A single-premium immediate annuity (SPIA) is a contract between an individual and an insurance company. The individual pays a large lump sum upfront in exchange for guaranteed income payments that start almost immediately.
Annuities can be a good idea if you're scared you might run out of money in retirement, or if you don't enjoy the ups and downs of the stock market. But they might not be right for everyone.
Pros:
- Immediate payments that typically begin 30 days after purchase.
- The insurance company promises to pay the annuitant a regular income according to the terms of the contract.
- Buyers can choose monthly, quarterly, or annual income payments.
- Payments can be set for the annuitant's lifetime or for a specific period (e.g., 5 or 10 years).
Cons:
- Once purchased, a SPIA typically cannot be canceled for a refund.
- Payments usually end upon the annuitant's death, but there are options to extend benefits to beneficiaries.
- SPIAs can provide a reliable income stream in retirement but may limit access to funds for emergencies.
Funding:
The lump sum used to purchase a SPIA often comes from retirement savings like a 401(k) and IRA, or from personal savings accounts and inheritances.
Payments:
The size of the payments is calculated by the insurer based on factors such as:
- The annuitant's current age and life expectancy
- Prevailing interest rates
- The annuity payment duration
Types of SPIAs:
- Fixed: Payments remain the same for the contract period.
- Fixed Indexed: Payments fluctuate based on the performance of a stock market index.
- Inflation-protected: Payments increase in line with future inflation.
By converting retirement savings into a steady stream of income, SPIAs can help retirees ensure they don't outlive their savings and provide a predictable "paycheck" for life.
