When you purchase an immediate annuity, you pay a lump sum into an annuity, and the insurance company begins paying you regular payments. These types of products can help you convert your assets into a predictable income stream that's similar to a regular paycheck from an employer.
How Immediate Annuities Work
So, how exactly does your premium become a stream of income? You purchase an immediate annuity by making a premium payment to an insurance company. You might get those funds from an employer's retirement plan, an inheritance or another source. The insurance company then gives you payments over time and could help provide income you can't outlive.
You can receive income payments from an immediate annuity every month, every year or possibly a different cadence that fit your needs. You can also choose how long you receive payments for. For instance, payments may last for as long as you live or for a certain number of years. No matter what you choose, the insurance company will continue to pay you the agreed-upon amounts, even if that means paying you significantly more than you initially deposited.
When Immediate Annuities Could Make Sense
Immediate annuities may help if you want to turn assets into a stream of guaranteed payments. Here are a few types of individuals that an immediate annuity may be beneficial for:
Retirees: Pension plans with guaranteed lifetime payments used to be the norm, but employers increasingly leave retirees to figure out retirement income for themselves. With an immediate annuity, the goal could be to achieve the same result as a pension — income for the rest of your life. Using retirement assets to fund an immediate annuity converts a lump sum of money into regular payments.
Guarantee-seekers: Prehaps you've done an excellent job of building assets over your lifetime, but you're not comfortable keeping your money in the stock market throughout retirement. Poorly timed market crashes can rattle your nerves or potentially drain your funds early. An immediate annuity provides a guaranteed stream of income, which you receive regardless of what happens in the financial markets. You know exactly how much to expect, and you may not need to adjust your budget when the markets misbehave.
Inheritors: If you're fortunate enough to receive a significant inheritance, it's important to use that money wisely. But a sudden influx of money can be intimidating. How much of it can you spend, and how much should you set aside? Understandably, some inheritors overspend and exhaust the funds too soon. An immediate annuity can help set up an income stream from an inheritance — and can help the money last. With a predictable income stream, it can be easier to plan for the future and manage your spending.
When you're no longer working, but you want to be able to count on a guaranteed income stream, an immediate annuity may be a good option for you. After you pay a lump sum up front, you'll get a consistent "paycheck," which may help you better manage your savings over the years. But whether an immediate annuity is right for you will depend on your unique situation. Consider speaking to a financial professional to determine whether it's a good choice for your needs.