Explore the pros and cons of immediate annuities to decide if they're right for your retirement income plan.
Article: 5 minutes
Updated: August 24, 2026 Published: October 1, 2019
By: USAA Reviewed by: Editorial contributors
USAA Life Insurance Company and USAA Life Insurance Company of New York.
An immediate annuity is an insurance product that converts a lump-sum premium into a guaranteed income stream. It can be a powerful tool for retirement income planning that provides peace of mind against fears about outliving your money.
Annuities can be powerful tools for retirement, and an immediate annuity can help you be financially prepared. There are two broad categories of annuities: deferred annuities and immediate annuities. A deferred annuity is where your money grows tax deferred over time, and you can either withdraw funds in the future or convert the money to an income annuity, by annuitizing.
With an immediate annuity, you purchase the annuity contract with a lump sum of money and start receiving payouts soon after that. We'll go over the pros, cons and a few myths of immediate annuities, which are also called income annuities and single premium immediate annuities, or SPIAs. There are different types of annuities, so it's important to understand them to determine which might be right for you.
Immediate annuities can be a great choice for people who want financial stability in retirement. By surrendering a lump sum, you can guarantee an income stream for a certain amount of time or for the rest of your life. This will give you peace of mind and protection against longevity risk and market fluctuations.
However, this kind of annuity also has some downsides. These include the potential to lose liquidity, inflation risk and missing out on potentially higher returns from investments such as mutual funds or exchange traded funds.
Some people might be spending their assets too fast in retirement, while others might be so worried about saving that they spend less than they could. An immediate annuity can provide a life long income stream so you can enjoy retirement. With an immediate annuity, you surrender a lump sum of money to the insurance company, who in return provides you with a guaranteed income stream. For example, depending on age, interest rates, and contract terms, you might surrender $500,000 to receive a monthly amount of $3,500 for the rest of your life. In the case of a fixed income annuity, that $3,500 per month amount could stay the same for the life of the guaranteed period. In the case of a variable income annuity, it could produce income that rises or falls with underlying market performance, for example paying $3,200 one month and $3,600 another month. If the annuity contract has a cost of living adjustment, or COLA, the amount might increase each year. For example, a COLA of 2% per year could mean the $3,500 per month payment in year one increases to $3,570 per month in year 2.
Those who have a defined benefit pension plan from their prior employment, such as retired military servicemembers, are receiving an annuity payment.
Investment returns can be variable and unpredictable. Negative returns, especially in the first few years of retirement, can increase the chances of running out of money before running out of time. An income annuity is an insurance product rather than a market-based investment, and a fixed income annuity is free from market fluctuations.
Most of us want a long life, but longevity can multiply the other risks in retirement. Since no one can predict how long they'll live, it's hard to make sure you won’t run out of money. An immediate annuity can help manage this risk by ensuring a guaranteed paycheck.
Managing our finances as we grow older, or relying on others to manage them, can be risky. An immediate annuity provides a safe income stream that doesn’t need much maintenance.
Conceptually, the payouts from an immediate annuity have three parts: return of premium, interest, and mortality crediting. This last part, mortality or longevity crediting, is a unique and powerful feature of immediate annuities. This means that premiums from those who live shorter lives help pay those who live longer.
Immediate annuities give you income rather than long-term growth. If growth is your goal, you might want to look at other suitable investments.
Fixed payments could lose their purchasing power because of inflation. Although some immediate annuities have an inflation adjustment, this would usually mean reducing the initial payout you receive for the opportunity to have it increase over time.
In most cases, aside from any guaranteed refund or period-certain provisions, once you pay a lump sum premium to the insurance provider, accessing your funds, aside from the periodic payment you receive as part of the contract, can be difficult, if not impossible. That's why it's important to carefully evaluate your situation to determine if an immediate annuity is appropriate for you going forward. You are essentially surrendering the funds to the insurance company.
Immediate annuities are usually associated with low fees or expenses. Nevertheless, the costs associated with an immediate annuity may be higher than other suitable alternatives. As with any financial commitment, it's essential to understand all related fees and expenses before committing. For immediate annuities in particular, you want to look at the bottom line: how much you receive in payments each month, for how long, and does it adjust with inflation. Higher embedded costs are reflected in lower payout rates, all else being equal.
The insurer's ability to pay out an immediate annuity depends on its financial strength. Check the company's credit rating when you’re looking at immediate annuities. Be careful not to be enticed by a payout that seems too good to be true. A lower credit rated company may offer a higher payout, but it is not without risk.
