An immediate annuity is a simple insurance product that provides you with a guaranteed, predictable income. The process is straightforward: You give an insurance company a lump sum of money, and in return, they start sending you a monthly paycheck right away (within 12 months).
For retirees, this tool can be a powerful source of peace of mind.
And according to financial experts, now is a particularly good time to look at them. Because of the current interest rate environment, annuity payouts are the highest they have been in over a decade.
However, buying an annuity is a big, irreversible decision. It’s a long-term commitment. As your trusted advocate, we’re here to give you the clear, simple facts so you can decide if it’s the right move for you.
Key Takeaways
- What it is: An immediate annuity is a simple way to turn a “lump sum” (like from your 401k or savings) into a guaranteed monthly paycheck for life.
- Why Now? Payouts are higher than they’ve been in 10+ years, meaning you get a bigger monthly check for your money.
- It’s a “Gap” Filler: An annuity is designed to fill the “income gap” between your Social Security and your monthly bills.
- It’s Irreversible: An annuity is a commitment. You are trading access to your lump sum for the guarantee of lifelong income.
Why You Might Want to Consider an Immediate Annuity
Retirement Income Gap
Find your “gap” right now with this simple calculator.
A. Your Essential Monthly Bills
B. Your Guaranteed Monthly Income
An Honest Answer: How Much of Your Savings Should Really Go Into an Annuity?
This is the most important, honest advice you will receive. An annuity is a “peace of mind” tool, not an “all-in” investment. You should never put all your money into an annuity.
Most financial experts agree:
- Your “Emergency Fund” Stays Out: You must keep 6-12 months of living expenses in a liquid, FDIC-insured savings account or CD that you can access.
- Your “Annuity Money”: An annuity is for the “safe” portion of your savings—the money you are only using to cover your “Income Gap” (the number you found above).
How Much Income Can You Get?
Your payout is clear and depends on just a few factors: your age, your gender, the amount you put in, and the payout option you choose.
The table below shows sample monthly payouts for a $100,000 immediate annuity, based on today’s high rates.
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Age When You Buy
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Single Male Payout
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Single Female Payout
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Joint (Couple) Payout
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Age 65
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~$660 / month
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~$630 / month
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~$550 / month
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~$740 / month
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~$710 / month
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~$620 / month
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Age 75
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~$850 / month
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~$810 / month
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~$710 / month
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Note: Payouts are estimates for a “life-only” plan and will vary.
You can also add a “Cash Refund” option. This is a very popular feature that answers the fear: “What if I die early?” With this feature, if you pass away before you have received at least your original $100,000 in payments, the difference is paid to your children or beneficiary.
The Honest Pros vs. Cons
An annuity is a tool, and like any tool, it has a specific job. Here are the honest trade-offs.
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The Pros (Why You'd Want It)
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The Cons (The "Trade-Offs")
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It Solves the #1 Fear: You are 100% guaranteed to never outlive your income.
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It's Irreversible: You are "locking up" your lump sum. You cannot call and ask for it back.
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Inflation: A $500 check is worth less in 20 years than it is today.
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It Creates "Pension" Confidence: You can pay your fixed bills with guaranteed checks, not by pulling from a risky 401(k).
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High "Surrender" Fees: If you force a withdrawal in the first few years, the fees are very high. This is a long-term commitment.
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Pay Attention to the Company's Financial Strength
This is the most important step. An annuity is only as good as the company that promises to pay it. You must choose an insurer that is financially sound.
- Check the Rating: Only use companies with an “A” (Excellent) or “A++” (Superior) rating from AM Best.
- State Protection: If an insurer does fail, your policy is still protected (up to a certain limit) by your State Guaranty Association.
How Your Annuity Payouts are Taxed
This is a critical question, and the answer is simpler than it looks. The tax treatment depends entirely on what kind of money you used to buy the annuity in the first place.
There are two main paths:
1. If You Use “Qualified” (Pre-Tax) Money
- What this is: This is money from a retirement account that you have not paid taxes on yet, such as a Traditional 401(k), Traditional IRA, or 403(b).
- How it’s taxed: This is very straightforward. Because you’ve never paid a dollar of tax on this money (it grew tax-deferred), 100% of every annuity check you receive is taxed as regular income.
- The Simple Way to Think About It: Treat your annuity check just like you would any other retirement withdrawal or a paycheck. The full amount is added to your income for the year.
2. If You Use “Non-Qualified” (Post-Tax) Money
- What this is: This is money from a regular savings account, a CD, an inheritance, or a brokerage account. It’s money you’ve already paid taxes on over the years.
- How it’s taxed: This is where the big benefit comes in. You will only pay taxes on the interest or earnings, not on the money you put in (your “principal”).
- How it Works in Practice (The “Exclusion Ratio”): You do not have to do the math. The insurance company calculates a simple “exclusion ratio” for you. A portion of every single check is a tax-free “return of your principal,” and the other portion is taxable “interest.”
- Example: You might get a $700 check, and the 1099 tax form from the insurer will show that $500 of it was your principal (tax-free) and $200 was interest (taxable). This makes a large part of your new paycheck tax-free.
A Powerful Bonus: Help With Your RMDs
Here is a major benefit for seniors using their “Qualified” (IRA/401k) money.
Once you are 73, you are forced to take “Required Minimum Distributions” (RMDs) from your IRA. These RMDs can be large, and they all count as taxable income, which can push you into a higher tax bracket and even make more of your Social Security taxable.
When you use a portion of that IRA money (e.g., $100,000) to buy an annuity, that money is no longer part of your IRA balance for RMD calculations. This can be a powerful strategy to lower your RMDs, which in turn lowers your total taxable income in retirement.
As always, we are not tax advisors. The tax rules are complex, and you should always consult with your personal tax professional about your specific situation. You can read the official IRS guidance in their Publication 575 (Pension and Annuity Income.
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Frequently Asked Questions (FAQ)
The “catch” is the main trade-off: liquidity. When you buy an annuity, you are giving up access to that lump sum. You cannot ask for it back. It is a permanent commitment in exchange for a permanent paycheck.
This is the most important question. It is not an investment—it is insurance. You are not trying to “beat the market.” You are insuring yourself against the risk of running out of money. You are buying a guarantee.
No, almost never. An annuity is a tool to cover your essential bills (like housing, food, utilities). You should still have other money in savings (for emergencies) and possibly in the market (for growth).
This is a common fear, but it’s solvable. You can choose a “Cash Refund” or “Period Certain” option. This guarantees that if you die before a certain time, the remaining payments will go to your children or beneficiary.
They are often the same thing! “Immediate” just describes when it pays (now). “Fixed” describes how it pays (a guaranteed, unchanging amount). A “Fixed Immediate Annuity” is the simplest, safest, and most popular option for seniors.
Annuity payouts are linked to the yield on highly rated corporate bonds, which are based on interest rates. As interest rates have gone up, the amount of income an insurer can earn on your lump sum has also gone up. They pass that higher return on to you as a larger monthly check.
