The Benefits and Drawbacks of Immediate Annuities

Annuities The Benefits and DrawbacksBy Rob Wiegland, Staff Writer

Planning for a comfortable retirement is hard work – and that hard work does not end when you hang it up and hit the golf course. Making the next egg you have accumulated during a lifetime of work last can be just as challenging as putting the money aside in the first place, and it is vital for retirees to have a plan in place to protect those accumulated assets while helping them grow.

One option retirees may want to consider is the purchase of an immediate annuity. Buying an immediate annuity can be an effective way to turn a lump sum of cash into a stream of monthly payments that are guaranteed for life. To understand how an immediate annuity works it is helpful to compare it to a traditional defined benefit pension. The immediate annuity works in much the same way – you are essentially using part of your nest egg to buy those future payments. Lottery payouts work the same way as well, as you will see if you are lucky enough to hit it big. While this kind of arrangement will not be the right choice for everyone, many retirees like the protection these financial instruments can provide.

Even so it is important to look at both the advantages and the disadvantages of this part of the post-retirement planning process. Immediate annuities can be great vehicles and provide great peace of mind, but it is important to be careful and to shop around before making a decision.

It is of the utmost importance, for instance, to purchase an immediate annuity from a company with the highest possible credit rating and a reputation for quality. It is also important to check with your state’s insurance commissioner's office to make sure your payments will be protected. Immediate annuities are protected in each state by the State Guarantee Fund, each state sets it's own liability limits. Simply contact your local Department of Insurance for details. Immediate annuities are safe and secure because of the high oversite by each state and the Guarantee Fund.

And of course it is important to consider how inflation may eat into the value of those monthly annuity payments. Even a moderate rate of inflation can significantly reduce your purchasing power over time, so it is important to factor this reduced buying power into the equation. In some cases it may even be worthwhile to accept a lower initial payout in exchange for ongoing protection from the ravages of inflation. Many annuity providers offer indexed payments that automatically rise with the cost of living, similar to the way Social Security works. In the long run it may be worthwhile to accept a lower payment in exchange for this kind of sleep well at night protection.

Finally, many financial planners recommend that retirees use only a part of their nest eggs when purchasing an immediate annuity, investing the remainder in a conservative mix of stocks and bonds. This approach ensures that there will be funds available in the event a large expense crops up in the future. By keeping a part of the nest egg available retirees can protect themselves from the unexpected while still enjoying a steady stream of income throughout their lives.

As with all important decisions, please seek competent advice for legal and tax matters.