A steady post-retirement income is essential for a stress-free, independent lifestyle. However, relying purely on Social Security in the absence of any pension income may not be enough to secure your golden years. An income annuity, while assuring the additional income, suffers from loss of control over your assets and the right to leave them behind for your loved ones. Thankfully, there is a way out of this dilemma while still benefiting from immediate annuities.
Single Premium Immediate Annuities (SPIA)
You can secure an annuity for a fixed term of your choice – 5, 10, or 15 years – by purchasing an SPIA for an immediate payout. This is called a Fixed Term SPIA. You could invest in this form of income annuity with just 50% of your savings (or any portion). The amount of extra income you get will depend on the term you opt for and your age. This leaves about 50% of your savings which you can invest in other options. Compare to immediate annuities.
Examples of this approach
Recent Retiree
Use of an immediate annuity by a new retiree is used as an illustration. A 66-year-old retiree does not receive a company pension. His Social Security income amounts to $18,000 annually. He wishes to complement this income with an immediate annuity. He has a total of $400,000 of retirement investments.
The retiree decides to purchase a 10-year-term immediate annuity that would pay him $1942 per month. Fifty-percent of his annuity company would be used to ensure this decade-long monthly payout. This leaves him with $200,000 which he can use to invest in other options, options that will leave principal for beneficiaries, if he desires. Having a secure income source form the immediate annuity gives him great flexibility with his other retirement funds. He has the flexibility to decide on the aggressiveness of investing, liquidity, tax impact, etc. The decision on these assets can be made by the buyer, based on factors like market timing and his own personal requirements, while receiving a guaranteed income from the annuity company-- the $1942 in the case of the 66-year-old retiree.
Older retiree addresses concerns about legacy and the need for living expenses
In this example, an 80-year-old retiree has $200,000 in savings and a mortgage-free house.
She has been drawing $2,000 every month from savings and is concerned about depleting her savings and leaving behind very little, or worse, nothing for her children. She uses 50% of her remaining savings to purchase an immediate annuity with lifetime payments. Although the immediate annuity will exhaust the $100,000 she deposits, the income stream will permit her to keep the other $100,000 intact for her heirs.
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on SPIA can you have a beneficiary?
You can have a beneficiary on an immediate annuity. However, if you opt to take the benefits for life, then no beneficiary is needed as the payments stop when you die. But if you opt to take the benefits over a fixed term, say 15 years, if you predecease that term your beneficiary gets the remaining payments for the term.