An immediate annuity is a really interesting financial tool. If you’ve never heard of it, then you’re not alone. People don’t commonly make use of this financial option because it’s rarely the smart move for someone. However, there are instances when you might have a good reason to purchase an immediate annuity. Let’s explore this further.
What Is an Immediate Annuity?
Basically, here’s how an immediate annuity works:
- You pay a lump sum up front to a company.
- The company repays you a set amount each year.
At a basic level, it truly is as simple as that. The purpose is so that you can have a guaranteed set amount of income coming in each year in the future.
Immediate Annuity Drawbacks
As aforementioned, most people don’t even know what an immediate annuity is. That’s because it simply doesn’t make sense for a lot of people. Even if you know what it is, you might quickly dismiss it as a tool for you.
The biggest drawback of the immediate annuity is that you have to have a large lump sum of money up front. You more or less give that to a financial service with the agreement that they’ll give it back to you in allotted amounts. However, if you have a large lump sum of money, then you might be better off investing it in other ways. For example, you might choose traditional retirement accounts, bonds, etc. for storing that money. Plus, let’s face it; most people don’t have a big lump sum of money to simply store away.
If you have a steady income, then there’s almost no reason to consider getting an immediate annuity.
Is There Ever a Good Reason to Purchase an Immediate Annuity?
That said, these things exist for a purpose. You might find that you actually do have a good reason to purchase an immediate annuity.
Benefits of the Immediate Annuity
This tool provides you with a set, steady income every year in the future for a guaranteed number of years. You can often start withdrawing as early as one year after investing in an immediate annuity. If you aren’t sure whether or not you’ll have a steady future income, then this can be an asset.
There are also some tax benefits of using an immediate annuity. These depend on several factors including whether or not you’ve already paid taxes on the lump sum money you’re investing in the first place.
Good Reasons to Purchase an Immediate Annuity
So, although this product isn’t right for most people, you might have a good reason to purchase an immediate annuity if any of the following scenarios apply to you:
- You’ve received a lump sum of money. You know that you’re not good at saving and investing, so you might benefit from having a service allot that amount to you regularly in the future, rather than having access to all of it right now.
- If you are close to retirement then you might want the security of a guaranteed income stream.
- As someone who is risk averse, you’re looking for a predictable way to plan for your future income.
- You have a lump sum to use for retirement but have maxed out your other retirement plans.
If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.