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What is an Immediate Income Annuity?

The FACTS:

It is an exchange of a Lump-sum of money for a Monthly Income Stream guaranteed for Your Life, the joint life of you and your spouse or for a Specified Period of Time 10 Year to 30 Years. Contrary to what you read and hear, you can add guarantees to the Life Options. This can be in the form of an Installment Refund Guarantee or a Certain Period. The trade off is a lower monthly income stream and is not as low as you may think. The younger you are the less the trade off is.

Here is a listing of the payout options:

Life Only
Life with Installment Refund
Life with 20 Years Certain

Joint and Survivor Life
Joint and Survivor Life with Installment Refund
Joint and Survivor Life with 20 Years Certain

Joint and 75% to Survivor Life
Joint and 67% to Survivor Life
Joint and 50% to Survivor Life

10 Year Period Certain
15 Year Period Certain
20 Year Period Certain
25 Year Period Certain
30 Year Period Certain

Safety, Simplicity and No Fees: You know up front how much of a Lump-sum you need to exchange for the Monthly Payment you receive. Nothing else is charged to you nothing is deducted from your payments. It is what it is!

Immediate Income Annuities are all about Guaranteed Fixed Spendable Monthly Cash Flows that you receive each month for life. When you’re in Retirement these Cash Flows are what’s important to you. Nothing else comes close in importance.

Having a Guaranteed Monthly Income Stream as part of your Portfolio improves the performance of your Entire Retirement Portfolio. How? It allows you to focus on investing long-term for maximum compounded return without having to worry about your monthly spendable funds/cash flows.

A point that is unique, very important and never discussed in buying a lifetime annuity… The waiting for Higher Monthly Payouts. Remember Immediate Income Annuities are based on how long you live even when you add a guarantee. We all know that you will die at a point in time in the future. We just don’t know when that point in time is. So, weather you Buy an Immediate Income Annuity today, 1 Year for now or 2 Years from now is not going to change the point in time payments will stop (Your date of Death).

Therefore, each month you wait to Buy this annuity is a month of cash flow you forgo. Wait a Year and it may take years to make up that loss of cash flow and you may never make it up. My point… Once you are at or near the point when you need monthly cash flow and you have made the decision that Immediate Income Annuities are what you want to help meet your retirement income needs then it simply makes no economic sense to wait. In the last 10 years, the Payouts in Immediate Income Annuities are not materially different from the high point to low point especially on the Life Options which are based on the very long end of the Yield Curve. As an example the 30 Year Treasury Bond Yield today is 4.66%. The two peak yields in the last 10 years were ~ 5.35% in June of 2007 and ~ 6.23% in February 2000 (moved quickly in the mid 5%’s after). Not much of a range If you really think about it.

Yes, Immediate Income Annuities, Fixed Rate Annuities and Index Annuities when honestly reviewed should play a role in everyone’s portfolio for a percentage of your investable long-term assets from age 50 up and until the day you die. They provide safety, predictability, an attractive rate of interest and Cash Flows during Retirement that can’t be safely matched by other investments you may allocate into.

With deferred annuities you have an beneficiary who would receive the $100K. But with the product that Neal is talking about you already turned on the income stream, and then depending on the product if you die the next day your assumption is correct.

Isn’t there an heir to the money, ALWAYS? If not, what kind of bafoon would sign up for some sort of thing?

Assuming there is always an heir, I guess the secret is to just out live their expectations.
.-= Financial Samurai´s last blog ..How To Get Your Super Motivated Boyfriend to Marry You =-.

Great post. I am glad to see there are voices out there discussing what a horrible investment annuities can be. They aren’t in all cases, but I find they are more often than not.

If you know you are going to live well beyond the life insurance company’s actuary tables, then it may be beneficial. Of course, who knows how they they will actually live.

Also, counterparty risk is rarely mentioned as another risk to these products. Sure, the states audit insurance companies and have reserve requirements, but that doesn’t guarantee that a company won’t mismanage their assets or reserves.

Overall, I think you hit the key points on fixed annuities, and this will really help your readers.

What about insuring against loss of principal? Or insuring against future possible flucuations in the market? If you had 100K in 2007 you CERTAINTLY did not have 100K in 2008 nor did you have the income produced by that 100K. What if you were already retired? and were depending on that income?

I am not saying they are for everyone, but your blanket statement indicates you might not understand the product

“My fear is that many people are sold these investments because of the salesperson’s need for a commission rather than from a client-needs standpoint.”

A VALID VALID FEAR! Actually just read a great article you may be interested in about how Planners SHOULD act (but as we both are well aware don’t):

http://www.myjourneytomillions.com/articles/financial-planners-act/

As I mentioned in the post, I calculated the return on a simple basis…I wrote this last night and didn’t have my calculator and I figured that the difference wouldn’t matter all that much. But thanks for pointing this out. I’ll keep my trusty TI with me from now on!
.-= Neal@WealthPilgrim´s last blog ..Financial Aid Forms – Best Way To Increase College Aid for Free? =-.