What Is a Single Premium Immediate Annuity (SPIA)?

The Annuity Man

In the Roman times, the dutiful Roman soldiers laid it on the line to expand and protect the empire. They were fearless warriors.  Because of their unyielding commitment, the Roman government guaranteed a lifetime income stream for the soldiers and their families.  The Latin word “annua” means payment, which is where the word annuity originates.  This income guarantee to these Roman soldiers and their families were the first Single Premium Immediate Annuity (SPIA) on record.  Today's SPIA strategy is pretty much the same structure as that original annuity design.  Lifetime income worked back then, and it still works now.

The Original Annuity Type

Single Premium Immediate Annuities (SPIAs) have been purchased in the United States for hundreds of years, and are a simplistic transfer of risk pension plan.  Income can start as soon as 30 days from the policy being issued, and that initial payment can be deferred as far out as 1 year.

SPIA payments are primarily based on your life expectancy at the time you start the income stream.  It's very important to point out that interest rates play a secondary role in that pricing formula.  You can customize the payment structure to guarantee a lifetime income stream of payments that you can never outlive, or you and someone else (i.e. joint with your spouse) can never outlive.  You can also choose to have those payments pay only for a specific period of time (i.e. Period Certain), or your can combine the lifetime income guarantee with a period certain.  It’s all up to you.  The bottom line is that you can choose the exact structuring of the policy.

Single Premium Immediate Annuities (SPIAs) can be used inside of an IRA (i.e. qualified money), outside of an IRA (i.e. non-qualified money), or within a Roth IRA.  Regardless of the structure you choose, the SPIA contractual guarantees are the same.  The difference is how the income stream is taxed.  With a Traditional IRA, all of the SPIA income is taxed at ordinary income levels.  With non-IRA assets, only a portion of that income stream is taxable because SPIA payments are a combination of return of principal plus interest.  You only pay taxes on the interest portion of that payment.  With Roth IRA money, all of the SPIA income is tax-free.  Just remember that Single Premium Immediate Annuities (SPIAs) are personal pension plans that are customizable and can be used within any account type.

Commodity Quote

Buying a SPIA is like buying a plane ticket.  Single Premium Immediate Annuities (SPIAs), and all annuity types for that matter, are commodities.  You have to shop all carriers for the highest contractual guarantee for your specific situation, and quotes change every 7 to 10 days.  Think of SPIA quotes like a gallon of milk.  Every week or so, it spoils or expires. 

Part of Your Income Floor

Single Premium Immediate Annuities (SPIAs) should be used as part of your overall "income flooring" plan.  Social Security payments, pension payments, dividend income, and lifetime income guarantees from annuities should represent that guaranteed income stream you need hitting your bank account every month.  With over 10,000 baby boomers retiring every single day, setting up a guaranteed income floor is the goal of most people transitioning into retirement. 

It's important to understand that SPIAs are transfer of risk strategies.  You are transferring the risk to the annuity company (i.e. life insurance company) to pay.  In an investment world of "Return on Investment" (ROI), with annuities....there's no ROI until you die.  Up until that point, it is a pure transfer of risk.  A Single Premium Immediate Annuities (SPIA) is a transfer of risk contract between you and the annuity company.

That's how a Single Premium Immediate Annuity (SPIA) works.  You can't hate all annuities and also hate your Social Security or pension payments.  In essence, it's impossible to hate lifetime income guarantees, so there's no way to hate SPIAs.

It might be time to get a SPIA quote on yourself to help fill in that income floor.  What have you got to lose, other than more lifetime income!

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