Is a SPIA Annuity a Good Retirement Investment?

Close up of a mature couple doing online shopping in the morning.
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If you are approaching retirement, you will be aware that you can begin receiving Social Security benefits at age 62.

However, if you choose to start receiving Social Security at age 62, your starting benefits will be 25% to 30% less than if you wait until your normal or full retirement age (66 or 67, depending on when you were born). If you wait even longer than that, your benefits will increase each year until you are 70.

That’s why delaying the start of your Social Security to maximize your benefits makes sense, even if you intend to retire early. But how will you enjoy your retirement lifestyle during the years between retiring and starting your Social Security benefits? And is there a complementary income source that can be paired with SSA payments? One option is to look at a Single Premium Income Annuity (SPIA). 

Many individuals save for retirement by contributing to employer-sponsored pension plans, typically a 401(k). Individuals can also save independently for retirement, usually through IRAs. However, in retirement, these accounts must be managed for income. Both annuities and Social Security are one in the same from a structure standpoint: they both provide a lifetime retirement income stream that you can never outlive.

Are You Retirement Ready?

The most basic annuity, SPIA, pays a lifetime income in exchange for an initial lump-sum premium. It is a contract with an insurance company which pays you a set amount every month for the rest of your life. The income for any given premium depends mainly on the market interest rates at the time of purchase and the purchaser’s age and sex (women receive lower monthly payouts because of their longer life expectancy).

For a general example, with a market interest rate of 3.9 percent and a $100,000 premium, a 65-year-old man would receive about $545 per month from an SPIA, while a woman would receive around $511 per month.

SPIAs ensure you’ll never run out of money — annuities insure retirees against the risks of outliving their retirement savings (longevity risk) or losing savings due to low or negative investment returns (investment risk) — and, hence, can be a useful part of retirement planning for many people, especially when used with Social Security payments to create a guaranteed income floor.

There are plenty of bells and whistles that can be added to a SPIA, but every additional feature will cost you a little more. Some annuity buyers would prefer to buy an inflation-indexed annuity, which adjusts each year for inflation (like Social Security), but there are fewer and fewer companies selling them each year. Part of the SPIA payments is considered by the IRS to be a return of your principal, and thus is tax-free (unless it is inside an IRA, and then it is all taxable income). Additionally, SPIAs have a relatively low commission rate paid to the agent.

Are You Retirement Ready?

SPIAs are not for everyone. A prepaid premium for a monthly income for life is something most anyone would covet, but you still need to have that substantial lump sum premium at your disposal. Many retirees cannot afford a large investment, especially if regular funds are needed for things like regular pricey health care and hefty debt payments (and emergencies).

The big issue with SPIAs is that they don’t adjust for inflation. If the last year has taught us anything, it’s that a person’s spending power can fluctuate wildly and decrease rapidly. A fixed income stream is nice but not knowing what it gets you in the future is a drawback that can’t be overlooked. It might not be smart to put all your money into a SPIA, but if you can afford it, they may provide an interesting and safe piece in your retirement puzzle.

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