Fixed Immediate Annuities: Turning Money Into Income

Annuities have become popular products in recent years because of their ability to address so many needs of today’s consumers—especially those nearing retirement and those already retired. An annuity is a contract, purchased from an insurance company, that enables you either to build money for retirement on a tax-favored basis (deferred annuity) or to turn a pool of money into a stream of income guaranteed for a fixed period of time or for life (fixed immediate annuity). This latter type of annuity, a fixed immediate annuity, can be thought of as the opposite of life insurance. While life insurance provides protection against dying too soon, a lifetime fixed immediate annuity provides protection against “living too long.” It is unique in that it can turn savings into a stream of payments that will last an entire lifetime.

Who Buys Fixed Immediate Annuities?

Fixed immediate annuities can be used for many purposes, all involving a need to generate an income out of an existing pool of money. For example, many people purchase fixed immediate annuities as a payout vehicle for their retirement savings. With people living longer and longer, many retirees are concerned that their savings may eventually run out. By purchasing a lifetime fixed immediate annuity, a retiree can obtain an income stream for the rest of their life. They may also be able to save on their taxes, especially if their retirement savings are in a tax-qualified pension plan, where taking the money all at once could result in a huge tax liability right away that eats into their retirement “nest egg.” In some states, the income from a fixed immediate annuity doesn’t count when determining eligibility for Medicaid.

Others use fixed immediate annuities to spread out the receipt of a large sum from an inheritance or the proceeds from a life insurance policy. Some use a fixed-term fixed immediate annuity in order to bridge a temporary gap in income, such as between the date of early retirement and the date on which their Social Security benefits would be the highest. Such fixed-term fixed immediate annuities can also be used to spread money over the period of time it will be needed, such as during the years a couple needs to fund their children’s education.

How Do Fixed Immediate Annuities Work?

When you purchase a fixed immediate annuity, you pay the insurance company a lump-sum payment, called a premium, and the insurance company promises to send you income payments. In fact, what you’re buying is a promise. It’s important that you match the income to your needs while also leaving enough money aside for emergencies, since the purchase of a fixed immediate annuity is an irrevocable commitment, usually for the long term, for both you and the insurance company. That’s why it’s also important to pick a strong insurance company, since the promise you buy is only as good as the insurance company making it, and you want a company that will be there down the road to honor its commitment.

Most fixed immediate annuities lock in a fixed rate of return and generate a fixed payment amount. Therefore, your payments won’t be affected by the daily ups and downs of the financial markets. You usually have the flexibility to choose the frequency with which you receive your payments, generally monthly, quarterly, semi-annually, or annually, and you can also have the payments sent to someone else, if you choose.

Peace of Mind

Many people find that fixed immediate annuities can provide them with the peace of mind they want during their retirement years. They sleep better knowing that they have an income stream they can use to help pay their daily living expenses, and they don’t have to worry about managing that money or how it would be affected by financial market swings. For some individuals, a fixed immediate annuity is just what they’ve been looking for.

 

For more information about fixed immediate annuities, please contact Christopher Naugle, Agent, New York Life Insurance Company, at 716-626-7387 or 716-628-3236.