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Basing SPIA returns on the market means you take on a bit more risk. In bad years, your payments could drop—but in good years, you could receive more income than you would with a fixed rate. SPIAs are less complicated than some other annuity products. If you use a SPIA with a fixed interest rate, your future income is not based on the market.
When a client passes away earlier than expected, part of their deposit goes to the surviving annuity customers through a payment known as a mortality credit. If you live a very long life, these credits increase your overall payout. SPIAs have fewer fees than other annuities due to their simplicity. You avoid some of the account management and investment fees seen on deferred annuities. As a result, more of your deposit goes to your retirement income. This helps your retirement income keep up with inflation.
Keep in mind, though, with a COLA rider, your first annuity payments will be lower than comparable payments from policies without COLA riders to provide room for a lifetime of inflation adjustments. When you purchase an annuity, you generally lock away that money for the immediate future. A period of high inflation could reduce your long-term purchasing power from a SPIA.
Moving your money in a SPIA could reduce the potential inheritance for your heirs, depending on how you set up the contract. If you set up a SPIA for your life only, it will not pay anything more after you pass away. Alternatively, you may buy a contract guaranteeing a minimum number of monthly payments or you can purchase a death benefit rider to make sure that some amount goes to your heirs. Either of these moves, however, will lower your monthly annuity income.
If you sign up for a variable SPIA, your payments depend on the market. A SPIA works well for people who need money now and value certainty with their investments. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright Advisor Websites.