What is an Immediate Annuity?
An immediate annuity is a financial product designed to provide a steady stream of income, typically used during retirement. Unlike a deferred annuity, where payouts begin at a future date, an immediate annuity starts generating income right after a lump-sum payment is made. This is particularly beneficial for retirees seeking reliable cash flow.
How It Works
To purchase an immediate annuity, an individual makes a one-time payment, commonly referred to as a premium. In return, the insurer commits to pay the annuitant a specified amount on a regular basis, often monthly, for a predetermined period or for the rest of their life. The payout amount depends on various factors, including the individual's age, gender, and prevailing interest rates.
Benefits
- Guaranteed income for life or a set period
- Protection against market volatility
- Simplifies retirement budgeting
Considerations
Although immediate annuities offer many advantages, it's essential to consider factors such as the fees involved, the insurer's financial strength, and the lack of liquidity. Once the premium is paid, the funds are generally locked in, making it challenging to access the capital later unless specific provisions are included.