What is a Single Premium Immediate Annuity (SPIA)?

Single Premium Immediate Annuity Defined

A Single Premium Immediate Annuity (SPIA) is a type of annuity that can provide a steady income stream, typically for retirees.¹ It operates in the following way: you pay a lump sum to an insurance company, and in return, it starts making regular payments to you almost immediately. Depending on your annuity terms, these payouts can last for a specific number of years or the rest of your life.

Several reasons why someone might consider a SPIA include:

1. Guaranteed Income: Once you buy a SPIA, you are assured of a regular income. This can be very comforting, especially for a retired person who wants to help ensure a steady cash flow.
2. Simplicity: A SPIA is simple: pay a single premium and receive regular payouts without worrying about managing amounts or market fluctuations.
3. Customization: You customize the annuity by choosing a payout period for a set number of years or your lifetime, with some SPIAs continuing payouts to a spouse after your death.

A single premium immediate annuity can provide a stable retirement income with simplicity and certainty. However, before acting, evaluating your financial situation and needs is essential. Consulting a financial planner can help determine if a SPIA suits you.

How Single Premium Immediate Annuities Work

A single premium immediate annuity (SPIA) is one of the most straightforward annuities worth considering for helping secure your future financial income. Let’s break down how SPIAs work so you can understand if they’re the right fit for you.

1. Initial Payment: You start by making a single, one-time payment to an insurance company. This is your premium.
2. Immediate Income: Unlike other types of annuities that might defer payments for years, SPIAs begin paying out within a year, often within a month. This is why they’re called “immediate.”
3. Regular Payouts: The insurance company provides regular payouts after your initial payment, depending on your chosen terms. The amount is based on age, initial amount, and selected payout option.

SPIAs offer various payout options to address different needs, including

• Lifetime Income: This option pays you as long as you live. It’s a great choice if you’re worried about outliving your savings.
• Period Certain: This guarantees payouts for a specific period, such as 10 or 20 years. If you pass away during this period, your beneficiaries will continue to receive the payouts.
• Joint and Survivor: This option ensures that payouts continue to your spouse or another beneficiary after you pass away.

A single premium immediate annuity can be valuable for creating a stable income stream during retirement. By understanding how they work and considering your situation, you can determine if a SPIA aligns with your financial goals.

Video Transcript

What is a SPIA?

What's a single premium immediate annuity or SPIA?

The name may seem long and complicated, but the concept is simple.

In short, a SPIA has just two steps: 

• Step one: you make a one-time upfront payment.
• Step two: you get regular retirement payouts in immediately.

Best of all, those payouts can last a lifetime.

If you live to 100. it pays to 100: if you live longer, it pays longer.

So, you never stop receiving income no matter what happens with rates or markets.

How a SPIA Works

In some ways, a SPIA works like a pension plan, plus it's customizable with dozens of different payout possibilities.

And SPIAs typically have no added fees due to their simplicity.

History of SPIA

For a final fact, SPIAs are actually the oldest form of income insurance.

They date to Roman times when soldiers received lifetime payouts for their service.

Of course, these days, you don't have to march into battle for lifetime income.

You can get it from an annuity provider.

See if SPIA suits your retirement needs.

Contact us to learn more.

© Western & Southern Financial Group. All rights reserved.

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Pros of Single Premium Immediate Annuities

Steady and Predictable Income

A key attraction of a SPIA is its predictable income. You know exactly how much and how often you'll receive payouts upon purchase. This steady income is especially reassuring in retirement, helping cover living expenses without concerns about market fluctuations and investment performance.

Simplified Financial Planning

With a SPIA, you don't need to monitor your payouts or decide whether to buy or sell assets. The insurance company handles the risk and management, freeing you from such tasks. This simplicity helps you manage your finances and better enjoy your retirement.

Protection Against Longevity Risk

Longevity risk is the danger of outliving your savings. A SPIA can guarantee lifetime income, ensuring regular payouts for as long as you live. This helps provides security and peace of mind, ensuring you won't run out of money in your later years.²

Tax Benefits

SPIAs can provide tax benefits. Annuity income is usually treated as part principal (not taxed) and part interest (taxed), spreading the tax liability over what may be many years and potentially helping keep you in a lower tax bracket.

Customizable Options

SPIAs are customizable to your needs and goals. You can choose fixed payouts for a specific period, such as 10 or 20 years, or for as long as your lifetime. Some SPIAs also offer some inflation protection by adjusting payments for rising living costs.

Cons of Single Premium Immediate Annuities

Limited Access to Funds

One main disadvantage of single premium immediate annuities is limited access to your funds. When purchasing a SPIA, you exchange a lump sum for regular payouts, making the money inaccessible. You can't withdraw from your annuity if you need a large sum for an emergency.

