FedWeek’s recent article entitled “Buying an Annuity for an Income Stream” explains that these annuities come in two varieties, immediate fixed annuities and immediate variable annuities. With an immediate fixed annuity, you receive the same amount each month, as long as the annuity lasts.
However, a fixed payout may not be attractive, because that fixed amount is likely to decrease in value over the years as prices increase.
There are, however, immediate variable annuities with payments that are indexed to inflation.
There’s are also immediate variable annuities, where you decide among investment accounts with the aim of upping your payments.
Immediate annuities can be a good strategy for people 65 and older. That’s because the older you are when you buy one, the more cash flow you’ll get and the greater the portion of each check that will be a tax-free return of capital.
When you purchase an immediate annuity, you can select some of the terms of the contract. Let’s look at some of the common choices.
A straight life annuity will pay one individual for as long as he or she lives, whether it’s a month or 50 years.
With a joint annuity, a married couple purchases an annuity that will pay as long as either spouse is alive.
Finally, there are period certain annuities. This kind of annuity can be on one person’s life, just like a straight life annuity. However, with a period-certain annuity, the insurer agrees to make payments for at least a specific number of years (a common term is 10 years). If the annuitant dies within that term, payments to a beneficiary will continue until the term is completed. You can get period-certain annuities for many different lengths of time.
Note that joint annuities and period-certain annuities have smaller payouts than a straight life annuity.
You need to consider whether protecting a spouse or another beneficiary is worth the reduced cash flow while you’re around.