What Are The Disadvantages And Advantages Of Single Premium Immediate Annuities?
This website has already discussed some advantages of immediate annuities for retirement savings. However, some time and passed and the economy has changed. I decided it would be worthwhile to re-visit the topic.
I also wanted to point out this single premium immediate annuity calculator you can use for free.
For this discussion, we are talking about fixed, single premium retirement annuities. Please understand that contracts can differ wildly, and it is up to you to discuss the details with a professional. However, we will narrow down our thoughts to annuities with the following characteristics.
- Fixed Annuities – That means we are not discussing variable annuities which are much more risky, though may also have bigger returns in good years. A fixed annuity may have a fixed interest rate (like a bank account), or it may be set to a market index. Fixed annuities that are set to a market index, like the S&P 500, still should have a guaranteed minimum return.
- Single Premium – This means you fund the account with one lump sum of money. You may, for example, get a distribution from your workplace when you retire, or you may decide to use money you have saved in your bank, money market, CD, etc.
- Immediate Annuity – This means that you plan to fund your account, and then immediately start taking income out of it. This is a typical thing that a retiree might do. He or she funds the annuity with one lump sum of money, and then plans to take income for some set period of time, or for a lifetime.
Who Offers Annuities?
Annuities are insurance company products. Life insurance companies know how to make the calculations to estimate lifetime payments.
Single Premium Immediate Annuity Disadvantages
There are two big drawbacks to immediate annuities. If these concern you, you may want to consider an alternative way to save your money.
- You will have to have a large enough lump sum of money in order to fund the account. If you want lifetime income payments, you cannot expect to get very far if you can only invest $5,000.
- You will also have to give up control over this large sum of money for a long period of time. Most annuities have long surrender periods, so you will be penalized if you do decide to withdraw your money before the time period is up.
Single Premium Immediate Annuity Advantages
So why would people ever want to give up control of a large sum of money? There are several advantages of these types of accounts to consider.
Few Alternatives – The biggest reason that many people decide to use an annuity to invest their money, and provide retirement income, is that they do not like the alternatives. Bank products, like savings accounts and CDs, are paying very low returns these days. Market investments, like stocks, can be very risky.
Minimize Risk and Maximize Rewards – So what you get in return for giving up control of your money is a way to maximize your returns while minimizing risks. While most annuities are not FDIC insured like a savings account, they are backed by top insurance companies and state regulations.
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