There may be no resource more valuable in retirement than income that’s guaranteed for life. Guaranteed income provides you with a base level of certainty and predictability. It’s not impacted by market fluctuations, and there’s no risk that you’ll outlive your funds. When you have guaranteed income, you can make financial and spending decisions with confidence.
Unfortunately, guaranteed* income is becoming more and more rare for many retirees. There was a time when workers could expect to have their entire retirement funded by Social Security and employer pensions. Today’s Social Security benefits are unlikely to fund a full retirement, however, and few employers still offer a pension.
There is good news, though. You can create your own stream of guaranteed lifetime income using something called a single premium immediate annuity (SPIA). These tools are insurance products that convert a portion of your assets into a guaranteed lifetime income stream. They’re not right for everyone, but they can be useful in the right situation. A financial professional can help you determine whether a SPIA is right for you.
What is a SPIA?
As mentioned, a SPIA is a type of insurance policy. However, instead of protecting against your premature death, a SPIA provides protection against outliving your assets. When you open a SPIA, you contribute a lump sum of assets. The insurance company then calculates a payment amount and pays you that benefit for the rest of your life.
This process is called annuitization, which is the conversion of a lump-sum amount into an income stream. Once you annuitize your funds, you’ll no longer have access to them. However, you will have an income stream that’s guaranteed for as long as you live.
How are payments calculated?
Your SPIA payments are based on a variety of factors. The primary factor is the amount of your initial premium. Everything else being equal, the more money you contribute, the higher your payments will be.
Another important factor is the expected duration of the payments. Most people choose to receive payments for life. The insurance company can’t predict how long you will live, but it can use mortality tables to generate an estimate of your life expectancy.
The longer your life expectancy, the longer the payment duration. The longer the payment duration, the lower your payments will be. Another way to say this is that if you’re younger when you open the contract, your payments will likely be lower due to your longer life expectancy. Conversely, opening a contract at an older age will likely lead to higher payments.
What happens when you pass away?
The payments may be guaranteed for life, but there’s no guarantee on how long you will live. There’s the risk that you could pass away soon after opening the annuity. If you open a single lifetime SPIA with no protections for beneficiaries, your payments would end at your death.
Fortunately, you have options that can provide income for your loved ones after you pass away. You can choose a joint-life payout, in which the payments are made for your lifetime and your spouse’s.
You can also choose a period certain. This is a period of time in which the payments are guaranteed to be made, even if you pass away. For example, you could choose a life payout with a 10-year period certain. If you pass away in the second year, your beneficiaries would receive payments for the remaining eight years. If you live beyond the 10-year minimum period, there’s no income continuation for your beneficiaries.
Ready to develop your guaranteed retirement income strategy? Let’s talk about it. Contact us today at Safe Retirement Strategies. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity
*Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
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