Single Premium Immediate Annuities Help Insure Financially Secure Golden Years
A popular approach to money management in the current financial environment is an investment known as the single premium immediate annuity, or SPIA. Its premise is simple. You turn over a lump sum of cash to an insurance company; in return you start receiving a fixed monthly payment. It begins immediately and continues as long as you live, even if you live to 110. This type of arrangement is ideal if you are concerned about outliving your assets, don't enjoy dealing with the volatility of the stock market and don't want to have to make any investment decisions. Because of their guarantee of lifetime income, single premium annuities can act as a substitute for traditional pensions, which are going the way of the Model T Ford.
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Tax Benefits of Single Premium Annuities
Favorable tax treatment of the monthly annuity checks is another advantage of these investments. Part of the monthly income you receive from a SPIA is considered a return of principal and is thus excludable from income taxes. How much you get for the money you turn over to the insurance company depends upon your age, gender and prevailing interest rates at the time you make the purchase. For example, as a 65-year-old woman who invests $100,000, you would get $630 a month for life, based on the average quotes provided by more than a dozen major life insurance companies. As a 65-year-old man who invested the same amount, you would receive $669 for life.
Does the Interest Rate Affect the Wisdom of Single Premium Annuities?
A common investor question is whether today's low interest rates make this a bad time to purchase annuities. Not according to investment advisors who are clear about the benefits of annuities. Frequently cited is the perspective that the time to buy an immediate annuity is when you need it. The average purchase age for an immediate annuity buy is approximately 70. Coincidentally, this is about the time when people must begin taking distributions from their individual retirement accounts; withdrawing some money from an IRA and investing it in a SPIA counts as a distribution. By this time, most investors have had several years of experience managing their retirement finances and may be ready to turn over the job of managing their assets to an insurer.
The SPIA Financial Guarantee
The promise that you won't run the risk of outliving your assets appeals to many shell-shocked victims of the bear market. The guarantee of an immediate annuity is especially comforting to those who had the bad luck to retire just when stocks headed south.
Despite their appeal as a safe haven, you should never put all your money into an immediate annuity, partly because you want to have some liquid assets available for an emergency and partly because they may not be indexed to inflation (unless you pay extra). One rule of thumb is to put no more than 30 percent to 35 percent of your assets in these investments.
A unique attribute of SPIAs is that they are an investment where procrastination can pay off. The reason is that the longer you delay, the shorter your life expectancy. This means that you will get a greater payout than if you had purchased the annuity at a younger age.
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Buying your SPIA
There are two major factors to concentrate on when looking for an annuity. The first is the financial health of the insurance company from whom you buy. You want to be sure it will be around as long, if not longer, than you are. You may wish to restrict your shopping to companies that qualify for the top "superior" rating of A+ or A++ by the rating agencies, such as Best's Insurance Reports (available in many libraries).
The second thing to look for is the highest "price" or monthly payout you will get for your money, which can vary significantly from company to company. Even though the difference may seem small at the beginning, it can amount to tens of thousands of dollars more income in your pocket over the decades.