Immediate annuities convert a lump sum into guaranteed lifetime income, offering retirees a pension-like alternative to managing portfolios through market volatility.
Here's how they work. You hand a lump sum, typically $100,000 or more, to an insurance company. In return, that company sends you a fixed monthly or quarterly payment for life. A 65-year-old man who invests $250,000 in an immediate annuity might receive roughly $1,200 to $1,400 per month, depending on current interest rates and the insurance carrier. Women receive slightly lower payments because of longer life expectancy.
The appeal is straightforward. You eliminate sequence-of-returns risk. Stock market crashes in your early retirement years won't force you to cut spending. You stop obsessing over whether your portfolio will last 30 years. Social Security covers basics, and an immediate annuity covers everything else. That's peace of mind many retirees value.
Immediate annuities come with real tradeoffs. Once you buy one, you've locked in today's payout rate. If interest rates rise significantly tomorrow, you're stuck with lower payments. You also lose access to your principal. If you die at 70, the insurance company typically keeps remaining funds (though some products offer survivor benefits for higher payouts).
Inflation erodes purchasing power over time. A $1,400 monthly payment buys less groceries in 15 years. Some insurers offer cost-of-living adjustment riders, but these cut your initial payout by 15 to 25 percent.
Shopping for immediate annuities requires comparing quotes from multiple carriers. Fidelity, Vanguard, and Schwab all offer them. Rates vary meaningfully between insurers. A $200,000 investment might generate $950 monthly from