The Pros and Cons of an Immediate Annuity
Jan 18, 2023
Blueprint Income Team
Immediate annuities have many financial benefits that help make retirement planning simpler, but also some drawbacks. Find out what an immediate annuity has to offer before you purchase.
- If you're considering an annuity, read more about the pros and cons of an immediate annuity
- Immediate annuities guarantee an income stream during your retirement
- You can choose features and options to customize an immediate annuity that fits your needs
- Knowing that you’ll have a guaranteed income stream allows you to have a riskier portfolio (all else equal)
Figuring out how long your retirement savings need to last is difficult. Guaranteed retirement income and a paycheck you won’t outlive sounds like a dream, right? Well, you can purchase an immediate annuity (also known as a single premium immediate annuity or SPIA), which provides exactly that! Buying an immediate annuity with your pre-tax or post-tax retirement savings has a number of benefits, but also some drawbacks. We cover the pros and cons of an immediate annuity below:
Table of Contents
- By buying, you’ll know you won’t outlive your savings.
- No cash value, but if you need a paycheck early, you can usually get it.
- You can add your spouse to your policy.
- It’s a simple product.
- You can plan your riskier investments more easily.
- Immediate Annuities work as an alternative fixed income investment.
- Your savings are protected from the market and the income you’ll get is pre-determined.
- How Can I Buy an Immediate Annuity with Blueprint Income?
By buying, you’ll know you won’t outlive your savings.
Insurance is typically thought of as something you buy to protect you and your family from unfortunate events. The immediate annuity offers a more pleasant kind of protection though: longevity insurance, meaning it protects you from outliving your savings. The longer you live, the more financial value the immediate annuity provides.
You can add your spouse to your policy.
Immediate annuities can be set up as joint annuities, which means that the paychecks continue as long as either you or your spouse live. Structuring the contract like this is a great way to preserve financial stability and quality of life for the surviving spouse.
Immediate annuity rates based on a $174,132 Integrity life-only policy for a male aged-65 with income starting immediately. Rates as of 10/4/2017.
Let’s take a look at an example. Matthew is 65-years-old and about to retire. Matthew expects that he will pass away before his 63-year-old wife, Lindsay. He wants to know that she’ll be okay financially once he’s gone, so he’s considering adding her to his immediate annuity. Matthew can purchase a joint life policy so that the retirement income payments continue until both of them have passed away. If Matthew doesn’t opt for a reduction in payments when it’s just one of them, the income payments will be lower since they’re expected to be paid over a longer period of time. But since their expenses will decrease when it’s just Lindsay, they’ve opted for a 25% income reduction (which is the same as a 75% continuation) to increase their income when they’re both alive.
You can plan your riskier investments more easily.
Adding an immediate annuity to your portfolio makes your retirement planning easier. Knowing that you’ll be receiving a steady paycheck in retirement to cover all or some of your expenses means you can take more risk with how you invest the rest of your money. You can learn more here about how we suggest you pair an annuity with investments to best cover your basic and discretionary expenses.
Your savings are protected from the market and the income you’ll get is pre-determined.
The savings that you allocate to an immediate annuity aren’t in the market, so they won’t be affected by swings in stock or bond prices. And, by selecting the refund at death option, you can make sure that all of your savings will be passed onto your beneficiaries if you pass away prematurely.This can be a drawback for some people. The income the insurance company guarantees you is determined upfront, and won’t grow if there’s market upside. If you’re looking for an investment style product, an immediate annuity isn’t the right solution.
No cash value, but if you need a paycheck early, you can usually get it.
Immediate annuities are like paychecks rather than savings accounts, so the money you receive each month isn't usually flexible. This can be a downside, as you don’t have withdrawal control over your savings. However, most insurance companies offer the option to receive the next few months of payments in advance, which can be useful in emergency situations. This benefit goes by many names: commutations, withdrawal benefits, or payment acceleration. Each insurance company has different rules as to how many months of payments you can receive at once, and how many times you can utilize the benefit. Ask us for more details.
It’s a simple product.
Unlike many insurance products, an immediate annuity has a simple structure. For every dollar you contribute in premium, the insurance company will tell you how much you’ll receive every month, starting when you retire and continuing for the rest of your life. There are a couple options in the plan that can affect the level of income you’ll receive, but that’s it.
Immediate Annuities work as an alternative fixed income investment.
While immediate annuities are primarily insurance products, the value they offer can be compared to low-risk fixed income investments, such as an investment grade bond fund. As you approach retirement and no longer want to take as sizable equity market risks, you’ll likely move some of your assets into safe but low returning bond funds. Moving some of those assets instead into a high-rated immediate annuity has the added benefit of providing you with a pre-determined lifetime income stream.
Let’s use Matthew as our example. A big portion of his IRA is invested in an investment grade bond fund which is only earning 2%. Taking a look at his sources of retirement income (such as Social Security and a rental income property), Matthew has a spending gap of $1,000 per month, i.e. his projected monthly expenses are $1,000 higher than his income. Matthew decides to fill that spending gap with an immediate annuity. Matthew will take $174,000 of his IRA that’s currently earning only 2% and use it to purchase an immediate annuity. Starting in one month, the immediate annuity will provide him with a $1,000 paycheck that will continue for as long as he’s alive. In comparison, simply leaving the money invested in his IRA bond fund and withdrawing $1,000 per month would deplete his IRA by age 82.
Immediate annuity rates based on a $174,132 Integrity single and joint life-only policies for a male aged-65 and a female aged-62 with income starting immediately. Rates as of 10/4/2017.
How Can I Buy an Immediate Annuity with Blueprint Income?
At Blueprint Income, we offer annuities from more than 15 top rated insurance companies. Click below to get real-time personalized quotes using our immediate annuity calculator, where you can compare options offered from different insurers on an apples-to-apples basis.
From there, you’ll get access to our annuity guides, team of specialists to help you analyze your retirement finances and walk you through the application process. If you have questions about how the pros and cons of an immediate annuity apply to your specific situation, just send us an email at [email protected].
Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.