If you have spent any time looking into the many options to fund your retirement, you have likely already come across annuities. Annuities are one of the most common strategies for receiving consistent money in retirement.
However, there is not just one type of annuity; instead, you will be able to choose between a wide range of products, such as single premium immediate annuities, deferred annuities and more. Understanding which one is the right choice for you comes down to learning more about how they work and evaluating your specific situation and goals.
What a Single Premium Immediate Annuity Is
A single premium immediate annuity, (SPIA), is a type of investment product that will pay you a predictable amount each month. As the name implies, you fund the annuity in a single, lump sum payment upfront.
Some types of annuities allow you to continually contribute money over time so that you can gradually increase the amount in the annuity before you begin taking payments. However, an SPIA only allows a one-time payment. Most people choose to fund this product using the retirement savings they have accumulated over their lives, such as their 401(k) account or an IRA.
Once the annuity is funded, you will begin receiving payments from the lump sum (with interest) over a defined period, which you agree to by signing a contract for the annuity. Some SPIAs may span for 20 years, while others will last for your entire life. Be sure to read the details before you sign an agreement.
The Factors That Impact Your Payment Size
One of the most appealing elements of an SPIA is that it provides consistent and predictable payments for a time period, or even the rest of your life, allowing you the benefit of being able to budget reliably.
However, understanding the number of your payments will be important in order to make decisions about your finances. You have some control over how large your single premium immediate annuity payments will be when you receive them. Here are the things that matter most:
1. Inflation riders
Annuities do not, by nature, automatically keep up with inflation. However, you may be able to purchase an inflation rider that helps your money stay consistent even as inflation rises. If you do this, you may need to pay a fee for the rider itself, and you may need to accept smaller annuity payments in the beginning so that the balance in your account can grow.
2. The funding amount
As you may expect, those who contribute more to their annuity are poised to receive more in return. The bigger the lump sum that you use to fund the SPIA, the higher your pay each pay period.
3. The term
Annuities are not required to last for the rest of your life. If you choose a shorter term, the money in your annuity can be broken into larger chunks, because it needs to cover less time. Therefore, if you do opt for an annuity that lasts the rest of your life, your payments may be a little smaller than they would be in an annuity that lasts only a set number of years.
The Benefits of a Single Premium Immediate Annuity
SPIAs offer a range of benefits that make them a popular choice for retirees. Consider that they:
- Provide predictable payments
- Offer lower fees
- Ensure guaranteed income
- Are simple to understand compared to other annuity products
These are just a few of the many reasons that SPIAs make up a large portion of the products considered for retirement portfolios. While Pillar Life does not directly offer SPIAs for sale today, you have the option of converting their MYGA to a SPIA at the annuitization date.
Potential Disadvantages to Be Aware Of
Of course, an SPIA may not be right for everyone. You should understand that:
- Inflation can reduce your earnings without a rider
- The upfront cost to fund the annuity can be cumbersome
- You cannot access the money early without paying a significant fee
This means that single premium immediate annuities are best for those who are confident that they will not need all of that money in the short term.
Trust the Experts to Help You Choose the Perfect Retirement Strategy
You may be considering a single premium immediate annuity for the first time, or you may have already decided that this is the right way to fund your retirement. No matter your current stage in your financial journey, be sure you entrust your annuity to a reputable and experienced provider.
At Pillar Life Insurance we have designed our products to let you be in charge. You can obtain more information in our FAQs section. When you are ready to buy, our customer portal will walk you through a step by step questionnaire which you can complete on your schedule.