A single premium immediate annuity (SPIA) is an annuity in which you purchase up front with a sum of money, then the insurance company agrees to pay you a certain amount of money for the rest of your life starting immediately. Well, as immediate as 30 days after the papers are signed and squared away.
There are two types of single premium immediate annuities. The first type is the single premium fixed annuity whereby all payment amounts are of a fixed dollar amount. The second type is a single premium immediate variable annuity, one that is linked to the performance of a mutual fund, stock index, or a combination of both.
Both types of SPIAs work to solve the same basic problem: the need for consistent inflation-protected payouts that will provide for a stable standard of living during retirement.
Single premium fixed annuities are generally inflation adjusted so that the monthly payouts or distributions grow over time to negate cost of living increases. Not all fixed annuities account for cost of living increases, so be sure to ask your broker if you’ll be inflation protected.
Single premium immediate variable annuities solve the inflation problem by tying the annuity to the changes in the stock market. The stock market, of course, tends to beat the changes in inflation.
Why Consider a Single Premium Immediate Annuity?
Single premium immediate annuities offer several benefits over other investment portfolios. First, they pay out for the rest of your life, so you’ll never have to worry about running out of money. Also, since they do not decrease in value, you can draw capital faster from an annuity than you could a stock or bond portfolio. Finally, single premium immediate annuities require no planning, they’re easy to set up, and are widely available. There’s a lot to be said about a retirement plan that is as easy as it is profitable!
How do I start?
Your first step is to get in contact with a broker who can help you plan for your retirement. You will need to know how much annual income you’ll need to cover expenses, as well as the amount you can afford to invest in your chosen annuity.
Your broker can then tell you how much you’ll have to put down to receive your requested annual income. For example: If you invest X amount, you’ll receive Z amount each month until death. It couldn’t get any easier than that.
Things to Keep in Mind
Unlike other annuities, SPIA’s do not pay after your death. If you were to buy a $100,000 annuity, and then die a week later, you would’ve lost all of your money and no one would have claim to that cash but the insurance company. Next, you’ll need to decide whether you want a fixed or variable annuity. Variable annuities may give you more upside, but may also be less rewarding if the stock market goes sideways for the first few years of retirement. Fixed annuities give you safety and security, but you pay a premium for the risk the insurance company has to accept.