As the retirement landscape continues to evolve, retirees seeking a steady stream of income are increasingly turning to single-premium immediate annuities. Essentially an insurance plan designed to provide guaranteed payments over a set period, these annuities have seen a surge in popularity, with sales reaching a staggering $3.3 billion in the first quarter of 2023. This represents a 120% increase from the previous year, according to data from financial trade organization LIMRA.

For retirees concerned about outliving their savings or needing additional funds to cover ongoing expenses, immediate annuities could be a viable option. Not only do they offer a sense of security in a fluctuating market, but they also deliver a predictable income. However, the amount a retiree receives depends on several factors, and there are potential downsides to consider. Understanding what an immediate annuity entails, its benefits, and drawbacks, is crucial before signing any contracts.

The Growing Popularity of Immediate Annuities

Immediate annuities, a type of insurance plan designed to provide a steady stream of income, are rapidly gaining popularity. According to the financial trade organization LIMRA, sales of single-premium immediate annuities have surpassed $3.3 billion in the first quarter of 2023, marking a 120% increase from the same period in the previous year.

What is an Immediate Annuity?

An immediate annuity is an insurance plan funded with an initial lump sum payment and then makes regular payouts. "Immediate annuities can be used to generate an immediate cash-flow stream from a pot of money that is intended to last a lifetime or a set number of years," explains Aaron Maassel, owner and founder of Voyageur Advisory Group. While these annuities provide financial stability, there are trade-offs, usually in the form of fees and growth limitations.

When Do Payments Start?

Once an immediate annuity is purchased, payouts typically start within a month. Payments can be scheduled monthly, quarterly, or annually. Payout periods can also be customized to fit individual needs. Many opt for a lifetime annuity plan, which guarantees payments for as long as they live.

Benefits of Immediate Annuities

Immediate annuities offer a sense of financial security with a guaranteed income stream, regardless of market fluctuations. Jeff Kronenberg, founder and president of Imagine Wealth Group, likens it to a pension. "You’ll be able to count on money to pay your bills no matter what happens in the economy or in the stock market," he says. Immediate annuities can also offer tax savings, as you’re only taxed on the income you withdraw annually.

Drawbacks to Consider

Despite the benefits, there are potential downsides to immediate annuities. For one, access to the initial lump sum payment is restricted and early withdrawals often come with penalties. Additionally, immediate annuities may not provide an inheritance to your heirs, although some contracts do offer a lump sum death benefit.

Takeaways

Immediate annuities can offer financial security for retirees, providing a steady income stream and peace of mind. However, potential limitations and restrictions mean they may not suit everyone. As always, it’s important to carefully evaluate your personal financial situation and goals before making any major decisions.