Liz Weston: Why retirees may want to buy an immediate annuity now

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When you purchase an immediate annuity, you’re paying a lump sum now in exchange for a stream of payments over a fixed period or for your lifetime

An immediate annuity is an insurance product that provides guaranteed income: You give an insurer a chunk of money, and the company gives you a stream of payments that can last for life. The payments begin within 12 months of purchase.

Now may be a good time for retirees to buy an immediate annuity, since payouts are the highest they’ve been in a decade, says Rob Williams, managing director of wealth management at Charles Schwab.

But buying an immediate annuity — also known as an income annuity or a fixed immediate annuity — is effectively irreversible, so you’ll want to choose carefully.

WHY YOU MIGHT WANT TO CONSIDER AN IMMEDIATE ANNUITY

One of the big risks in retirement is outliving your savings. Having enough guaranteed income to cover basic expenses can give you assurance that you’ll keep a roof over your head and food in the fridge, no matter what.

A major source of guaranteed income is Social Security, and some people still have traditional pensions. If you don’t have enough guaranteed income to cover essential living costs, though, an immediate annuity could fill in the gap, says Wade Pfau, author of “Retirement Planning Guidebook.”

But immediate annuities shouldn’t be an “all or nothing” solution, Pfau says. Ideally, you also would have money invested in stocks for growth, as well as cash reserves for emergencies.

Immediate annuities can help you ride out down markets, Williams notes. The steady stream of income could help you avoid selling investments to meet living expenses, he says.

HOW MUCH YOU CAN GET FROM AN IMMEDIATE ANNUITY

There are many types of annuities,