Immediate Annuity
What is it?
An immediate annuity is also called a Single Premium Immediate Annuity (SPIA). This type of annuity is a type of insurance contract that is purchased with a lump-sum of money which offers you guaranteed income for the rest of your life or for a set amount of time. Typically income can start as soon as 1 month or 1 year depending on the contract.
How Do SPIAs Work?
SPIAs are an annuity contract that is purchased with an upfront lump-sum of cash. In exchange, an insurance company will guarantee you a regular income (much like a pension or Social Security) for your lifetime or for a set number of years. Typically within one month of you deposit, the SPIA starts paying you a regular income.
How do you finance a SPIA? Most SPIAs are purchased with a 401(K) or IRA rollover. This can be done after age 59.5 or if you are changing employers and need to move your 401(K) from your previous employer.
If you are wondering why anyone would ever chose to purchase a SPIA, there are a few good reasons. The insurance company that accepts your contract will pay back your deposit plus interest, so over the course of the contract, you will receive more money than you initially deposited. Secondly, most SPIAs have contract bonus, typically a percentage of the initial deposit or a flat amount.
Benefits of a SPIA
SPIAs can be an ideal retirement vehicle for people who need income right away
- SPIAs are simple compared to other annuities. The insurance company tells you how much they'll pay based on your deposit
- Generates guaranteed income for life (or set amount of time) that won't run out
- SPIAs with a fixed interest rate are not based on market flucuations so you can rest easily knowing your retirement income won't disappear with a bad market
- Lower fees compared to other annuities
- You can purchase an inflation rider that increases your payments as you age to keep up with the cost of living
- You can purchase a spousal rider that guarantees payments to your spouse for a set number of years
Drawbacks of a SPIA
There are trade-offs with all retirement accounts, SPIAs are no different
- Annuities in general have poor liquidity, once you sign up the decision can be permanent
- Most SPIAs do not have any inflation protection unless purchased ahead of time
- SPIAs require a large up front deposit such as a 401(k) rollover
- Can reduce inheritance for your families depending on the contract. If the contract is designed for your life only, once you pass away, the payments stop
Have a question? We're here to help.
Contact a financial professional to assist with any unanswered questions.