It’s normal to worry about outliving your savings or navigating the twists and turns of the market as you prepare for retirement. That’s where single premium immediate annuities (SPIAs) can give you peace of mind. They offer a dependable income stream you can count on for a fixed number of years or for life. This helps ease those concerns and lets you enjoy your later years.

Learn more about SPIA annuities and their pros, cons, and rates to decide if this annuity type is a good fit for your retirement portfolio.

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What’s an SPIA?

An SPIA is a contract with an insurance company that facilitates a one-time payment to buy an annuity in exchange for a steady income. 

These annuities often focus on retirement planning, even though they can benefit anyone — regardless of life stage. If you’re nearing retirement or coming into lump-sum amounts from home sales or inheritances, an SPIA can provide reliable income. They’re also great if you prioritize stability and minimal risks, since they generate a steady income that remains unaffected by market changes.

An SPIA is also an excellent way to diversify your income sources alongside retirement accounts or pensions. This annuity can help with financial needs like paying for education or healthcare, since it provides a reliable cash flow. And if you find managing multiple investments overwhelming, an SPIA can consolidate your finances into one source of guaranteed income. Overall, these annuities are versatile financial tools that can contribute to a more secure financial future — whatever your circumstances.

SPIAs are part of the broader category of immediate annuities designed to initiate payments shortly after the initial deposit. This type is flexible, and you can customize your plan to suit your needs, whether you want guaranteed income for a set period or your whole life.

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How does an SPIA work?

An SPIA is an interesting option for those looking to make a one-time contribution. That’s why it’s called "single premium."

This type requires a single lump-sum payment and provides flexibility to collect income immediately or later. You can fund an SPIA using sources like a 401(k), Roth IRA, or personal savings, and the insurance company will provide steady payments in exchange for the lump-sum deposit.

If you want to include another person in your plan, joint life annuities ensure that your spouse or co-annuitant continues to receive payments after you’re gone. You can also add features like liquidity benefits or cost-of-living adjustments through optional riders. It’s all about creating a plan that works specifically for you.

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4 benefits of an SPIA 

Here are four reasons to consider using a SPIA to support your future.

1. Financial security

One key benefit of an SPIA is financial security. Transforming a lump sum into guaranteed periodic payments lets you enjoy a steady cash flow for the long term — whether at the start of your career or when entering retirement. You can plan for future expenses or enjoy life without worrying about economic challenges.

2. Annuity riders

With annuity riders, you can customize your annuity to your specific needs. For instance, adding inflation protection allows your payments to increase over time, and an income guarantee ensures that your beneficiary(ies) receives payments if anything happens to you. This lets you design a financial strategy that aligns with your goals and lifestyle.

3. Potential for lower commissions

SPIAs have lower commission rates, ranging from 1% to 3% of the premium, which helps reduce costs. Unlike more complicated annuities that might include administrative fees or withdrawal penalties, SPIAs have straightforward pricing with minimal additional expenses. This approach allows you to keep more in your account, so you’ll receive more income from your annuity over time.

4. Tax efficiency

If you purchase a non-qualified SPIA annuity, you use funds you've already paid taxes on, which can be a smart way to manage your taxes. When you fund these annuities with after-tax dollars, you’ll only owe on the earnings — so the interest you accumulate — not on your initial contribution. It's a tax break that can boost your long-term financial health.

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4 drawbacks of an SPIA

Like any savings option, an SPIA annuity has pros and cons. Consider the following disadvantages when choosing an annuity that fits well into your financial plan. 

1. Limited access to funds

Opting for an SPIA means you’ll have less control over your account, which can sometimes feel restrictive. Having limited access to your money may be challenging, especially during emergencies when you need cash quickly. And you could miss out on other savings opportunities that might offer higher returns because your funds aren’t as flexible.

2. Inflation risk

SPIAs provide a steady and dependable income, which many find reassuring. But it's important to keep inflation in mind. As the cost of living rises, those fixed payments may not go as far as you hoped. Understanding this is key to thoughtful future planning.

3. Lack of flexibility

SPIAs aren’t highly flexible. You’re usually locked in for good once you invest, so it’s tough to get your money back if you face an emergency or unexpected costs. Consider how important flexibility is to you when exploring your options.

4. Potential for lower returns

SPIAs can sometimes offer lower returns than other investment options, especially when interest rates are low. It's all about balancing security and growth.

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SPIA rates and payouts

Your insurance company calculates SPIA rates based on several factors, including your age and gender at the time of purchase and your initial contribution amount.

Here's a simple way to think about it: The more you invest, the higher your payout rate might be. For instance, if you invest a smaller amount (say between $10,000 and $24,999), you might get a payout rate of around 3.75%. But if you invest a larger sum (like $100,000–1,000,000), your payout rate could be slightly higher — around 3.95%.

Payout frequency and duration are customizable, allowing monthly, quarterly, or annual payments. You can choose a fixed payout period (like 10, 15, or 20 years) or an immediate lifetime annuity. The internal rate of return for immediate fixed annuities typically ranges from 1% to 2%, based on market returns and life expectancy. The insurance company sets these rates by considering their costs, potential returns, and life expectancy tables.