Retirement income that’s guaranteed for life can be a valuable resource. It provides you with financial certainty so you can make informed spending decisions. Guaranteed income isn’t impacted by market volatility, which could reduce your anxiety about the future. Best of all, you can’t outlive guaranteed income, so there’s no risk of running out of money in the later years of retirement.
Unfortunately, guaranteed retirement income isn’t as common as it used to be. Most retirees can count on Social Security benefits, which are guaranteed for life. For most people, however, Social Security is likely to be insufficient to fund a full retirement. Pensions are also disappearing from employer benefit offerings. Many retirees will likely have to rely on withdrawals from savings to pay for their retirement expenses.
However, you have the option to create your own stream of guaranteed lifetime income by using an annuity, specifically something called a single premium immediate annuity (SPIA). A SPIA is an insurance policy in which you convert a lump sum of assets into an income stream that lasts for a specified period of time, usually life. SPIAs aren’t right for everyone, but they can be helpful tools for some retirees.
What is a SPIA?
A SPIA is an insurance policy that protects you against outliving your assets. When you open the policy, you contribute a lump-sum premium amount. The insurance company then pays you a regular benefit amount over a predetermined period of time. In most SPIA contracts, the benefit is paid for life. However, it can also be paid over a finite period, such as 10 years.
This conversion process is known as annuitization. Once you complete the annuitization process, you’ll no longer have access to your premiums. You’ll have the income stream, but not access to the assets that were used to fund the policy. It’s often wise to keep liquid assets available outside the annuity in case you face an emergency.
How are the payments calculated?
The insurance company uses a few factors to calculate your premium amount. First is the amount of your initial premium. Everything else being equal, the more money you contribute, the higher your payments will be.
The other important factor is the duration of the payments, which is life for most policies. The insurance company doesn’t know exactly when you will pass away, but it does use mortality tables to generate an estimate of your life expectancy.
The longer your life expectancy, the longer the expected payment duration. A longer payment duration usually leads to lower payments. This means that the younger you are when you open the contract, the lower your payments will be.
What happens when you pass away?
One of the risks in a SPIA is 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. It would be unfortunate to contribute a lump sum to a policy and then receive only a few years of payments.
Fortunately, there are options available to protect your beneficiaries in the event you pass away early. One option is a joint-life payout. Under that option, the payments are made for your lifetime and one other person’s lifetime. This is a popular option for married couples.
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 is no income continuation for your beneficiaries.
Ready to develop your guaranteed retirement income strategy? Let’s talk about it. Contact us today at Carstens Financial Group. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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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