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Types of Income Annuities


Immediate Annuities:


Whatever the annuity purchased, there are essentially two ways it can pay out, either immediately or at a later date (deferred. An immediate fixed annuity is what most people think of as the classic annuity. You start to receive periodic checks after the first month of investment.


Check are typically issued monthly, but can also be semi-monthly, quarterly, and semi-annually. This contrasts with fixed deferred annuities that automatically re-invest interest and pay out at the end of the term in one lump sum.


Whatever the annuity purchased, there are essentially two ways it can pay out, either immediately or at a later date (deferred. An immediate fixed annuity is what most people think of as the classic annuity. You start to receive periodic checks after the first month of investment.


Advantages of Immediate Annuities:


With social security payments in decline, an average annual inflation rate of 3%, and advances in healthcare, outliving their retirement savings is becoming more and more likely for the average American. Immediate annuities are one of the only investment vehicles that can protect against this likelihood. No other investment guarantees a lifetime income you can't outlive.


Retirement planning based on life expectancy is getting tougher. The average 65-year-old healthy American male is expected to live until 85. But, there's 50% chance of living past 85, and a 25% chance of living past 92. Underestimating your life expectancy should be blessing, but can turn into a curse if you can't cover basic living expenses. Immediate annuities can insure you against this possibility. Moreover, studies have found that 25-40% more money would be required to have this assurance with an annuity-free retirement portfolio.


Deferred Income Annuities:


If you're looking for a future source of guaranteed income that will last the rest of your life, a deferred income annuity may be right for you. A deferred income annuity (DIA) allows you to use a lump sum or multiple purchases to receive a guaranteed1 "retirement paycheck". The DIA provides guaranteed income (your "retirement paycheck") beginning at a future date of your choice (generally, 13 months to 40 years from the initial purchase).

DIAs are designed to use your "retirement paycheck" to help cover your essential living expenses, as defined by you, in retirement. Generally, the longer you defer taking income, the greater your "retirement paycheck" will be. This "retirement paycheck" continues for the rest of your life, and—if you choose a joint life option—for the rest of your spouse's life, no matter how long both of you live.

Also, if you're using qualified assets, a deferred income annuity may be purchased as a Qualified Longevity Annuity Contract (QLAC), ultimately providing you with potential tax benefits. Generally, with qualified assets, you must begin required minimum distributions (RMDs) by April 1 following the year you reach age 72. However, RMDs for money used to purchase a QLAC can be delayed past age 72 and up to age 85.