An immediate annuity provides a secure, stable way to turn your money into retirement income. You give a lump sum of money (called a “premium”) to an insurance company which, in turn, promises to pay you a steady stream of income for as long as you live, or for a period of time you specify. The payments from an immediate annuity are made in periodic (monthly) installments to you, usually within the first year of deposit.
Unlike income from financial products that can fluctuate, annuity income payments are guaranteed for a certain period of time or for your lifetime.
The amount of each payment installment you receive from an immediate annuity is determined by an interest rate (locked in at time of purchase), your life expectancy, and the initial premium payment amount.
An immediate annuity, often called a SPIA (Single Premium Immediate Annuity) is a practical tool for turning a lump sum of cash into a lifetime stream of income. In the “good old days” you would hit retirement age and your company would hand you a watch and promise you a monthly check for the rest of your life. In these days of “defined contribution” plans, 401ks and IRA retirees are essentially told “Here’s your retirement cash, make sure you die before its gone”.
You might have spent your life as an engineer, or a writer, or a factory floor manager, but suddenly you are confronted with the obligation to become an asset manager and investment advisor. In these circumstances, an immediate annuity is an invaluable tool. A SPIA allows you to take a portion of your irreplaceable retirement funds and turn them into a guaranteed payment stream for as long as you (or your spouse) live. Its kind of a build it yourself guaranteed pension.
If a retiree can calculate his core living expenses, compare them to his anticipated social security payments, pensions and other guaranteed lifetime distributions he can identify the anticipated shortfall. Using a SPIA, he can then convert a portion of his retirement savings into a guaranteed monthly payment stream to cover the difference.
Knowing that his monthly nut is covered with guaranteed income, without touching any additional principal in his retirement accounts, our retiree now has the freedom to manage the remaining assets for growth and safety with an idea of protecting against future interest rate risk and market risk.
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