Single Premium Immediate Annuities
David Novak
David Novak
May 24, 2016
3 min read
Clients approaching retirement or already retired are seeking ways to minimize market risk on their retirement assets. Some may have suffered market losses and need time for them to recover. Incorporating a Single Premium Immediate Annuity (SPIA) into a diversified retirement plan is very attractive to those clients that do not want market performance dictating their retirement lifestyle.
Clients can deposit savings into a SPIA to cover their fixed monthly expenses, for a certain period of time or a lifetime, while keeping the rest of their assets invested and hopefully growing for future use. Once these core expenses are covered, clients will feel more comfortable keeping other assets invested in the market.
The following charts explain the monthly guaranteed lifetime payouts one can expect off of a $100,000 deposit:
| Male | |
|---|---|
| Age | Monthly Income Guaranteed |
| 60 | $577.49 |
| 65 | $639.60 |
| 70 | $729.19 |
| 75 | $843.91 |
| 80 | $1005.54 |
| Female | |
|---|---|
| Age | Monthly Income Guaranteed |
| 60 | $541.98 |
| 65 | $591.73 |
| 70 | $665.45 |
| 75 | $774.84 |
| 80 | $925.17 |
The Advantages of a SPIA
Peace of mind knowing fixed expenses are covered
Investment risk elimination – regardless of what happens in the market, a SPIA is protected from loss
Ability to be aggressive with other investments since core expenses are covered
Income that cannot be outlived
Strong return on investment
Portion of income exempt from taxation (to life expectancy)
Put the Idea Into Action
Paul Conner is 62 and is thinking about retiring. He is evaluating his retirement plan and his financial professional suggests depositing $100,000 from his IRA into a SPIA and start receiving income today to supplement his income. Paul thinks he is too young and that it is better to wait until he is older where the payments will be higher and his retirement assets will be allowed to grow.
While the SPIA payments will be larger when he is older, he will be missing out on a significant amount of income over his lifetime by waiting until age 70.
| $100,000 SPIA at age 62* | |
|---|---|
| Yearly Income | Yearly Income |
| Total Lifetime Income | Total Lifetime Income |
| Return on Investment | Return on Investment |
| $100,000 SPIA at age 70** | |
|---|---|
| Yearly Income | Yearly Income |
| Total Lifetime Income | Total Lifetime Income |
| Return on Investment | Return on Investment |
The Cost of Waiting
By waiting until age 70 to open a SPIA, Paul would have lost $36,932 in income over eight years. In order for him to make up this income loss, he would have had to deposit approximately $116,000 into a SPIA instead of $100,000.
* Life only SPIA based on the average life expectancy of a 62 year old, which is 22.5 years.
** Life only SPIA based on the average life expectancy of a 70 year old, Which is 16 years.
