Immediate Annuities
(aka, SPIA’s: Single Premium Immediate Annuities)
According to Tom Hegna’s book, “Don’t Worry, Retire Happy!”, there have been many studies that have looked at what it takes to have a happy fulfilled retirement. They conclude that having a base income that you can’t outlive is the cornerstone to that happening. I have seen and experienced this phenomenon in my practice for years. Clients who have pensions and other guaranteed lifetime income streams are relaxed and happy. In retirement, it isn’t as important how much wealth you have, but how much income you can count on. After all, you no longer have a paycheck from work, so you need a paycheck from somewhere.
When planning for retirement, we have to build in a number of contingencies as to things that can happen to ruin your retirement happiness. We have to plan for market fluctuations, health issues, inflation possibilities, long term care, disability, unexpected repairs, interest rate changes, and a host of other issues that must be addressed. However, they all pale in comparison to the number one issue in retirement; “will my money last as long as I do?” See, if you don’t live very long, the other issues mentioned above won’t be an issue. However, if you live a long and full life, many of these issues will become potential pitfalls. I’m sure you know of someone who is experiencing this right now.
Since a secure retirement is based on income, not total wealth, having enough income that you cannot outlive is the cornerstone of a successful retirement income plan. The main sources for this type of income are pensions, social security, deferred annuities with income riders and immediate annuities.
Life Income Immediate annuities
These provide, in exchange for a sum of capital, a lifetime income. This income lasts as long as you do, even if you live well beyond 100! One of the reasons people don’t use these more often, is the concern that they will begin income and they will die, losing the benefit of the capital they exchanged for the income stream. As a result, you can add additional guarantees. For example, you can ask the insurance company for a life income or 10 years or 20 years. With this option, the income lasts your lifetime or that number of years, whichever is greater. This can offer additional peace of mind for the purchaser. Other options like increasing annual income and inflation indexing your income are also available.
Fixed Period Immediate annuities
These annuities work like the Life Income annuities above, but they don’t run for your lifetime, but a period of years. These contracts can be very helpful in providing income to bridge a period of time, like 10 years. Where this could come in handy is for a person who retires early and wants to wait to claim social security until it is optimized at age 70, so they maximize the lifetime income. It could also help if you wanted to start a business, yet want the security of knowing the bills would be paid so you can fully focus on building your business. There are many situations where knowing you have guaranteed income for a period of years is a real stress reliever.
Because life income annuities pool the risk of living a long time, the insurance company can guarantee a much higher income stream than might be available elsewhere, even in the current low interest rate environment. Because of that, we always look at a number of different companies when looking for the best option for a client. Not just the highest payout possible, but the financial strength and history of the company must be taken into consideration.