your money. If you need it right away, it won't be available—at least not without a significant penalty.

  • There is no accumulating phase. Because payments begin instantly, there is no accumulation phase and thus less growth potential.

  • Leave a smaller legacy. Unless you have specified a time period for receiving payments, the balance of your annuity will be transferred to the insurance company's general account after you die. It will not be passed on to your heirs.

  • Higher initial costs. Immediate annuities are purchased with a large cash deposit.

Is an immediate fixed annuity suitable for me?

An immediate annuity might be an excellent supplement to your retirement portfolio to help pay basic living needs if you want to ensure that the money will flow regardless of how long you live. The more confident you are in your ability to live to a ripe old age, and the less concerned you are about outliving your money, the more of your assets you might want to devote to an immediate annuity, though you'll want to leave yourself enough assets outside the annuity to meet unexpected expenses, fund the occasional splurge, or provide for your heirs.


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