Can Immediate Annuities Feature in Your Retirement Plan?

Last Modified on May 26, 2020

Retirement planning is essential for sustaining a balanced and comfortable life in your later years. People are generally inclined towards traditional retirement options like 401(k)s, individual retirement accounts (IRAs), Roth IRAs, mutual funds, fixed income plans, and general retirement accounts. However, there is one more option that can feature in your retirement plan.

Immediate annuities have been gaining popularity in retirement portfolios among investors of all ages, especially the ones nearing retirement. Though annuities are not a new name in investment markets, there are several myths and misconceptions associated with them that deter investors from including them in their plans. Immediate annuities are, in fact, one of the least complex instruments with a high level of transparency. Here’s what you must know if you are considering investing in them. 

What are immediate annuities?

An immediate annuity is a pension plan that generates an income stream (annuities) on a monthly/yearly basis after you have paid the lump sum amount to the offering company. An immediate annuity is just like any other annuity plan in structure but with immediate effect. It is an excellent way of securing income for a lifetime, especially in retirement, when you have limited sources of revenue. 

Structurally, all annuities are similar to pension plans. Retirees can pay a certain amount of money to the company and in return, get guaranteed regular income at a predetermined rate. 

Who should consider investing in immediate annuities?

People who have surplus money at hand and are looking for an avenue that ensures guaranteed monthly income throughout a lifetime can opt for investing in immediate annuities. Individuals who have already retired or are about to retire in a couple of months can also choose to invest in these annuities. 

What are the benefits of investing in immediate annuities?

Immediate annuities offer several benefits, such as:

1. They provide immediate income starting from the day of policy issuance.
2. They ensure that you live within your retirement means.
3. They ensure that you are funded for life, backed-up by the assets of the insurance company.
4. The instrument is an uncomplicated form of investment with a guaranteed income stream. It allows you to park your surplus lump sum money and receive regular income upon retirement. 
5. They allow you to choose from a variety of payout options. You can opt for monthly or annual payouts. Some companies also permit you to chalk out a customized payout plan as per your needs. 
6. Annuities are one of the safest investment options since you are aware of how much money you will receive each month or year. You can also be assured of its continuity throughout your life.
7. Immediate annuities come with many tax advantages too. They allow you to pay tax in portions only upon receiving the income and not in a lump sum all at once. 
8. At times, the return on the principal of annuities is higher than other fixed-income assets. But this can depend on the amount you are investing, the market conditions, and the performance of all the assets involved.

What to keep in mind while investing in immediate annuities?

Here some things to factor in:

1. Inflation

The basic annuity plan is not inflation-adjusted. The income you receive now will remain the same throughout your lifetime. However, if you prefer an income-generating scheme that accounts for rising costs, you can opt for inflation-protected annuities. 

2. Death of the policyholder

The most significant advantage of an immediate annuity plan is also its disadvantage. Although you are entitled to receive a regular, predetermined income throughout your lifetime, the payment will stop on your death. This may leave your spouse in distress if this is the only source of income in your family. To cope up with this situation, you can consider investing in a joint annuity. Under this scheme, a couple can opt for a joint annuity option, and the payouts continue throughout the life of both the beneficiaries. 

If there are other beneficiaries apart from your spouse who is looking forward to the benefits of your immediate annuity scheme, you can opt for the ‘life and period certain’ option. Under this scheme, you can opt for a specific period until which your beneficiaries will receive payouts after your death. 

This can be better explained with an example. Consider a scenario where you have opted for a ‘life and 20 years’ annuity plan. If you pass away after five years of collecting the payouts, your designated beneficiaries will be entitled to receive payouts for another 15 years in your absence, making a total of 20 years as per your plan. 

3. Refund of the principal amount

Many people are concerned about what happens to the principal investment if the entire amount is not paid out during their lifetime. Under a basic scheme, your beneficiaries will receive no refund if you pass away before the total amount is paid back. However, you can opt for the principal refund scheme under which your beneficiaries will receive the remaining funds in your absence. 

Should you have immediate annuities in your retirement portfolio?

Immediate annuities are ideal for people who are looking to invest in avenues that generate instant income. They can serve as an excellent hedge against the market risk in your diversified investment portfolio and be useful to generate assured income. 

To sum it up

Dealing with immediate annuities can be a little tricky since the payouts are instant. If you are already retired, then it is an advantage. On the other hand, if there is still some time left for retirement and you are not looking for an immediate source of income, you may need to reconsider your decision or wait a while. You can also consider a deferred annuity plan in such situations. No matter what you decide, you must think of the long-term implications of annuity plans on your financial goals.  

If you need help in deciding between deferred or immediate annuity plans, you can seek professional guidance from financial advisors.