Immediate Annuity: What Are Immediate Annuities and How Much Do They Pay?
An immediate annuity is a type of investment vehicle that begins paying out distributions within the same year that you deposited funds. Withdrawals can begin as soon as one month after you make your initial payment.
Immediate annuities are sometimes called income annuities, since they deliver a steady source of income, or single premium immediate annuities, since you make one payment and then begin taking disbursements within that year.
For people seeking a steady source of income in retirement, an immediate annuity can deliver a guaranteed income stream for an entire lifetime or a specific time period, which can be as short as five years. You can typically buy immediate annuities from a life insurance company, but they are not a life insurance product.
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Immediate Annuities vs. Deferred Annuities
An immediate annuity begins with one lump-sum payment to the insurance company. You can begin withdrawing funds as soon as one month after that initial premium payment. You may be able to wait as long as one year before you start taking disbursements, which can be taken as a lump sum or monthly payments, depending on the terms of the annuity.
With a deferred annuity, the investor makes monthly premium payments, either on a tax-deferred basis or with after-tax dollars. Then, they can begin making withdrawals after a certain amount of time.
Benefits of an Immediate Annuity
Some immediate annuities offer an option to index your payment amount based on inflation annually. This is called a “cost-of-living adjustment” and can help ensure that your retirement income increases if the cost of living rises.
Alternatively, you can receive steady payments monthly, with no changes based on inflation. You could also choose an annuity with a fixed percentage increase of 1% up to 5% annually. This can help you plan and budget better, since you know what to expect.
Some immediate annuities also give you the option to pull out a lump sum of money in case of an emergency or a better financial opportunity. This adds liquidity to your investment that may not be available with other types of investment vehicles, such as a 401(k).
Most people opt to take their annuity payments on a monthly basis to provide a steady stream of income, but some annuities allow you to take disbursements quarterly or annually. You’ll want to consider your budgeting needs and tax ramifications for withdrawals.
For many people today, an annuity takes the place of pensions that workers used to receive from their job after retirement. In 2019, only 13 million private-sector workers had a pension, compared to 27 million in 1975, according to USA Today. With fewer private companies today providing pensions, people need to take retirement savings into their own hands. An annuity can fill this role.
An immediate annuity provides a safe and stable investment that may also have tax benefits depending on the type of annuity you choose.
Types of Immediate Annuities
Immediate annuities vary in their terms. You can open a single- or joint-life income annuity, which puts money in your pocket from the starting date through your life. A joint-life income annuity pays through the lifetime of the last surviving spouse. If you want to ensure a source of income even after your other retirement investments, such as a 401(k), may have been depleted, you might consider this type of annuity.
Keep in mind, if you don’t live long enough to receive the full amount you invested, you could lose money. However, you could come out ahead with a higher return if you live longer than the insurance company expects.
You can also add a death benefits rider to an annuity, which means that the remainder of the funds in the annuity can be passed onto an heir.
A fixed-period annuity, on the other hand, pays benefits for a pre-determined amount of time, typically between five and 30 years.
A specified amount annuity pays a set dollar amount. Once that amount has been paid, payments stop. If you are looking for a predictable retirement income for a certain amount of time, you might choose this type of annuity.
Non-Qualified and Qualified Immediate Annuities
As with deferred annuities, immediate annuities can be qualified, which means they are paid for with pre-tax dollars and taxed upon withdrawal. A non-qualified annuity is funded with after-tax dollars. That means you won’t pay taxes on the principal, but interest withdrawals will be taxed at your federal marginal tax rate.
You can use money from a Roth IRA or 401(k), which are tax-advantaged retirement accounts, to fund a qualified annuity. You will pay taxes on the principal and interest upon withdrawal. If you’re looking for tax advantages in your working years, and expect to have less income in retirement, a qualified immediate annuity can provide a steady income stream with a tax advantage while you work.
How Much Does an Immediate Annuity Pay?
An immediate annuity may not pay as much as some other investments, but it is extremely low risk for those who are close to retirement and want to bolster their nest egg.
Annuity payments depend upon:
Your age
Your general health
Your gender
Where you live
Type of annuity
The rating of the insurance company offering the annuity
Monthly payments for a 55-year-old with a single-life income annuity will be lower than those for a 70-year-old with the same product. That’s because the 55-year-old will, presumably, receive more payments over their lifetime.
Likewise, men often receive larger payouts than women, because, on average, they have a shorter lifespan.
Immediate fixed annuities for someone with a normal life expectancy should be between 1% and 2%, according to Annuity Guys.
This is lower than many other retirement investments. A 401(k) typically pays an average of 5% to 8%, according to Time. The stock market delivers an annualized return of roughly 10% based on the performance of stocks in the S&P 500.
However, these investments tend to be more volatile, which means you could lose money. A 401(k), which is usually a mix of stocks and bonds, is more diversified and may be lower risk than building a portfolio of stocks.
But an immediate annuity with a fixed rate puts reliable money in your pocket on a pre-set schedule, regardless of market performance.
Who Is an Immediate Annuity Best For?
If you are getting close to retirement, or have already retired, and fear you may not have enough money to last through your later years, an immediate annuity could be a solution. If you are in good health, you might consider a single-life income annuity, which will pay you a fixed return for your entire life.
Key Takeaways
An immediate annuity can supplement other retirement income, such as your Social Security income and money from a 401(k) or other investments. If you are nearing retirement age or already retired, have a lump sum of money to invest, and want a guaranteed monthly income, an immediate annuity can provide these benefits.
FAQ
Here are the answers to some of the most frequently asked questions regarding immediate annuities.
How much does a $100,000 immediate annuity pay monthly?
The payouts for immediate annuities depend on whether you choose a life annuity or a term-certain annuity. It also depends on the age and gender of the annuitant, or the person who receives the money.
As an example, a $100,000 annuity for a 55-year-old woman could pay $6,443 per year, or $537 per month. The same product for a 55-year-old man could pay $6,588 per year, or $549 per month. The best rate for a 70-year-old man, as of April 2024, according to Blueprint Income, is $725 per month and $695 for a 70-year-old woman.
As with any investment, it's good to shop around and keep fees, surrender fees and withdrawal penalties in mind before you choose an annuity.
What is the downside to an immediate annuity?
An immediate annuity may not be the right choice for you if you don't have a large lump sum of money to make your initial premium payment. An immediate annuity requires that you begin taking disbursements within a year of opening the account. If you'd rather wait until later in your retirement, or you haven't retired yet, an immediate annuity may not be the best choice. Keep in mind, you may get a higher return on your investment with other investment products.
Are immediate annuities a good idea?
Immediate annuities can be a good idea for certain people who want a guaranteed stream of income in retirement and have funds to invest immediately. A single-life or joint-life annuity is best if you are younger and in relatively good health with a life expectancy into your 70s, 80s or longer.
How much does a $300,000 annuity pay per month?
Immediate annuity payments vary depending on where you live, the product you choose, your age and gender. As an example, a $300,000 annuity from an A+-rated insurance company would pay a 55-year-old in Massachusetts roughly $1,719 per month.
You can use an annuity calculator to determine the monthly or annual payout of an immediate annuity based on your individual circumstances. You can also speak to a financial advisor or investment professional to determine if an immediate annuity is the right choice to help you meet your financial goals in retirement.
This article originally appeared on GOBankingRates.com: Immediate Annuity: What Are Immediate Annuities and How Much Do They Pay?
