Your parents probably knew about a lot of things that are no longer around today: Burma Shave ads, smallpox vaccinations, Howard Johnson restaurants. They may also have had firsthand experience with pensions, which are increasingly rare.
You can create a pension — out of your own money — with a single-payment immediate annuity (SPIA). It, too, will never run out. And today’s higher interest rates mean higher monthly payouts for you. But do some serious research before you buy to make sure you understand both the pros and cons of SPIAs.
A SPIA is an insurance product. You pay the amount you want to invest, and the insurance company tells you how much it can pay you each month for the rest of your life. The amount you get depends primarily on your age and current interest rates. You can also get a SPIA that pays out for only a few years starting at any age and pays even more per month, but they aren’t really suitable for retirement.
In its simplest form, a SPIA gives you that payment every month until you die — even if you live to be 120. The flip side: Those payments end if you die three years after you buy it, and you lose any other money invested in the SPIA.
“These typically do not have a beneficiary linked to them, meaning that if you die, the income stops,” says Nicholas Bunio, a certified financial planner (CFP) in Downingtown, Pennsylvania. “More now offer a spouse or partner to be tied to this, but other than that, if you pass on too soon, you’re out of luck.” But there are SPIAs that offer lifetime benefits for both you and a spouse, so if you’re married, it is worthwhile to shop around.
Most financial planners agree that if you take a 4 percent initial withdrawal from your retirement savings and increase that amount by inflation each year, you would have a very low chance of running out of cash over your lifetime. This assumes that you’re taking withdrawals from a mix of 50 percent stock mutual funds and 50 percent bonds funds. If you had $100,000 in retirement savings, you could withdraw $4,000, or $333 a month, from your savings in the first year. If inflation were to rise 5 percent that year, you could withdraw $4,200 the following year.