Immediate vs. Deferred Annuities: Which Is a Better Fit for You?
When you’re planning for retirement, timing matters. One tool to consider is an annuity, but it is important to understand the different types and their features.
Two types of annuities are immediate and deferred. You can understand the difference between them by thinking of them as turning on a faucet:
- An immediate annuity starts the flow of income right away.
- A deferred annuity stores the water in the sink until you’re ready.
Choosing the right option for you can help you feel confident about your retirement income and long-term financial security.
Immediate Annuities
An immediate annuity gives you income almost right away. You pay a lump sum, and your payments usually start within 30 days.
The pros of an immediate annuity include:
- Guaranteed, predictable income
- Simple to understand
The cons of an immediate annuity include:
- Limited growth potential
- Requires a large upfront payment
When an immediate annuity makes sense:
- You’re retired and need income now.
- You want to bridge the gap until Social Security starts.
Deferred Annuities
A deferred annuity allows you to invest money now and receive income later.
Deferred annuities have two phases:
- Accumulation phase: You contribute funds (either as a lump sum or through periodic payments), and the money grows tax deferred.
- Distribution phase: At a future date, you start receiving regular payments, which can last for a set period of time or for life.
The pros of a deferred annuity include:
- Tax-deferred growth
- Guaranteed income
- Flexible payout options
The cons of a deferred annuity include:
- More complex
- Withdrawals that can be taxable
When a deferred annuity makes sense:
- You’re in the middle of your career and can allocate more funds for retirement.
- You’re in pre-retirement, when you’re focused on securing guaranteed income for retirement.
- You’re in early retirement, when you may not need income immediately but want to start planning for later years.
Immediate vs. Deferred — What’s the Difference?
Now that you have a better understanding of immediate and deferred annuities, here’s how they compare:
Timing:
- Immediate starts now.
- Deferred starts later.
Growth:
- Immediate provides payments right away, limiting growth potential.
- Deferred has a long accumulation period, allowing for compounding.
Contribution flexibility:
- Immediate is one lump sum.
- Deferred allows ongoing contributions.
Liquidity:
- Immediate locks in your money.
- Deferred may offer limited withdrawals.
Complexity:
- Immediate tends to be simpler.
- Deferred options can be more complicated.
Taxes are another consideration when you compare immediate and deferred annuities.
- Annuity earnings are usually taxed as ordinary income.
- Each payment may be tax free.
- With deferred annuities, growth is tax deferred, but withdrawals are taxable.
Next Steps
When deciding which annuity works best for you, there are some basic questions to ask yourself:
- Do I need income now or later?
- How comfortable am I with market risk?
- Do I want flexibility in contributions?
If you need guaranteed income right away, an immediate annuity may be the right fit. If you want to grow your savings for future income, you might consider a deferred annuity.
To learn more about the retirement products WoodmenLife offers, visit:
When you’re ready to decide whether you want a running faucet or a filled sink, a local WoodmenLife Representative can help walk you through your options.
Written by: Gary Peterson, Senior Copywriter
This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Read More
Annuities 101: Your Guide to Retirement Income
Understanding Annuity Taxes and How They Affect You
Qualified vs. Non-qualified Annuities
Choosing Between Annuities and Life Insurance
Understanding Fixed and Variable Annuities
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