What is an immediate fixed income annuity?

According to a 2023 Gallup survey, 71% of nonretired adults in the United States are at least moderately worried about being able to fund their retirement — and 42% say they are very worried about it.¹ If that's a concern for you, an income annuity might make sense because it can help you create guaranteed income you can’t outlive. The concept is simple, but there are many different types of annuities, and to make the right choice, you have to understand the different options available. This article will help you understand:

• What an immediate fixed income annuity is, and how it works

• How it compares to other types of annuities

• Whether this type of annuity is right for your retirement

Understanding immediate fixed income annuities

An annuity is a retirement vehicle – a contract with an insurance company – designed to provide a steady, guaranteed stream of income in retirement. You can contribute to an annuity as part of your long term retirement strategy alongside any contributions you make to a 401(k) or an IRA, and defer taking income until later. But what if you already have savings built up, and you’re ready to start turning some of it into regular recurring income?

An immediate annuity is a contract to provide a guaranteed stream of income that starts right away (or within 12 months) from a single lump sum that you pay to the insurance company (which is why it’s sometimes called a single premium immediate annuity). In turn, the insurance company makes payments to you for a set amount of time, or the rest of your life – depending on the contract terms you choose. Annuities are typically written by life insurance companies because they have the underwriting expertise needed to estimate the cost (or risk) of providing a lifetime payout that could stretch for decades.

After you make a lump sum payment, it starts providing guaranteed income for life (or as long as you designate). And from the moment you sign the contract you can know the exact amount of each retirement income payment.

Is an immediate fixed income annuity right for you?

To better answer this question, it helps to consider the benefits and alternatives. An immediate fixed income annuity may be the right choice for you if:

• You want a reliable way to turn retirement savings into income - It can be hard to figure out the best way to draw down retirement savings and turn that money into recurring income. Do you sell assets that are up or down? Do stocks go first, or bonds? An annuity helps take those concerns away, and with an immediate annuity, payments can start as soon as you purchase your contract (or any time within the first year) and then continue for the rest of your life (or a specific time period that you choose).

• You need a steady source of income now - An immediate fixed income annuity allows you to start receiving payments right after purchase or within 12 months.

• You have a lump sum of money to invest now - Immediate annuities are purchased with a lump sum that typically comes from your retirement savings; or from the sale of a house or business.

• You aren’t comfortable with market volatility - If you want to know that the money you put into your annuity (principal) is secure and won’t be subject to market dips – then a fixed income annuity can be a good choice. However, like other annuities, this isn’t a liquid investment. There are restrictions and penalties to withdrawing funds beyond the regular payments specified in your contract.

What if you want market returns?

While many annuities are fixed rate annuities that pay predictable interest, if you shop around you can find options to take advantage of market growth.

• A variable annuity lets you invest your money in an array of investment options similar to mutual funds. While this can provide the potential for higher overall returns, there are no guarantees – you assume all the investment risk. That also means that future income payments can’t be predicted: if the market drops and takes a while to recover, your principal amount could lose value, which could eventually result in lower payments.

• A fixed index annuity can also provide the potential for market growth with less downside risk: these annuities let you tie principal growth to a market index that you select, but you’re protected from losses if the index goes down (and your contract may even provide a minimum guaranteed interest rate). However, upside gains are also limited by caps, participation rates, or other measures specified in your contract.

What if you don’t need income now – or aren’t near retirement age?

If you can put off receiving payments, consider getting a deferred annuity: these annuities have an accumulation phase that gives your funds time to grow before taking income in the distribution phase, and offer tax-deferral benefits similar to those found in an IRA or 401(k) plan. But while those vehicles have IRS contribution limits, annuities don’t, making them a great way to save extra for retirement. And with a longer investment horizon, a variable or fixed index annuity can make more sense in a deferred annuity, because your money has more time to recover from market dips.

Getting started with immediate fixed income annuities

As part of your retirement planning strategy mix, annuities can help you achieve a greater level of income stability so that no matter how long you live, you won't outlive that stream of income. If the benefits of a fixed income annuity make sense to you – and you want a stream of income to start in the 12 months – then now would be a good time to speak with a financial professional about your options.