As discussed earlier, the immediate annuity will begin sending you payments as soon as you make your investment. What is the benefit to this? Are there any negatives? The immediate annuities pros and cons are not overly complicated. This type of investment is really only suitable for a certain type of person, as we will see.
The Immediate Annuity Advantages
The main positive of the immediate annuity is the fact that it helps regulate spending in retirement. If you are a spendy person or someone with poor impulse control, you may need help preventing yourself from spending your entire retirement before your passing.
The immediate annuity can do this for you. You make your lump sum payment up front and configure your payments to last a certain period of time, or until your death, in which your spouse or beneficiary would collect the rest.
A way to guarantee the level of income you will receive is to get a fixed immediate annuity. This will ensure that you receive a certain interest rate for the remainder of your payments. This is beneficial in that you can trust knowing precisely how much money you will receive each month, allowing you to budget appropriately.
Another benefit is earning enough to defeat losses associated with inflation. Your interest rate is likely to equal inflation at least, protecting your money from losing its value as time continues.
You can also take out a variable immediate annuity, which allows you to attempt to earn much more than you would expect with a fixed immediate annuity by controlling which portfolios your money is invested in.
The Immediate Annuity Disadvantages
If your interest rate doesn’t exceed that of inflation, you will lose a little value. However, losing a little is better than losing the full price of inflation. Another problem is that, even though you beat inflation with a variable immediate annuity, the high fees of management may reduce that profit margin drastically.
You’ll want to be very careful when making your decision on which type of immediate annuity to go for. You don’t want to outlive your payments, nor do you want your payments to run out too early or not be enough money to support your lifestyle.
The final problem, as with almost any investment tied to the stock market is that if the market crashes, so does your investment. This is the risk everyone must take though. You very well could profit gorgeously if the market performs very well.