======Immediate Annuity======
An Immediate Annuity (also known as a 'Single-Premium Immediate Annuity' or 'SPIA') is a contract you make with an [[insurance company]] that converts a single [[lump sum]] of cash into a guaranteed stream of income. Think of it as creating your own personal pension. You hand over your capital, and in return, the insurer promises to send you a regular check, typically starting within a month or a year. These payments can last for a specific period or for the rest of your life. The person receiving the payments is called the [[annuitant]]. This is in direct contrast to a [[deferred annuity]], where your money grows for a period of years before you start taking payments. An immediate annuity is not an investment in the traditional sense; it's an insurance product designed to protect you from [[longevity risk]]—the danger of outliving your savings.
===== How an Immediate Annuity Works =====
The mechanics are straightforward. You decide how much money you want to commit, and the insurance company calculates the size of your regular payment. This calculation is a bit like a secret recipe, but the main ingredients are:
  * **The Size of Your Lump Sum:** More money in means more money out.
  * **Your Age and Gender:** Insurers use actuarial tables to estimate your [[life expectancy]]. A younger person will receive smaller payments than an older person for the same lump sum, as they are expected to collect for longer.
  * **Prevailing [[Interest Rate]]s:** The insurer invests your lump sum. Higher interest rates at the time of purchase generally mean higher payouts for you.
  * **The Payout Option You Choose:** The guarantees you want will directly affect your income amount. More guarantees mean smaller payments.
Once you sign the contract and hand over your money—your [[principal]]—the decision is almost always irreversible. That capital is gone, exchanged for the promise of future income.
===== Common Payout Options =====
You have several choices for how you'll receive your money, each with a significant trade-off between the payment amount and the level of security.
==== Life-Only (or 'Single Life') ====
This option provides the highest possible regular payment. The catch? The payments last only for //your// lifetime. If you purchase a life-only annuity and are hit by the proverbial bus a month later, the insurance company keeps the remainder of your principal. All payments cease.
==== Period Certain ====
This adds a safety net. A "Life with 10-Year Period Certain" annuity pays you for life. However, if you die within the first 10 years, your named beneficiary will continue to receive payments until that 10-year period is over. This guarantee results in a smaller monthly payment compared to a life-only option.
==== Joint and Survivor ====
This is a popular choice for couples. It provides income for as long as //either// you or your spouse (or other designated person) is alive. When the first person dies, the survivor typically continues to receive payments, often at a reduced rate (e.g., 50% or 75% of the original amount). Naturally, because the insurer is on the hook for two lifetimes, this option provides the lowest initial payment.
===== The Value Investor's Perspective =====
A value investor approaches annuities with extreme caution. We prize flexibility, control over our capital, and buying assets for less than their intrinsic value. The immediate annuity structure challenges all three of these principles.
=== The Potential Upsides ===
  * **Behavioral Defense:** For retirees who fear managing their own money or are prone to panic-selling during market downturns, an annuity provides a bedrock of stable income. It can be a powerful tool for peace of mind, covering essential living expenses (rent, food, utilities) no matter what the stock market does.
  * **Simplicity:** It automates an income stream, shielding you from the complexities of withdrawal strategies in retirement.
=== The Glaring Downsides ===
  * **Loss of Capital:** This is the biggest red flag. You are giving away a large chunk of your wealth. That money can no longer be used for emergencies, given to heirs (except in limited payout options), or deployed into a wonderful business you find selling at a ridiculously cheap price. The [[opportunity cost]] can be immense.
  * **[[Inflation]] Risk:** Most basic annuities are [[fixed annuity|fixed annuities]], meaning the payment is the same year after year. A €2,000 monthly payment might feel great today, but after 20 years of even modest inflation, its purchasing power will be severely eroded. While inflation-protected annuities exist, they start with significantly lower initial payments.
  * **Poor Returns:** An annuity is a product that is //sold//, not //bought//. It contains fees and profit margins for the insurer. The implicit rate of return on your capital is often very low, especially in a low-interest-rate environment. A patient investor in high-quality, dividend-paying stocks could likely generate a superior (and growing) income stream over the long term while retaining full control of their capital.
  * **[[Counterparty Risk]]:** You are swapping your cash for a promise from an insurance company. While generally safe, you are betting that this specific company will remain solvent for potentially decades to come.
===== The Bottom Line =====
An immediate annuity is an //insurance product//, not a wealth-building investment. Its sole purpose is to transfer the risk of outliving your money to an insurance company, for a price.
For a value-oriented investor, it rarely makes sense to annuitize a large portion of one's nest egg. However, using a //small// portion to buy an immediate annuity to cover basic, non-discretionary living expenses could be a reasonable defensive move in retirement. This can create a psychological "floor," freeing you to invest the rest of your capital for long-term growth with more confidence. Before buying, always remember you are trading a large sum of flexible capital for a smaller, rigid stream of income.