After age 65, immediate annuities are attractive income vehicles. As you reach 70, 75, etc., your life expectancy gets shorter so you will get more cash flow if you buy an annuity at an older age.
What’s more, a large portion of the cash you get from an annuity will be tax-free, as a return of your investment. That will continue until you reach your official life expectancy, at the time of purchase. Going forward, subsequent payments will be fully taxable.
The catch? Interest rates are relatively low now so your payout may be modest. Therefore, it might make sense to spread your investment over several years.
Suppose, for example, you want to invest $100,000 in immediate annuities. You might invest $25,000 in 2008, another $25,000 in 2009, etc. Buying when you’re older will help increase the cash flow from the second, third, and fourth annuities. Moreover, interest rates might be higher in the future, which would raise your annuity payouts even further.
