When your friends, family or co-workers talk about retirement, many of the same topics turn up in the conversation — IRAs, 401(k)s, stocks, bonds and personal savings accounts. An immediate annuity rarely comes up, mostly out of confusion about how it works. And that's a shame because once an immediate annuity is established, it can be a simple, reliable way to generate income in retirement. See note 1
What's an immediate annuity?
An annuity allows you to turn savings, including your retirement savings, into a replacement paycheck. It's an agreement between you and an insurance company where you pay a lump sum up front, and they send you consistent payouts for a fixed term or for the rest of your life.
Immediate annuities, also known as income annuities, have sometimes gotten a bad rap over the years, in many cases because people toss them into the same category as investment products. The money paid up front for an immediate annuity shouldn't come with the expectation that it will grow and pay out at a higher rate. Instead, it helps to purchase peace of mind.
Many see this as a fair trade-off since an investment portfolio like most other retirement income sources has the potential to lose money while invested. With protected income, you should have money to spend on things that are important to you. This means you can take more trips. You can dine out more frequently. Simply put, you can do more in retirement.
Annuities may protect you from the risk of running out of money in retirement. They also may protect you from the risk of not being able to:
- Maintain your lifestyle in retirement.
- Spend on what you want, when you want.
- Take withdrawals when needed from your savings without worry.
- Leave a legacy for what's most important to you, whether it's your grandchildren, a charity or something else.
What are the benefits of an immediate annuity?
Immediate annuities may be ideal if you're nearing retirement or have recently retired and want reliable income in the immediate future. They let you transform a chunk of savings into a guaranteed monthly fixed income that starts right away. With many single premium immediate annuities, you can choose to get guaranteed payments for life, a set period or both. See note 2
The freedom of predictability
Outliving savings and investments is one of the fears in retirement. Putting part of your portfolio in an immediate annuity will provide you a paycheck for life and alleviate this fear. And just like the paycheck you had before retiring, this instills a healthy level of personal discipline, because you'll have the regular payments that are coming in instead of one large amount. This may help you maintain your lifestyle in retirement.
Protecting the people you care about
You'll have the option to name another person, like a spouse, as a payment recipient, so depending on the option you choose, payments may still be made as long as either of you is alive, or throughout the entire term of the immediate annuity. This helps ensure that you or a loved one will get the money back that you put in.
Special case withdrawals
USAA Life Insurance Company and USAA Life Insurance Company of New York's immediate annuity benefits may include a special one-time withdrawal in the event of certain financial emergencies, which could include large medical bills, foreclosure or unexpected funeral expenses. See note 3
Perhaps you're wondering how much of your retirement portfolio should be dedicated to an annuity. You can use our calculator if you want a rough idea of what would work for you.