Immediate Annuity: A Subsitute Retirement Plan

Many of us are worried about what we are going to do at the age of retirement. Most companies do not offer any pensions. Plus, many people are afraid that social security will be completely bankrupt by then. What are our choices?

One choice is an immediate annuity. An annuity is a financial contract that you make with an insurance company. In other words, you pay money into this contract. There are two kinds of annuities, immediate and deferred. 

If you need to start accumulating money, a deferred annuity is the way to go. But if you have a large cd, a large bank account, etc, all ready, you may want to check into immediate annuities.

With an immediate annuity, you put in a said amount, like you would a cd. The difference is that with an immediate annuity you can start receiving payments within a month. You can set up these payments for monthly, quarterly, semi-annual or annual withdraws. One good point about this is that unlike your savings account, you only have to pay taxes on the total amount you withdraw each year, nothing on the principal.

How do you set up an annuity? First, you find an insurance company that deals with annuities. Then you check their ratings. Each state has a department of insurance that can tell you about any insurance company within your state. Then you start building your contract.

You will make one lump payment. The size and time frame for your payments will be based on how much you put into that annuity in the beginning. You need an idea as to how you want to set up your payments. Then discuss your needs with the insurance agent.

Your next step will be deciding what kind of interest you want. There are two kinds of interest, fixed rate and variable interest. Fixed rate interest is just the way it sounds. A fixed rate; usually this is the rate of interest at the time you initially set up your annuity and based upon the amount you invested. If the interest rate goes up, your rate will not. But if interest rates goes down, your rate will not. Variable rates goes up and down as the interest rates does. When rates are high, your interest payments are high. But then again when they are low, so are your interest payments.