The good news is many Americans are living longer then they used to. The bad news is that also means they are often outliving their retirement income. An immediate annuity is a way to rectify that situation and provide regular steady income as long as a retiree lives.

Unlike other annuities that have been designed to build savings over time towards retirement, an immediate annuity also known as a single premium immediate annuity, or SPIA, are intended to be purchased during retirement, to ensure that your income stream lasts. In an immediate annuity, unlike regular contributions made over time, a lump sum is given to the financial institution, and regular monthly payments are earned back, for as long as the person lives.

As far as taxes go, the tax rates on immediate annuities are favorable, because a good portion of what you receive in your monthly payments is principle, which is not taxable, only the interest earned. In financial circles this is what is known as a favorable exclusion ratio.

The favorable tax rates, and steady income for life are not the only advantages of SPIAs. These annuities have been used by seniors to protect assets. When you take say $100,000.00 and put it in an immediate annuity, it has the effect of removing that amount of money from your estate. By protecting or sheltering your assets in this way, you may qualify for Medicaid if you are facing long-term care. Most SPIA are also protected from collection or garnishment from creditors, but check with the laws of your particular state regarding that aspect.

There are some drawbacks however. As with any kind of fixed annuity, a SPIA is designed to provide steady if modest income. Other types of investments can yield far more for the same amount invested, but of course are riskier. Also, since the payments are fixed, monthly payouts do not keep up with inflation, and will eventually lose value. Remember too, you are trading off liquidity, for steady income. Once you invest your lump sum in the annuity, you will no longer have access to those funds, except for the scheduled monthly payments.

Unlike other annuity products where the goal is to start saving and investing early, the SPIA may be the only annuity that it is best to take a "wait and see approach". An immediate annuity can be purchased any time during your retirement, and since the monthly payout is based on life expectancy, the longer you wait – the higher your monthly payment will be.