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Annuities have a pretty bad reputation, and I certainly have written my share of negative articles about them. But now there are some more appealing annuity options with much lower fees. One such option is a single premium immediate annuity, or SPIA for short. That’s where you hand over some money to the insurance company in return for a promise of a monthly payout for the rest of your life. It’s like creating your own pension.
Rather than talk about annuities in theory, I’ll use a real example on a recent quote I received. Here are the pros and cons, as well as my conclusion. (I will be getting payments from something that offers lifetime income but isn’t an annuity: You’ll have to read on to see what that will be.)
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My paycheck for life
SPIAs are often pitched as guaranteed income for life, which is very appealing. Annuity.org states that “Immediate annuities guarantee an income stream within a month of purchase.” It’s very easy to get quotes online, and most of the big brokerage firms, such as Fidelity and Schwab, can give you online quotes. I went to ImmediateAnnuities.com for myself. (AARP also has an annuity quote service.) I’m a male who will turn 65 this June.
If I forked over $100,000 today, the highest quote was a $535 monthly payment for life, with only $118 of that amount being taxable. The monthly payment would be about $78 lower if I bought a joint annuity that would continue as long as either my wife or I were alive. For this illustration and simplicity, I’m sticking to just myself. The $535 monthly paycheck translates to a 6.42 percent payout.
I’ve seen many in the industry pitch products like these as a 6.42 percent income payout that’s mostly tax-free. ImmediateAnnuites.com did not pitch it as income. Most of the payment from the SPIA is just returning the money I paid for the annuity, which is why the IRS doesn’t tax that portion. It’s not tax-free income; much of it is a return of principal. I’d have to live nearly 16 years just to get my original $100,000 back.
There are many reasons to consider a SPIA. First, there is a sense of security knowing you can’t outlive this monthly paycheck. That amount coming in every month feels good, and that set amount helps us budget our living expenses. This is especially true if you don’t happen to have a pension from a company you worked for. And when the rest of one’s portfolio plunges in a bear market, there’s comfort in knowing this payment is safe. One benefit I don’t see talked about much is that the annuity gives protection against possible cognitive decline. With this money held by the insurance company, we can’t do something foolish if our mental acuity fades.