An immediate annuity is a contract that provides you (or, perhaps you and your spouse) with a stream of income that begins right away. Generally, these payments are fixed.

At age 70, you might be able to buy an annuity for $100,000 and receive over $700 per month, around $8,500 per year. These monthly payments will continue as long as you are alive. Thus, you will have less concern about running short of money as you grow older.

What’s more, you’re locking in this cash flow for your lifetime. There’s no risk of lower income or a loss of principal due to interest rate fluctuations.

If you’re interested in an immediate annuity, buy from an insurer that’s well-rated by a firm such as A.M. Best or Standard & Poor’s. You want to be confident that the annuity issuer is in good financial condition so you can count on receiving checks for decades to come. Among well-rated annuity issuers, shop around. There may be sizable differences in payouts from one insurer to another.

When you buy an immediate annuity, part of the cash flow you receive will be tax-free, for many years. For example, at age 70, the IRS puts your life expectancy at 17 years. Thus, you are treated as if you’ll be getting a return of your investment over 17 years.

Say you buy an immediate annuity for $100,000, at age 70. Your return of principal would equal $5,882 per year, for 17 years. If you are receiving $8,500 a year from your annuity, only $2,618 ($8,500 minus $5,882) will be taxable.

Assuming an effective 30 percent tax rate, your annuity cash flow would be subject to $785 in tax each year (30 percent of $2,618). After paying this tax, you’d net $7,715 ($8,500 in cash flow minus $785 in tax). This is a return of more than 7.7 percent per year, after-tax, on your $100,000 outlay.

In this example, after 17 years you will have received all of your principal back, as far as the IRS is concerned. If you’re still alive, subsequent to age 87, all future annuity payments will be fully taxable. Using the same assumptions as above, you’d net $5,950 per year, after-tax, or 5.95 percent.