Single Premium Immediate Annuities (SPIAs) can be an incredibly powerful retirement tool for investors. An SPIA is effectively a contract with an insurance firm whereby you pay a lump sum premium in exchange for periodic (monthly, quarterly, etc.) payouts that are guaranteed over the course of your lifetime. For some SPIAs, the amount you receive periodically (monthly, quarterly, semi-annually or annually) is fixed. This makes the contract a single premium immediate fixed annuity. For others, the payout is associated with the performance of a certain mutual fund, making the contract a single premium immediate variable annuity.
Variable SPIAs tend to be quite complex and are often expensive. On the other hand, fixed SPIAs are simple and straightforward. They are the most popular option for investors, and an increasing number of insurance companies are now availing these products. Fixed SPIAs make retirement planning much easier and allow for higher withdrawal rates.
Retirement planning with SPIAs
Single premium immediate annuities make retirement planning predictable (just like pensions do!). You know that if you need a certain amount of income dollars each year during retirement, then you can simply go to an insurance company’s website and do some quick calculations via the online calculator. This way, you can figure out how much payouts you receive on depositing a specific amount of premium. Sounds pretty easy, right? That’s exactly why SPIAs are such a popular retirement planning too. They take the guesswork out of retirement planning.
Funding an immediate annuity
There are various ways in which you can fund your immediate annuity:
- Cash from a maturing CD (Certificate of Deposit)
- The money you make from selling bonds, stocks, a home or business
- Lump sum distributions from tax-qualified 401k or IRA accounts
- Exchanging the value of an MYGA (Multi-Year Guaranteed Annuity) product
What are the advantages of SPIAs
The most important benefits of an immediate annuity include:
- Simplicity – an SPIA is pretty much a ‘get it and forget it’ scenario. Immediately you buy your annuity, the only work remaining to be done is to collect your regular income payouts. There’s no need to observe market rates or keep track of dividends and interest rates.
- Security – immediate annuities do provide a reliable lifetime income that cannot be outlived. There’s also an option to receive income for a specified period of time (e.g. 10 years). For annuitants who are looking to plan for their retirement future without putting their premium on the line, this is a straightforward solution.
- Higher Returns – interest rates applicable to immediate annuities are typically higher compared to treasury rates and CDs.
- Preferred Tax Treatment – for investors who’re also looking to defer taxes till later in their retirement, immediate annuities are a good way forward.
- Safety of Principal – your funds in an immediate annuity are guaranteed by the financial strength of the insurance company you buy from, not the fluctuations of the financial markets.
- No Administrative or Sales Charges – immediate annuities lack the annual management and maintenance fees common with most other annuities (and especially variable annuities). 100% of the premium you deposit will go towards your monthly (or quarterly) income payouts.
Can I customize my immediate annuity product?
You might have heard terms such as ‘Single Life’, ‘Period Certain’, ‘Joint Life’ and others being thrown around when it comes to SPIAs. When you buy your immediate annuity, you’ll be asked to choose whether you want to receive income for life, or for a certain duration of time (maybe 10 or 15 years). You might also include your spouse in the contract so that income is disbursed as long as either you or your spouse is alive.
One of the main factors affecting the price of immediate annuities is age and life expectancy. You might want to talk to your insurance handler or annuity product specialist about your preferences when purchasing an SPIA.
I want to something for my family
Most people want to leave a little something for their family or other dependents when they die. For this reason, single premium immediate annuities are a deal breaker. Well, it’s all about tradeoffs. If you decide not to buy an SPIA so that you can leave most of your portfolio intact for your loved ones, there’s a real chance that you could end up spending all this money. If you are not wealthy enough to be sure that you can bankroll your retirement without any financial problems, it’s advisable that you consider dedicating a section of your portfolio to an annuity.
Immediate annuities: are they safe or not?
The first thing you want to check when buying an immediate annuity product is the financial strength of the insurance company. Basically, you’re more assured buying from well-established insurance services provider. But there’s really little risk (if any at all) for your money. Even if the insurer you buy from goes bankrupt, all states have a guarantee association. This is a body that’s funded by the insurance companies themselves, and that comes in in the case a specific insurer becomes insolvent. The state association guarantees coverage up to a specific limit (which varies from one state to another).
As a rule of the thumb though, we recommend buying single premium immediate annuities from companies of sound financial strength.