How Do Immediate Annuities Work?

In this video Ryan discusses about Immediate Annuities and how they can provide a guaranteed lifetime income stream you cannot outlive.

Outliving their money is the number one concern of baby boomers and retirees today.

An immediate annuity may be a great hedge against outliving your money. But they are far from perfect and there are many things to learn before deciding if one is right for you and your retirement.

Ryan explains the concept of immediate annuities and how they work. An immediate annuity is a type of annuity where an individual gives a lump sum of money to an insurance company in exchange for a guaranteed stream of income for the rest of their life.

Ryan mentions that there is a misconception that if an individual dies early, the insurance company keeps their money, but in the case of an immediate annuity, this is accurate. He also mentions that the benefits of having an immediate annuity include having a guaranteed income for life and having the ability to set up payments for a spouse or beneficiary, but adding these benefits can lower the monthly payment. The key word for immediate annuities is “pension” and it works like a pension with a guaranteed paycheck that cannot be outlived.

A few words regarding Immediate annuities:

Immediate annuities are financial products that provide a guaranteed stream of income for a specified period of time, usually for the remainder of the annuity holder’s life. An individual will pay a lump sum to purchase an immediate annuity, and in return, the insurance company will make payments to the individual at regular intervals, such as monthly or annually. The payments are based on the individual’s age, the amount of the lump sum payment, and current interest rates. Immediate annuities can provide a source of retirement income, and the payments are generally taxed as ordinary income.

Immediate annuities pros and cons:

Pros of Immediate Annuities:

Guaranteed Income: Immediate annuities provide a guaranteed stream of income that is paid out regardless of market conditions, making them a reliable source of income in retirement.

Lifetime Income: Immediate annuities can provide a lifetime income stream, which can be especially valuable for individuals who are concerned about outliving their savings.

Simplicity: Immediate annuities are relatively straightforward and easy to understand, making them a good choice for individuals who are not comfortable managing their own investments.

Low Risk: Immediate annuities are considered low-risk investments because they are backed by the insurance company and the income payments are guaranteed.

Cons of Immediate Annuities:

Lack of Liquidity: Once an individual purchases an immediate annuity, they cannot access their initial investment unless they pay a substantial surrender charge or sell the annuity to another buyer, which is often not possible.

Limited Growth Potential: Immediate annuities do not provide an opportunity for growth or appreciation, as the income payments are based on a fixed interest rate and are not tied to market conditions.

Inflation Risk: The income payments from immediate annuities may not keep pace with inflation, meaning that the purchasing power of the income stream may decrease over time.

Inflexibility: Immediate annuities are not flexible and do not allow for changes in the payment structure or amount, making them a less attractive option for individuals who may need to make changes to their retirement income plans over time.


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