Inflation Risk

SPIAs provide a fixed payout that is not tied to inflation, losing purchasing power over time. Some SPIAs offer inflation-adjusted payments, which usually cost extra, lowering initial monthly payouts.

Irrevocability

Another significant drawback is the irrevocable nature of SPIAs. Once you purchase a SPIA, you generally cannot change the terms or reverse your decision. This lack of flexibility can be a downside if your financial situation or needs change.

Potential for Lower Returns

SPIAs typically offer lower returns than stocks or mutual funds. The guaranteed payments are generally conservative, reflecting the lower risk. If you're seeking higher growth potential, you might find SPIAs less appealing.

Impact on Heirs

Finally, SPIAs can impact your inheritance. Once payouts begin, the insurance company discontinues them at your death unless you've chosen a rider or payout option for beneficiaries. This means your heirs may receive little or nothing from the initial payment.

Risks & Considerations

While SPIAs offer financial stability, it's essential to understand the risks and considerations before committing your money.

1. Illiquidity: One major downside of SPIAs is that your money is locked in, making it inaccessible in an emergency. This lack of liquidity can be problematic if unexpected expenses arise.
2. Inflation Risk: SPIAs offer fixed payouts, which don't adjust for inflation. As the cost of living rises, the purchasing power of the payouts will decrease, possibly posing a significant issue depending on how much you rely on them for living expenses.
3. Interest Rate Risk: The payout from a SPIA depends in part on the interest environment at the time of purchase. Low interest rates mean lower payments. If rates rise later, you could miss out on higher payouts.
4. Longevity Risk: SPIAs can help provide lifelong income, but predicting lifespan is tricky. If you die earlier than expected, you may not get back the total value of your payment. If you live longer, the insurance company bears the risk, which benefits you.
5. Opportunity Cost: Payment of a lump sum in a SPIA means forgoing potentially higher returns from other types of investments, such as stocks, bonds, and real estate, which carry greater risks. Balancing higher return potential with guaranteed income security is essential.
6. Tax Implications: Annuity payments are usually taxable, affecting your net income. Consult a tax advisor to understand your specific situation.

While SPIAs can provide a stable and predictable income, they aren't for everyone. Carefully consider your financial needs, potential risks, and other income options. Speaking with a financial advisor can help you determine how well a SPIA aligns with your overall retirement strategy.

Alternatives to Single Premium Immediate Annuities

SPIAs vs. Traditional Savings Accounts

SPIAs provide regular, predictable income, making them especially useful during retirement and often offer higher returns compared to traditional savings accounts, particularly in a low-interest-rate environment. However, they offer less liquidity since you typically can't access the lump sum after payment.

SPIAs vs. Bonds

SPIAs offer lifetime income, unlike bonds with a maturity date, ensuring you don't outlive your money. They also have no market risk, keeping your payments stable regardless of economic conditions. However, SPIAs lack flexibility since bonds can be sold or traded, and they do not provide capital appreciation like bonds, which can increase in value over time.

SPIAs vs. Stocks

Unlike stocks, which can be volatile and are by definition unpredictable, SPIAs provide consistent income. With SPIAs, there's no need to actively manage your payouts, where constant market monitoring is required. Although stocks generally offer higher potential returns over the long term compared to the fixed income of SPIAs, they also come with a higher risk. Additionally, unlike stocks, SPIAs do not offer the opportunity for your funds to grow in value.

SPIAs vs. Mutual Funds

SPIAs offer predictable income with fixed payouts, unlike mutual funds, whose fluctuating values can affect your income. SPIAs are straightforward and do not require portfolio management, providing simplicity compared to the greater management needed for mutual funds. However, mutual funds have the potential for growth and higher returns, which SPIAs lack. Additionally, mutual funds offer greater liquidity since they can be sold for cash, whereas SPIAs are locked in.

The best choice depends on your financial goals, risk tolerance, and income needs. SPIAs are ideal for stable, guaranteed income, especially in retirement. Consider stocks or mutual funds for growth potential and market risk comfort. Understanding these differences helps you make informed financial decisions.

Conclusion

Single Premium Immediate Annuities offer a reliable way to ensure a steady income stream throughout retirement. You can make an informed decision by understanding how they work and evaluating whether they suit your financial goals. Consult a financial advisor today to see if a Single Premium Immediate Annuity suits you.

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Sources

1. Single Premium Immediate Annuity (SPIA). https://www.annuity.org/annuities/immediate/.
2. Reduce Your Retirement Risk With a Fixed Annuity. https://www.killerstartups.com/reduce-your-retirement-risk-with-a-fixed-annuity/.