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Retirement is a Perfect Time to Purchase an Immediate Annuity


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Immediate annuities guarantee income: You pay a sum of money to an insurance company, and the firm provides you with a stream of payments that can last a lifetime. Payments begin as soon as 30 days after purchase.

According to Rob Williams, managing director of wealth management at Charles Schwab, and NerdWallet, now may be a good time for retirees to purchase an immediate annuity because payouts are at their highest in a decade.

As with any investment, before purchasing an immediate annuity, you’ll want to consult with a licensed financial advisor.

Why Think About an Immediate Annuity

Outliving your money is one of the major risks associated with retiring, and annuities can offer you peace of mind regarding this. Knowing that you’ll always be taken care of if you have enough guaranteed income to pay basic needs is important and invaluable knowledge.

Social Security is a significant source of guaranteed income, and some people still have traditional pensions. However, an immediate annuity could close the gap if your guaranteed income is insufficient to pay for your basic expenses.

How Much an Immediate Annuity Pays Out

There are numerous different annuity types, some of which are quite complex. Immediate annuities, however, are quite simple: Your payout is mostly influenced by the amount you invest, your age, the current interest rate environment, and the payment type you select.

According to Charles Schwab’s annuity income estimator, a 65-year-old male and female who invest $100,000 can anticipate receiving about $535 monthly if they select the joint life option, where the payment is made for both of their lifetimes. The monthly check reduces to roughly $532 if they opt for the cash return option, but any money that is left over in the event that the couple passes away before receiving their initial investment is given to their heirs. Simple, right?

Use Annuity FYI’s Income Annuity Quoting System to see exactly how much income you can receive in real-time.

Pay Attention to Insurer Ratings

Retirees browsing the annuity market should also take the insurance company’s rating into account. 

Tax Considerations

The source of the funds you used to purchase the annuity will determine how your payouts are taxed. A portion of each payment will be regarded as a return of your investment and won’t be taxed if the money comes from an after-tax account, such as a savings or brokerage account. 

The payouts will normally be taxed if the annuity is purchased with funds from a qualifying retirement account, such as an IRA or 401(k), but so will any withdrawals from such an account. When it comes time to determine necessary minimum distributions, which typically have to start at age 73, the money used to purchase an instant annuity won’t be regarded as a part of your retirement funds. For large savers who are concerned that such payouts may drive them into a higher tax band, this could be a blessing.
Learn more about annuities that produce guaranteed income.

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