If you’re looking for an ongoing source of income that you can’t outlive, a Single Premium Immediate Annuity (SPIA) could be an option.
An SPIA allows you to use a lump sum of your assets to create what some people call a “retirement paycheck” that provides steady income. The SPIA provides this income for the rest of your life. If it is set up as a joint life option, it can also provide income for the rest of your spouse’s life. It’s particularly useful for covering essential living expenses.
How does a Single Premium Immediate Annuity work?
With an SPIA, you pay a single premium, which can range from tens of thousands to several hundred thousand dollars. The insurer promises fixed periodic payments, usually monthly. These are based on the premium amount, the age and sex of the person buying the annuity, prevailing interest rates, and the selected payout option. Payments can start anywhere from 30 days to a year from purchase. This is the major difference between an “immediate” annuity and a “deferred” one, where income starts years later.
There are significant considerations: once the annuity contract is signed and the premium is paid, the decision is largely irreversible. Most SPIAs cannot be cashed out or surrendered for a lump sum. This must be taken into account before buying an SPIA.
What are the payout options?
An SPIA can be structured to pay out in several ways:
- Life only. Payments continue for the annuitant’s lifetime and stop at death. This provides the highest monthly payout, but no value for heirs.
- Life with period certain. Payments continue for life, but if the annuitant dies within a specified period, such as 10 or 20 years, a beneficiary will receive payments for the remainder of the period.
- Joint and survivor. Payments continue as long as either of two people (often spouses) is alive. The monthly amount is usually less than a single-life payout.
- Period certain only. In this case, payments continue for a fixed number of years regardless of survival, then stop entirely.
This is a critical decision, because you are considering a balance between maximizing monthly income and protecting against the risk of dying early (in which case you wouldn’t recoup the premium.
Why do people buy Single Premium Immediate Annuities?
The primary appeal of a Single Premium Immediate Annuities is longevity protection, insuring against the risk of outliving one’s savings. Because insurers pool mortality risk across many annuitants, they can offer income that is often higher than what a retiree could safely generate by drawing down a similar amount from a personal investment portfolio, particularly for older buyers.
SPIAs also offer predictability. Unlike withdrawals from a market-based portfolio, SPIA payments are fixed and unaffected by market downturns, which can provide peace of mind for retirees who want to cover essential expenses like housing and healthcare with guaranteed income.
How does a Single Premium Immediate Annuity handle taxes?
For SPIAs purchased with after-tax (non-qualified) money, each payment consists of a return of principal and taxable interest, calculated via an “exclusion ratio.” SPIAs bought inside an IRA or other qualified account are fully taxable as ordinary income, since the funds were never taxed.
Is a Single Premium Immediate Annuity right for my portfolio?
Single Premium Immediate Annuities tend to be useful for retirees who want to guarantee coverage of fixed essential expenses. They can also be good for people who are concerned about outliving their assets, or who want to simplify retirement income management. They’re generally less suited to those who need liquidity, expect a shorter-than-average lifespan, or want to leave a larger inheritance.
Once purchased, the premium is no longer liquid, so it’s not available for emergency funds. Fixed payments can also lose purchasing power due to inflation. You can guard against this with a cost-of-living adjustment rider, but that can reduce the initial payout. SPIA payouts can also be heavily influenced by interest rates at the time of purchase.
And if you were to die shortly after purchasing an SPIA with a life-only option, the insurer keeps the remaining premium.
Miser Wealth Partners can help you weigh all annuity options, and see if a Single Premium Immediate Annuity or other vehicle can be a valuable part of your retirement planning.
