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What is an immediate annuity and is it right for you?

An immediate annuity can be a useful tool to help create a guaranteed income stream in retirement that you can depend on month to month.

Planning for retirement starts with saving money during your working years and building a retirement nest egg over time. However, it doesn't end there. Retirement planning should also include addressing your income needs during your retirement years. Your retirement income plan should include covering basic expenses (e.g. housing, utilities, food, insurance). It should also provide income for doing things you enjoy (e.g. travel, buying a new boat). An immediate annuity is a financial tool that is designed to help you create guaranteed lifetime income.

The idea of a guaranteed income stream for life from an immediate annuity is appealing for obvious reasons. But what exactly is this financial tool, and how can you decide whether one is right for you? Here are answers to some top questions.

What is an immediate annuity?

An immediate annuity consists of guaranteed lifetime income in exchange for a lump sum of cash. The "immediate" in "immediate annuity" simply means that payments start right away. They may also be referred to as single premium immediate annuities.

What are the advantages of an immediate annuity?

Outliving savings is a common worry in retirement, and an immediate annuity guarantees a steady source of income for the rest of your life.

The number of employers that provide a traditional retirement pension plan has declined dramatically over the years. Many employers now offer only a defined contribution plan such as a 401(k). As a result, many Americans retiring today do not have the benefit of a company pension like retirees did in years past. An immediate annuity provides you with the option of using a portion of your retirement savings to create guaranteed lifetime income.

By providing guaranteed lifetime income, immediate annuities also impart confidence and financial security during your retirement years.

Types of immediate annuities

There are two types of immediate annuities that grow income:

  • Fixed immediate annuities – For fixed immediate annuities, you provide a lump-sump payment to an annuity provider. In exchange, the provider pays you a consistent amount of income, either for life or a specific period of time. The amount is based on a fixed interest rate and does not fluctuate with changes in the market.
  • Variable immediate annuities – For these annuities, you elect your payment to the annuity provider to be invested in various subaccounts related to assets like stocks, bonds or money market funds. Because the performance of those assets varies with the market, your income from this type of annuity varies as well. If the assets do well, the amount you receive may increase. If they don’t, you could receive less.

Immediate annuities and deferred annuities

The difference between an immediate and deferred annuity is when you will start receiving payments. Payouts from an immediate annuity begin either right after you deposit the lump-sum or within the first year afterward. Deferred annuities start payments on a date at least a year in the future. They can be funded either with a lump sum or payments over time. Deferred annuities tend to make higher payments because the provider has a longer period of time to invest your initial payment(s).

There are other types of annuities as well. Doing some research to collect more information can help you choose what annuity might be best for you.

What payout options are available with an immediate annuity?

Immediate annuities provide a variety of options to customize your payout. You have the option of creating guaranteed lifetime income for yourself or jointly with another individual. One immediate annuity can provide guaranteed lifetime income for two people — for example, both you and your spouse.

In addition, you also have the option of adding a certain period of time to an immediate annuity. This guarantees that payments will last for your lifetime or the certain period (e.g. 20 years), whichever is longer.

How does an immediate annuity fit into a financial plan?

An immediate annuity can provide confidence and financial security for those who want guaranteed lifetime income during retirement. It can also be helpful to those who may be worried that projected living expenses in retirement may exceed their sources of income. Talk to your local State Farm® agent to discuss your retirement goals and see if an immediate annuity could help address your retirement income needs.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Neither State Farm nor its agents provide tax or legal advice.

Each State Farm insurer has sole financial responsibility for its own products.

State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)
Bloomington, IL

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