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Get Retirement Income With Immediate Annuities

They aren’t for everyone, but they can ease worries about running out of money

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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.

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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. 

Lifelong income

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.

Currently, a $100,000 SPIA would pay $613 a month for a single 65-year old man in California, according to A married couple, each 65, would get $535 a month. You can get variations through special terms, called riders, but you’ll generally get lower monthly payments. For example, a SPIA that promises to give the remainder of the premium to your heirs after you both die would pay $517 a month for a couple. But those payments are usually fixed for life, and over time, inflation could reduce the purchasing power of your benefits. 

How are they able to offer such high payouts? To some extent, insurers invest in higher long-term returns from stocks, bonds and other investments. Although no one knows what the financial markets will do in the future, stocks and bonds have typically returned more than short-term Treasury securities over the long term. According to Standard and Poor’s, the S&P 500 has gained an average 7.45 percent the past 25 years, a period that has included four bear markets. Bonds have returned an average 4.95 percent, according to Morningstar, the Chicago-based investment tracker. Inflation has averaged 2.47 percent.

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Another reason: death. When you die and you have money invested in a plain-vanilla SPIA, the money that hasn’t been paid to you goes back into the pool that pays other people. According to IRS mortality tables, the average 65-year-old lives a little bit longer than 85 years.

Why buy a SPIA?

People are living longer. In 1960, the average life span for men was 66.6, while women lived to 73. As of 2015, men lived an average of 77 years, while women lived an average of 82 years, according to the U.S. Census Bureau. “Remember that half the people live longer than average and some people live to a very old age,” says David Haas, a CFP in Franklin Lakes, New Jersey. “Annuities are a great tool to minimize the risk of outliving your money.”

Higher payouts. Lower interest rates in the first part of the century made annuity returns unattractive. That’s changed. “Interest rates are higher — [SPIAs] are much more attractive since the income will be on par with pension plans,” Bunio says. But higher interest rates also mean higher inflation.

Simplicity. Totaling up your investment assets, figuring out how much to withdraw, choosing which funds to withdraw them from and adjusting that for inflation every year is a bit of a chore. A simple monthly payment might better suit your time and temperament.

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Social Security. If you’re 65 and would like to get your maximum Social Security benefit by waiting until age 70 to claim, you could get a SPIA that lasts for five years. In this case, you’d get $1,791 a month for a $100,000 deposit in California, according to That’s lower than the $2,484 average Social Security payout you would get if you file at age 65 this year. But when you reach 70, you could file for a higher Social Security payout, which, unlike the annuity, would also be automatically adjusted for inflation each year.

Why should you avoid SPIAs?

Inflation. The main drawback with SPIAs is that, like pensions, their payments aren’t adjusted upward for inflation. Over time, unless you purchase an inflation rider, your SPIA payment will have less and less purchasing power.

Health. “Immediate annuities are not a good choice for people in ill health or with shorter-than-average life expectancies,” says Andy Baxley, a Chicago-based financial planner. Some people don’t like the idea that they might die before they get their full payout from a SPIA. “You won’t be around to care, but the idea of that does bother some people,” says Baxley.

Cost. You have to expect to live a long time to get the full benefit of a SPIA, and it can be more expensive than some other retirement products. If you already have a pension and Social Security, you could probably get higher long-term returns from a portfolio of stocks and bonds than you would get from a SPIA, Baxley says. “Immediate annuities are not a good choice for people in ill health or with shorter-than-average life expectancies,” he adds. And if you already have a pension and Social Security, Baxley says, you could probably get higher long-term returns from a portfolio of stocks and bonds than you’s get from a SPIA. 

No refunds. In most cases, you can’t change your mind once you’ve bought a SPIA. Some states give you a few days to reconsider, but after that, the decision is permanent.

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