Single Premium Immediate Annuity (SPIA)

**ABNAK** · 03-23-23, 19:11

Okay, let's say you will have maybe only $270K to invest in an annuity. Not a huge chunk of change but looking to supplement other income in retirement. From what I've seen a SPIA with that amount will give you roughly $1300 a month for the rest of your life.....after taxes (assuming a 25% tax) it's around $975 per month. Let's round it down to $900 to be on the conservative side. If that is enough to add into your monthly retirement mix and make it work what is the downside? I'm very pragmatic and do not intend to play the stock market with my retirement funds.

My understanding is that anything called "guaranteed income" is obviously involving the solvency of the insurance company you purchase it through. The State Guarantee Association in Tennessee insures you for up to $250K. It's kind of like an FDIC for annuities. That $250K amount is close to what I'd be investing anyway, so even if the insurance company went tits-up I'd be essentially covered.

If I have X, Y, and Z to add together for retirement and an SPIA annuity would add another $900 per month why not? Yeah, it's not inflation-proof (although there are some you can buy that do this, but you likely wouldn't get that $900 per month to start with). No, you can't pull out without penalties, some of them huge.

I've read on TOS that financial people don't even care to initiate an SPIA because the return for the company selling it isn't worth the effort; sure, they WILL if you insist but not in their best financial interests. They'd rather steer you into other more profitable (for them) but more risky (for you) products.

I am VERY conservative with my financial planning, and don't want ANY risk shy of having the TN State Guarantee Association pick up the tab in a worst-case scenario and the company goes under.....even then I'm just about covered in my initial investment.

Also, has anyone heard of you only being allowed to invest 60% of your retirement fund in an SPIA? Sounds fishy to me. "Stan the Annuity Man" said that in an email. Supposedly the companies are "looking out for you" (yeah right). They don't want all your eggs in one basket, of course for your own good.

Seems to me they don't want you buying a not-very-profitable product and want some of your $$$ going into more profitable things for them, albeit more risky for you.

**Allen** · 03-23-23, 19:37

The downside is there's no upside. The issuer keeps 100% of that. You get what you get for the life of the product, and depending on how it's structured, it may be designed for a terminal value of $0, e.g. nothing gets passed on. Over long term (e.g. 30 year period) S&P, or Vanguard total markets index (VTSAX) returns ~8%. At $250K, thats ~30K a year. Do a 2% safe withdrawal rate and you're looking at about $4250 post tax for year 1, and a non 0 terminal value. 1/2 of what the annuity promises, but if you hit 8%, Y2 gives you $4590 post etc. Outside a first or second year 20-30% drawdown, you're looking at hitting the annuity $# in year 17, and having the asset (shares) in perpetuity & increasing safe cashflow.

$0 in commissions opening a vanguard account & selling 2-3% of the balance over the course of the year for income.

**ABNAK** · 03-23-23, 19:59

Allen,

It's just my wife and I so no kids to leave anything to. She has her own retirement account and will have almost twice what I have when she retires, but she's 5 years younger so those gains are a few years off. Some annuities have an option to refund the unused $$$ to your spouse, but there is obviously a cost for that caveat in lower monthly payouts.

**SomeOtherGuy** · 03-23-23, 21:15

Inflation risk is huge, especially right now. It could make the annuity puny if we get nothing more than a repeat of the 1970's.

Apart from that, some considerations:
-your personal life expectancy vs. what their calculation suggests. If you are healthy and your older relatives live(d) to 100 that's one thing, if you have 10 years left or if all your ancestors die young, it's likely a bad choice.
-how much you need stability and predictability. Any decent equity investment is likely to beat this in the long run. If you have a large SS payment, an actual pension, or lots of assets to draw on, the deal gets worse.

If it still seems to make sense, shop around for the best deal, both for payments and credit quality of the insurer. TIAA-CREF offers similar annuities - I don't know if they offer to anyone besides teachers and college profs/admins, but it's a solid company. Just for one example.

With the amount you're talking about, some time with a financial advisor who gets a fee directly from you, not a commission, would also be worth considering.

This may sound odd, but if you know any actuaries socially (or through church, etc.) they would be a good resource for this. Life actuaries would be best, but any type of actuary will likely understand the factors more than you. (I realize most people don't have actuaries in their social circle; I know dozens so it's not as weird for me.)

In some cases nonprofit charities have relationships where you buy an annuity with the charity getting a remainder interest. Because they can negotiate better terms, you might find that you get a better deal overall (in terms of your monthly payment amount) even though some funds wind up with the charity instead of the issuing insurer. If you have any preferred charities - college/university, national church organization, major hospital system, large veterans organization - it would be worth contacting their planned giving department to see if there are options there.

**Todd.K** · 03-24-23, 01:08

Originally Posted by Allen

Over long term (e.g. 30 year period) S&P, or Vanguard total markets index (VTSAX) returns ~8%.

I understand people worry about the risk of the stock market. But if you think the index is going to collapse bad enough and long enough that you can’t recover… you are describing the collapse of the entire US economy.

At that point ANY money that isn’t physically hidden in your mattress or walls might as well be in a Greek bank.

**Buncheong** · 03-24-23, 05:46

If $270,000 is "not a huge chunk of change" I'd say money isn't something a man in your position needs to worry about very much.

**Crow Hunter** · 03-24-23, 08:05

Inflation is the biggest danger and insurance company solvency being the 2nd biggest.

Since it is basically giving your money to the Insurance company and they invest it in the stock market/bond market and make X% on it and they pay you $Y/month until you die (or complete the contract), obviously, you can make more on it if you were to invest it yourself. But you might have sequence of returns risk if you have a big drop, right as you retire. However there are ways to mitigate that risk using various bond products. (I-bonds and TIPS) that match your needs. Liability Matching Portfolio is the lingo. https://www.bogleheads.org/wiki/Matching_strategy

The best place to ask these types of questions is on Bogleheads. Lots of very smart people on there that will help you. There are quite a few of the very well known retirement and investment advisers that post there. They don't always answer your questions but sometimes they do and there are lots of posters there that are extremely knowledgeable.

I would just lay out your entire net worth and plan and let them critique it or advise. You don't have to follow anything they say and the advice is free.

Also look up Clark Howard and see his advice on annuities.

Personally, I don't plan on doing any annuities with my retirement because I don't think the juice is worth the squeeze.

But it is a legitimate way of creating a personal "pension" plan, if you aren't already covered somewhere else with military retirement, Social Security, defined benefit pension.

**utahjeepr** · 03-24-23, 11:35

I'm of the opinion that it's not a "bad" thing, just not a great thing. It's a safe but not very rewarding means of having a guaranteed monthly income. It's primary benefit is ease and convenience. You pay for that with slightly lesser returns. Inflation is your biggest risk. There are those that offer inflation hedges, but they are comparatively more expensive for the return.

I think there are better vehicles that are equally safe.

Kinda like with my thoughts on CDs. Sure they are OK, but you can do better with a tiny bit more effort.