Payments can start as early as one month after you purchase your annuity.
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What is an immediate annuity?
An immediate annuity, which can be thought of as an instant annuity, is an insurance product that can help provide a steady, predictable income stream in retirement. In exchange for one lump-sum payment, you get ongoing income. It’s called an immediate annuity because the income payments start right away.
Definition of immediate or instant annuities
First, let’s start with the basics. An annuity is a contract sold by an insurance company. It is different from retirement savings accounts like 401(k)s or IRAs, but it can help you achieve a similar outcome. The goal is to have enough money to last you through retirement. An annuity helps by providing guaranteed income.
There are a few types of annuities, and they all work slightly differently. An immediate annuity, as the name suggests, starts payments to you right away. You should consider an immediate annuity if you’re at or near retirement and worried about how long your savings will last, or you want the security of guaranteed payments. Guarantees are based on the claims-paying ability of the issuer.
Benefits of an immediate annuity
Annuities are becoming more and more popular for a reason. Retirement planning can be complicated, whether you’ve saved a little or a lot. Annuities can help simplify the process, so you can focus on more important things, like enjoying your retirement. Here’s what you can expect from an immediate annuity:
Guaranteed income right now
The primary benefit of an annuity is a steady stream of income that you can count on. The payments are determined up front when you purchase the annuity and are guaranteed for the life of the contract. Depending on your needs, immediate annuities can be structured to last for several years, or even for the rest of your life. You can read more about annuity payout options, but here are your basic choices:
Income for life
One of the most attractive options for immediate annuities is a guaranteed income for life. It’s a simple and effective way to remove the risk of outliving your savings. It can even come with additional benefits like a payout to your family when you pass away if you haven’t received your principal back.
Income for a defined period
Another common option is to use an annuity as a bridge for a certain number of years. For example, let’s say you want to retire at age 60 but want to defer collecting Social Security until age 70 in order to . You can opt for your immediate annuity to make monthly payments for 10 years, then rely on your Social Security income after that.
Annuities can take the guesswork out of retirement income
Whether or not your retirement savings will last is a common concern. With longer lifespans, higher healthcare costs, and unexpected turns in the market, how much you can afford to take from your savings in monthly withdrawals is a real worry. Annuities can simplify your retirement planning because you’ll know how much you’ll get, without the complexity of regularly monitoring and recalculating retirement accounts.
Potential protection against market losses
Now that you’ve created a nest egg, you want to protect it. A significant market downturn in your retirement years can have a devastating effect on your plans. Income from most immediate annuities does not fluctuate. You will receive the same amount every time no matter what happens with the market, which can provide valuable peace of mind.
Tax advantages of immediate annuities
As is the case with other retirement savings vehicles, there are some beneficial laws that help annuity owners limit taxes on their investments. Immediate annuities are taxed as ordinary income when you start receiving payments. The amount of tax you pay depends on whether you funded the annuity with pre-tax or after-tax dollars, and how much of the payment is principal versus earnings.
Related: 10 things you should know about income annuities.
How does an immediate or instant annuity work?
The important work comes with deciding which annuity is best for your situation. There are many options to consider, and it can be difficult to understand what you’re really getting, so it’s important that you talk to a qualified financial professional. They can walk you through several different scenarios and help you determine a strategy for your retirement. After that:
Purchase your annuity with a lump-sum payment
Once you have consulted with a financial professional and established the type of annuity that would suit your needs, the next step is determining the best way to fund the purchase. The most common source for funding an immediate annuity is savings from a 401(k), an IRA, or another retirement account.
Start receiving payments
You can choose to receive your income monthly, bimonthly, semiannually, or annually. And payments can start in as little as one month after your purchase. Whether you select a set term or payments for life, you can count on those guaranteed payments to help you feel more confident in your ability to plan for a secure retirement.
Immediate or instant annuity FAQs
Anyone can purchase an annuity; however, there are some circumstances under which an immediate annuity makes more sense than others. Those who are older or in ill-health may not get the same value out of an immediate annuity as someone who has recently retired and is in good health.
Typically no. You usually cannot withdraw money early from an immediate annuity.
Many immediate annuities give you the option of including a death benefit, and there are often a few different ways to structure them. It can provide a benefit if you pass away within a certain time frame and don’t realize the full value of your annuity, or it can be a refund of any remaining money in your account after you pass away.
There are no limits to how much you can invest in an immediate annuity. The amount you choose should be decided with assistance from a financial professional and based on your current savings, financial goals, and immediate needs. Because you generally will not be able to access the lump sum contribution you make to an immediate annuity, this should factor into your planning.
For many at retirement age, immediate annuities provide excellent value and give the peace of mind that comes with knowing that they will not outlive their retirement savings.
While immediate annuities are beneficial in many situations, they do come with some drawbacks. The initial lump-sum payment can seem high, and while they guarantee income, they are also irrevocable, which can reduce your liquidity.
If you want a reliable income stream and would like to reduce your risk of running out of money in retirement, moving a portion of your savings into an annuity may be for you.
Interested in how annuities can strengthen your retirement plan?
A New York Life financial professional can help you weigh the options and determine what’s best for your needs.
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New York Life Annuities are issued by New York Life Insurance and Annuity Corporation (“NYLIAC”), a Delaware Corporation or by its parent company, New York Life Insurance Company(NY,NY).