3 Things To Know About a Single Premium Immediate Annuity
More than 100,000 Americans turn 65 every month, the average retirement age. But many of them fear that their retirement money will run out during their lifetime.
This causes retirees to live with a scarcity mindset, spending as little as possible, and limiting their retirement. They don’t travel as much as they want, and they don’t spend money on their hobbies for fear of outliving their money.
That’s why smart workers who want to live comfortably during retirement invest in annuities. More specifically, they choose to buy a single premium immediate annuity (SPIA).
When you buy an annuity, you are essentially buying an income stream. You are guaranteed regular payments for a specified timeframe. Some provide payments indefinitely, ensuring you don’t run out of money during retirement.
Wondering how single premium immediate annuities work? Read on below to discover how these annuities can help you.
Table of Contents
1. What Is a Single Premium Immediate Annuity?
There are many different types of annuities. At their core, they are insurance contracts from financial institutions. Most people make a lump sum payment upfront to obtain an annuity.
And the contract ensures regular payments, either for a specified timeframe or for the duration of the investors’ life. As such, they are primarily used for retirement but aren’t limited to retirement.
An SPIA is a specific type of annuity that is meant to supplement existing retirement income. Once the lump sum payment is made, the investor starts receiving payments within one year.
This is different from other types of annuities which have an accumulation phase prior to receiving payments. This is where the “immediate” portion comes into play.
2. Choosing Your SPIA
SPIA’s are flexible. You can choose one that accommodates your needs and desires during your retirement.
Most will last the duration of the investors’ life, though you can choose an SPIA that will also outlast your surviving spouse or even your heirs.
You can select a single premium immediate variable annuity, with an interest rate that changes, in hopes of receiving more. Or you can choose a fixed rate for peace of mind.
Single premium immediate annuity rates depend on the timeframe chosen, as well as the amount invested upfront. They tend to hover between 3% and 5%. You can use a single premium immediate annuity calculator to find out how much you need to invest to receive your desired annual income.
You can also choose your distribution timeline, receiving payments monthly, quarterly, or annually.
3. Fund It Your Way
The best single premium immediate annuity will allow you to fund it from your desired source. No, it doesn’t need to be cash from a savings account, though that’s an option.
You can fund an SPIA from various sources, including a 401(k), IRA, or other pre-tax methods. Or you can fund it with after-tax dollars from a savings account, money market account, mutual fund proceeds, inheritance, and so forth.
The funding source you choose will determine if you’ll need to pay income tax on your received payments or not.
Live Your Retirement Fully
Purchasing a single premium immediate annuity might be one of the best things you can do for your retirement. Knowing you will receive regular payments for the rest of your life provides the peace of mind needed for an enjoyable retirement.
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