Whether you are many years from retirement or months away, you may have spent some time looking into the best ways to fund your post-work years. Along the way, you have likely already encountered some of the most ubiquitous retirement options, such as 401(k)s, IRAs and mutual funds.
However, have you considered how an annuity could provide consistent income, potentially for the rest of your life? If an immediate annuity seems as if it may meet your needs, it is important to first understand how it works, grows and disburses.
How an Immediate Annuity Works
An immediate annuity is a type of contract in which you contribute money and have it paid back out to you in set payments. It is not managed by a bank or investing firm as with other types of accounts; instead, annuities are issued by insurance companies. The aptly named immediate annuity will start paying you right away, and you are expected to fund the annuity in a single lump sum. That is why immediate annuities are sometimes called single premium immediate annuities.
You may choose a variety of terms for the annuity, such as whether you want it to pay out for the rest of your life or whether you will cash it out when the term expires. Be sure to read the fine print before agreeing to an immediate annuity, since it can be difficult to take that money back out later, even if you are willing to pay fees.
How Long the Accumulation Period Lasts for Immediate Annuities
For many people, one of the benefits of an immediate annuity is that it starts paying out right away. In other words, for those close to retirement, they do not have to wait months or years for the annuity to start supporting them; their payments will begin right away.
Most immediate annuities do start paying out immediately. For those that allow you to defer your first payment a little, you might be able to choose anywhere from 30 days to a maximum of 12 months. However, this also means that the accumulation period for an immediate annuity is, at best, very short.
What This Means for Your Annuity in the Long Term
The accumulation period of an annuity is when the money is allowed to grow based on the underlying investment. This gives your money a chance to work for you to balloon into a bigger balance which means higher payouts over time. With an immediate annuity’s quick payout schedule, your money does not get this chance to grow. You sacrifice growth potential for immediate cash, which may or may not align with your goals.
Alternatives with More Accumulation
If this accumulation phase is important to you and you still have some time before retirement, a deferred annuity may be a good fit. These annuities allow you to choose a disbursement date that is anywhere from one year up to 10 years or even 15 years into the future. During this time, accumulation will continue.
The Benefits Unique to Immediate Annuities
While immediate annuities do not accommodate a lengthy accumulation period, they do have their own advantages. For those on the cusp of retirement who do not have that long horizon to allow their money to grow before they start using it, deferred annuities are not an option.
Immediate annuities are easy to manage, and you can rest assured that your money will not fluctuate if the market turns bearish. Annuities do not track the market, and so if stocks plummet, your annuity value is secure.
As an additional benefit, immediate annuities can be customized to include provisions that meet your needs, such as beneficiary disbursement to ensure that your family receives any remaining amount in your annuity after you pass away. (Otherwise, it is distributed to the insurance agency that holds it.) You can also choose to set up your annuity so that payments are guaranteed for the duration of your life.
This way, you can rest assured that you will never outlive your money, which is an important consideration for those who are concerned about how to fund their retirement over the long term or those who are retiring early.
Take Charge of Your Retirement with Pillar Life Insurance
If you know that an immediate annuity is right for you and you are ready to get started, Pillar Life Insurance supports you in taking charge of your own retirement journey. Our self-service portal avoids the need to spend time speaking with consultants or scheduling a call. Our customer portal will walk you through the process so that you can get started on your journey to retirement.
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Try our annuity calculator and see how Pillar Life can grow your investment to meet your long-range financial goals.