Pros |
Guaranteed income: A steady paycheck, which could be for life or a certain period of time. |
|---|---|
Cons |
Loss of liquidity: You cannot easily access, if at all, the lump sum once the contract begins. |
Pros |
Market stability: Payments are fixed and immune to stock market crashes, although they could fluctuate based on underlying market conditions in the case of a variable income annuity. |
Cons |
Loss of growth: You miss out on higher potential returns from the stock market. |
Pros |
Simplicity: This safe income stream doesn't require active management. |
Cons |
Inflation risk: Fixed payments lose purchasing power as the cost of living rises, unless a cost of living adjustment, or COLA, is included in the contract. |
Pros |
Mortality crediting: Higher payouts are driven by the pooling of longevity risk. |
Cons |
Credit risk: Payouts rely on the financial strength of the issuing insurer. |
| Pros | Cons |
|---|---|
Guaranteed income: A steady paycheck, which could be for life or a certain period of time. |
Loss of liquidity: You cannot easily access, if at all, the lump sum once the contract begins. |
Market stability: Payments are fixed and immune to stock market crashes, although they could fluctuate based on underlying market conditions in the case of a variable income annuity. |
Loss of growth: You miss out on higher potential returns from the stock market. |
Simplicity: This safe income stream doesn't require active management. |
Inflation risk: Fixed payments lose purchasing power as the cost of living rises, unless a cost of living adjustment, or COLA, is included in the contract. |
Mortality crediting: Higher payouts are driven by the pooling of longevity risk. |
Credit risk: Payouts rely on the financial strength of the issuing insurer. |
| Pros | Guaranteed income: A steady paycheck, which could be for life or a certain period of time. |
|---|---|
| Cons | Loss of liquidity: You cannot easily access, if at all, the lump sum once the contract begins. |
| Pros | Market stability: Payments are fixed and immune to stock market crashes, although they could fluctuate based on underlying market conditions in the case of a variable income annuity. |
| Cons | Loss of growth: You miss out on higher potential returns from the stock market. |
| Pros | Simplicity: This safe income stream doesn't require active management. |
| Cons | Inflation risk: Fixed payments lose purchasing power as the cost of living rises, unless a cost of living adjustment, or COLA, is included in the contract. |
| Pros | Mortality crediting: Higher payouts are driven by the pooling of longevity risk. |
| Cons | Credit risk: Payouts rely on the financial strength of the issuing insurer. |
Many people don't understand annuities, or assume they only make sense for seniors or extremely conservative investors. There also are many common misunderstandings about how annuities work. Here are some of the frequent questions that come up when talking about immediate annuities.
In most cases, no, it's not better to wait. Immediate annuities are based on your age and long-term interest rates, so if you wait, you'll just miss out on the guaranteed monthly income you could have been receiving. You might have to wait a while for future interest rates to increase enough to make up for that lost income. Plus, timing the market is almost impossible. No one can predict when or even if rates will increase enough to justify waiting.
When you purchase an immediate annuity, your principal lump sum is locked in with the insurance company. But in exchange, you receive a stream of income for either a set period or the rest of your life. And while you are giving up liquidity with an immediate annuity, the same can be true for investments such as mutual funds or exchange traded funds. For example, with certificates of deposit, or CDs, you may be able to withdraw the principal amount at any time but you may have to pay early withdrawal penalties. And if you're relying on the interest from your CDs for your retirement income, withdrawing from the principal would reduce your cash flow. So even though you technically can access the money, it could hurt your retirement income.
An immediate annuity isn't the same as investing. It's not meant to help you build wealth; It's meant to provide regular payments during retirement. Don't think of it in terms of maximizing your return. Think of an immediate annuity as making sure you don't outlive your income. So while investments like stocks or real estate might offer higher returns, they aren't guaranteed.
An immediate annuity is just one of the tools you may want in your retirement income tool box. You can use the payments from your immediate annuity to cover your essential living expenses so you can invest the rest of your portfolio for other goals or long-term growth. That can help you avoid worrying about day-to-day expenses or the ups and downs of the financial market.
Deciding whether an immediate annuity is right for you involves carefully assessing your financial situation, retirement goals, and capacity and tolerance for risk. Consulting with a financial professional can provide personalized guidance, helping you make an informed decision that aligns with your long-term financial planning strategy. This choice can significantly impact your retirement income plan, making it crucial to consider all angles before committing.
Answer: The main difference between an immediate and a deferred annuity is the timing of the payouts. Immediate annuities usually start payouts within a year of purchase, and often much sooner. Deferred annuities grow over time, with payouts starting at a later date. Immediate annuities offer immediate income, while deferred annuities allow for accumulation.
Answer: You typically cannot withdraw money from your immediate annuity because the premium is irrevocably converted into a guaranteed income stream. Most immediate annuities do not have a cash value. In limited cases where an insurer allows lump-sum access or commutation, it may reduce future income and could result in fees, penalties, or tax implications.
Answer: Some immediate annuities have a return of premium option. That means that if you die before you get back your initial premium, the remaining balance will go to your beneficiaries.
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