In my previous article, I explained one of the simplest types of annuities: a Single Premium Immediate Annuity (SPIA). While a SPIA can be an excellent resource, it isn’t the best fit for all investors.
A SPIA is best suited for individuals who want more guaranteed, predictable income than just Social Security as part of their retirement financing solution. The ideal candidate generally falls into one or more of the following financial and behavioral profiles:
- Retirees, typically between 60 and 80, who seek longevity protection (lifetime income) because they are concerned about outliving their savings. SPIAs provide a reliable income stream for as long as they live.
- Conservative investors who prioritize stability over growth, who have a low risk tolerance and dislike stock market fluctuations. SPIAs do not rely on stock market performance and are not subject to stock market volatility. They guarantee a fixed payout for life or a set period.
- Recently retired (or about to retire) individuals who need an immediate, reliable income stream. SPIAs convert a lump sum into immediate, predictable income that can be used to cover basic living expenses.
- People who struggle with budgeting or overspending. A SPIA provides a structured, automated income stream that serves as a financial guardrail with each periodic payment. It ensures steady income regardless of personal self-discipline (or lack thereof).
- Someone without an employer pension, but who wants pension-like income. A SPIA acts as a personal pension replacement and a guaranteed income floor to supplement Social Security.
Who is NOT a good fit for a SPIA?
A SPIA may not be the best choice for:
- Someone who needs their entire asset pool to remain liquid. The lump sum is irretrievable once annuitized.
- People older than 80 or in poor health. If life expectancy is short, the annuitant may not receive enough payouts to justify the cost.
- Aggressive investors. Those seeking market growth may prefer equities or deferred annuities with market participation.
- Younger investors. SPIAs are not ideal for those who do not need additional income right away.
A cautionary note about SPIAs and inflation
One drawback with SPIAs is that they lack true inflation protection. They provide a fixed payout rate determined at purchase, so the dollar amount you receive each period doesn’t ever change. This means that the annuity will likely lose purchasing power over time. It is possible to purchase an annuity with a fixed yearly increase in payments, such as 2 or 3%. However, this is not true inflation protection because inflation can easily be greater than these increases. Moreover, your payout will be lower if you add these yearly increases than it would be without this feature.
Because SPIAs lack true inflation protection, they work best alongside Social Security (which is inflation-adjusted), as a base layer of guaranteed lifetime income to cover all or a portion of your non-discretionary spending. They can then be supplemented with other investments that hedge against inflation.
Conclusion
A SPIA is one of the simplest and most effective ways to secure a reliable stream of income in retirement, offering peace of mind and protection against longevity risk. However, like any financial tool, it is not a one-size-fits-all solution. While SPIAs provide guaranteed income, they come with trade-offs, including the loss of liquidity and exposure to inflation risk.
For those who value predictability and security over flexibility, a SPIA can serve as a powerful foundation for retirement income, especially when paired with Social Security, investments, and other inflation-hedging assets (including possibly other types of annuities). The key is to approach retirement planning with a diversified strategy – balancing guarantees with growth potential to ensure both stability and long-term purchasing power.
By understanding the strengths and limitations of SPIAs, retirees can make informed decisions that align with their financial goals and create a sustainable income plan that lasts a lifetime.
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