Is An Immediate Annuity Right For Me?
What Else Should I Consider When Thinking About Buying An Immediate Annuity?
Your age -- When you purchase an immediate annuity the payments are level for the rest of your lifetime from that moment on (unless you add a cost of living adjustment). Annuity quotes, however, are scaled to the age of the buyer.
What this means is that a 60 year old who invested $100,000 in an immediate annuity would receive a lower monthly payment than a 70 year old who invested the same amount. The reason for this is a 60 year old is expected to live longer than a 70 year old. So the insurance company anticipates paying many more checks to the younger buyer. The smaller monthly income amount the company pays the 60 year old will offset the greater number of payments he is expected to receive.
Ultimately, the rate of return you would have earned on an immediate annuity can only be known in retrospect, after you died. This calculation can only be made after we know how many payments you actually received from the annuity (i.e., how long you lived). If you lived significantly beyond the normal life expectancy for someone your age then the rate of return would have exceeded the return on many other guaranteed investments. If however you died prematurely then the return would likely have been negative.
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Your current liquid assets -- An immediate annuity converts a lump sum of money into a steady guaranteed payment. It’s like a do-it-yourself pension.
For this reason, the first requirement to buying an immediate annuity is to have liquid cash to invest. For many clients, this may require selling a portion of their stock portfolios, or selling a residence or a business, or transferring funds from a 401(k) or IRA.
Unlike a savings account, the money that goes into an immediate annuity cannot be withdrawn except under limited, special circumstances. So when considering how much to invest, it is important to calculate how much money you can truly put “out of sight, out of mind.” The balance should not go towards the purchase of an immediate annuity.
Your beneficiaries -- There are a number of ways to provide for your beneficiaries in an immediate annuity. You can choose a payment option with a term certain guarantee or one with a cash refund provision. These options set up your beneficiaries to either continue to receive payments until the end of the specified term or pay your beneficiaries the remainder of any premium that wasn't paid to you while living.
If you buy a basic Life Only immediate annuity without beneficiary provisions then when you pass away the annuity dies with you. For this reason, it's critical to consider how you want to provide for your beneficiaries in both selecting the details of your annuity and considering how much free cash to set aside.
Immediate Annuity Interest Rates
The question of yield looms large when deciding whether to buy an immediate annuity. Lower interest rates depress what insurance companies can earn, which reduces the amount of income they in turn can offer in their annuities. Annuity payouts are highly correlated with bond market interest rates.