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Are you worried about losing the security of a steady paycheck in retirement? That is an unfortunate concern for many working people today. However, there are options available that could help alleviate fears surrounding loss of income in retirement.
A single premium immediate annuity (SPIA) could help ease your worry over some of the most daunting financial problems you could face in your golden years. While you can't eliminate all of life's uncertainties, you can take advantage of products designed to lessen the impact of those disruptions.
Here are five questions that could help you take a closer look at SPIAs to determine if one could be the right choice for your needs.
1. What Is a SPIA?
For many, retirement means an end to the traditional 9–5 work commitment — but such freedom also means the end of a predictable stream of income. A SPIA is a fixed annuity that, upon your retirement, could potentially mimic the consistent paycheck you received at your job.
Here's how it works: You invest a lump sum of money into a SPIA and are guaranteed a stream of income. You are essentially buying cash flow based on a number of factors, including life expectancy and when you want to begin receiving the income stream.
2. What Are the Benefits?
A SPIA provides reliable income in a fixed amount for long as the policyholder lives in retirement. The insurance provider will calculate the amount of each SPIA payment using formulas designed to estimate average life expectancy, as it determines how long the insurance provider may have to make payments to the owner of the annuity.
The payments will continue for as long as the person lives. And the older the owner of the annuity lives to be, the more return on investment he or she will ultimately realize from the initial lump sum they paid.
A SPIA is permanent, but the owner has no access to the premium, which converts to an income payout stream. The annuity has no cash value or death benefit and can't be surrendered. The contract terms, such as payment amount and frequency, cannot be changes unless commutation is available and elected. Also, a SPIA should not be purchased if you need access to the premium for things like living expenses and other needs.
3. How Do Rates Impact a SPIA?
Low rates could be good for borrowers — but not always for those who invest a significant amount of cash into an SPIA. When rates are low, it could behoove SPIA purchasers to consider a staggered investment. As interest rates increase, SPIA payouts could get higher in tandem. As a result, the return on investment you realize could increase too.
4. When Can I Use a SPIA?
Many insurance providers let you determine when you would like to begin receiving SPIA payments. The optimal age to receive SPIA payments, however, really depends upon your motivation for purchasing the annuity.
It is important to note that earnings and pretax payments are subject to income tax at withdrawal. Withdrawals may be subject to charges, and withdrawals of taxable amounts from an annuity are subject to ordinary income tax. Also, the withdrawals may be subject to a 10 percent penalty from the Internal Revenue Service (IRA) if taken before age 59 1/2.
5. When Could It Be Right for You?
A SPIA could help ease your worries about outliving your financial cushion. Do you often ask, "Will I last longer than my retirement savings?" This was the case for Rachel, a 60-year-old single woman who has always saved diligently for retirement. She intends to work for a few more years before retiring, and her financial cushion is on track. Her grandmother and great-grandmother both lived to be 100 years old, which made her start thinking about her own longevity.
One of her primary concerns? She wasn't sure if she was saving enough to sustain a retirement that could last 40 years or more. Rachel decided to purchase a SPIA to help alleviate her fears. She stipulated that she doesn't want to receive the first SPIA payment until she turns 80 years old, which helps give her a sense of security for tomorrow.
The Bottom Line
The loss of steady income in retirement can be a scary prospect, but SPIAs are specifically designed to help alleviate those fears. You can start by considering what financial goals you have in regards to your retirement savings and strategy to determine whether a product like a SPIA may fit into your plans.