How to Choose Between an Immediate or Deferred Annuity
Annuities are contracts designed to provide a steady stream of income in retirement. However, purchasing annuities is not as easy as going into the offices of an insurance company, placing your money down, and getting the contract in return. It requires going through a process and making a series of important decisions, such as determining what type of annuity to purchase.
Annuities come in different forms, and a major point of decision is choosing between an immediate or deferred annuity. To help you choose which type is more suitable for you, here’s what you need to know.
An immediate annuity, as its name suggests, is designed to provide payouts immediately or after a short time following the time that you acquired the contract. When you decide to go this route, you will have to pay a lump-sum amount upfront. Typically, you will receive payments not longer than 13 months later. You have the option to receive income on a monthly, quarterly, or yearly basis. Depending on the contract, you will receive payouts for the rest of your life or only for a specific term.
Clearly, the main advantage of this type of annuity is the short waiting time before receiving income. If you are near retirement age, this type of annuity is more suitable for you, because payouts are given shortly after your lump-sum payment.
An immediate annuity can be a good solution to your predicament if you’re worried about outliving your savings in retirement. More so, it offers a good way to secure retirement income, especially if you think you haven’t saved enough prior to retiring.
When you purchase a deferred annuity, you have the option to pay in a lump-sum amount, make periodic payments, or a combination of both. Because of its flexibility, you have the opportunity to build a bigger fund for retirement.
In a deferred annuity, you are given the chance to grow your money overtime, tax-deferred. Payouts are usually set to begin at a later date in the future, usually by the time you hit retirement.
Typically, experts say that it takes between 15 and 20 years for a deferred annuity to generate a return that exceeds other conservative investments. Since that is the case, a deferred annuity makes more sense for individuals who are in their 40s or about a decade or two away from retirement.
Meanwhile, you also need to be careful not to withdraw from your deferred annuity prior to the set date in your contract or age 59 ½. If you do, you may have to incur fees and penalties. In most cases, however, you are allowed to withdraw up to 10 percent per year without penalties. This provision will begin 30 days after you purchased the annuity.
The Best Choice
When choosing between the two types, your proximity to retirement can be a good basis. Apart from that, the best choice will ultimately boil down to your needs, preferences, financial strength, and risk tolerance.
Navigating through the different types of annuities can be challenging and confusing. If you’re in the process of shopping around and planning a purchase, it’s smart to consult a professional whose expertise is in this field.
Discussing your needs and preferences with a professional allows you to feel confident about your annuity choice.