A single premium immediate lifetime annuity (SPIA) is a contract with a life insurance company where you deposit a lump-sum payment, and receive a set distribution every month for the rest of your life. Single premium immediate fixed annuities provide a specified payout each period.
Single premium immediate fixed annuities (SPIAs) are helpful for the following reasons:
- Makes retirement planning easier
- Allows for a higher withdrawal rate
- Provides extra income you cannot outlive
It is possible to purchase a fixed SPIA with a payout that adapts to inflation. Inflation-adjusted fixed annuities have higher premiums at the beginning of the policy.
SPIAs for Retirement Planning
Fixed single premium income annuities (SPIAs) make retirement planning easier in the same predictable manner as traditional pensions. It’s a good idea to utilize an online single premium immediate annuity calculator that adjusts for inflation. This will allow you to see how much you can purchase an annuity for, and how much you will pay per year (adjusted for inflation) for your life.
Withdrawal Rates and SPIAs
Fixed SPIAs give you the ability to retire with fewer funds than you would with a traditional stock/bond portfolio. For instance a 65-year old male can purchase an inflation-indexed annuity paying approximately 5.3% interest annually. Now, if that same 65-year old investor took a withdrawal rate of 5.3% from his stock/bond account(s), there’s a good chance that he’ll run out of funds during his lifetime. This risk is eliminated with an annuity.
What about Your Heirs?
It’s completely natural to want to leave behind some wealth for your children or loved ones. However, for many individuals knowing that the funds used to purchase an annuity may not be distributed to their heirs is disheartening. There is a solution! You may purchase a SPIA with “lifetime income with period certain”. This ensures you will receive income for life, or a specific period of time.
The important lesson to learn here is that, depending on how your expenses compare to the amount in your stock/bond accounts, deciding not to contribute part of your portfolio to your annuity could be detrimental. You run the risk of becoming a financial burden on your children versus leaving them a sizable inheritance.
The Bottom Line
Single premium immediate fixed annuities are great because they allow a higher level of spending than is provided for by a typical portfolio or other investment options. However, it’s advisable to opt for the “period certain” option to ensure your heirs will continue to receive your payments. Prior to purchasing an annuity, verify the financial strength of the provider and be sure you understand the rules and limits of coverage as designated by your state’s guarantee association. The insurance professionals at MedicareTalk can show you how a Single Premium Income Annuity can supplement your retirement income. Let us provide you a no obligation proposal.