In an era where people are saving less and living longer, more and more financial experts are recognizing the need to supplement Social Security with an additional amount of predictable income. The ultimate goal? To ensure that your basic monthly expenses will be covered — no matter how long you live and no matter what happens with the rest of your investments. We believe a Single Premium Immediate Annuity (SPIA) is an excellent way to meet that goal.
Wait a minute, you might say. I’ve been warned to stay away from annuities because [insert bad things here]. And it is true that there are numerous articles that completely dismiss annuities as a viable choice. But there are many kinds of annuities.
While the bad rap is justified for variable annuities and other variations with expensive bells and whistles, we’re not focused on fancy or expensive — we’re looking at understandable and reliable. And few financial products are as simple and easy-to-understand as a SPIA: you pay money in return for a predictable monthly income.
How does buying an annuity compare to investing the same amount? Let’s break it down with an example: a 70-year-old widower needs to decide what to do with the $200,000 proceeds from the sale of his house.
Option 1: With that money, he could purchase an annuity that would pay him approximately $1,190 per month for the rest of his life, no matter how long he lives. With the annuity, the monthly income will stop when he dies, even if he dies in the first year. So the longer he lives, the better the deal — similar to social security.
Option 2: Alternatively, if he invests the money and gets a long-term 4% real return (the return after inflation), he could spend $792 each month until age 95. However, even if he invests the money in a stock portfolio, there is no guarantee he’ll earn 4% after inflation. And with the inevitable down years in the stock market, he may feel compelled to spend less out of caution. Not exactly a scenario for a worry less retirement.
But what about leaving money for his (your) heirs? There’s nothing left after an annuity. (Of course, if he lives beyond age 95 in option 2, there’s nothing left then, either.)
Remember the first rule of saving: pay yourself first. That’s never been truer as you plan your retirement. Start by ensuring you have enough funds to live your life as well as possible, while you’re still alive. Anything above that is a wonderful bonus.
An annuity can help, but is buying one right for you? Our next post will wrap up this series with some guidelines.