No matter what life stage you’re in, making sure you have the income you need for retirement is an ongoing planning need. However, fewer than half of Americans are prepared to afford at least 80% of retirement expenses1. Retirees have a variety of financial options for building income streams, and your unique needs will guide which options are right for you. During retirement, you may find that you need supplemental income to carry you through. If you’re already retired and need an income boost, one investment strategy worth considering is an immediate annuity.
What Is an Immediate Annuity?
With an immediate annuity, you pay a lump sum up front and receive an ongoing, guaranteed amount soon after you purchase the annuity2. Because of how quickly an annuitant receives funds from an immediate annuity, these investments can help a retiree who worries they are running out of income. The income you receive is based on your age, gender, and purchase amount . It’s important to note, though, that unlike some annuities options, an immediate annuity is not reversible once you purchase one. So, you should make sure you have adequate funds to support the purchase before doing so.
In addition, once the annuitant passes away, the immediate annuity payments promptly stop — meaning you’re unable to name a beneficiary. For this reason, immediate annuities are often helpful for healthy retirees, because the longer you live, the better your return on investment3.
How does this tool help retirement?
If you need supplemental income now, an immediate annuity can help you with this goal. Once you make your lump sum payment to purchase the annuity, you can opt to take payments either monthly, quarterly, or yearly. Here are some other benefits for retirees exploring this option:
- Lifetime Income: Once you purchase an immediate annuity, you will never outlive it. As long as you’re alive, your annuity will continue to provide income.
- Tax-Free Principal: While the government taxes the interest on your immediate annuity like ordinary income, your principal amount is tax free, since it’s a return of your initial investment (and assuming you paid for it with after-tax funds). After you receive payments for 18 years, however, the rest of the payments are taxed like ordinary income, because you no longer have principal remaining.4
- Stable Performance: Since immediate annuities are an insurance product, their performance does not follow the financial markets’ fluctuations . As a result, they can be a less risky investment option for retirees who must carefully balance their investment risk.
The funds you can use to purchase an immediate annuity vary, as do the insurance options you have when purchasing one. If you’d like to explore if an immediate annuity is the right income strategy for you, we’re happy to talk.
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