PUBLISHED THU, JAN 9 2020 11:48 AM EST UPDATED FRI, JAN 10
2020 2:47 PM EST
KEY
POINTS
·
Sometimes it makes
sense to shift a portion of your assets to a single-premium immediate annuity
as a way to have income while delaying Social Security.
·
In simple terms, you
hand over a chunk of money to an insurance company in exchange for guaranteed
payments.
·
There is no upfront
fee or any ongoing expenses throughout the life of the contract.
·
However, there might
be other options that serve the same purpose and don’t tie up your money the
same way a so-called SPIA does.
Older Americans heading toward retirement can
face a conundrum: They’ll need income when they leave work, yet they want to
delay taking Social Security for as long as possible so they can maximize those
benefits.
For clients who have other assets available,
some advisors recommend that instead of gradually withdrawing from those
accounts — i.e., a 401(k), individual retirement account, brokerage, savings —
they instead move some of the money to a single-premium immediate annuity to
bridge that gap in income.
“It’s certainly a valid option,” said certified
financial planner Ronald Myers, a managing member at Fortune 360 Group in
Plantation, Florida. “But is it a good option? That’s a different question.”
Annuities, which offer varying levels of
guaranteed income either for a set time period or for life, come in a variety
of packages and can often be tricky to understand and, depending on the type,
more expensive than other options.
Yet SPIAs, as they’re called, generally are more
straightforward than their brethren. They make up a fraction of annuities sold
yearly — just $9.7 billion of $233.7 billion in 2018, according to
the LIMRA Secure Retirement Institute.
In retirees’ quest to ensure their savings stretch
through their lifetime, the option can end up being a viable piece of the
retirement planning puzzle. However, SPIAs also have limitations. And some
advisors say there are better ways to fund a short-term income gap.
“A SPIA is a place to secure a payout for a
period of time,” Myers said. “It’s not a place to make money.”
Basically, in exchange for guaranteed income
over a set period of time (or for your lifetime), you give an insurance company
a lump sum, which in turn becomes part of the insurer’s pooled investments.
There is no setup fee for a SPIA contract, and unlike some annuities, it comes
with no annual expenses.
However, once you hand over the cash and the
short window to change your mind ends, you generally can’t get your money back
— except in the form of payments that you already agreed to.
“All you’re left with is an income stream,” said
David Mendels, a CFP and director of planning at Creative Financial Concepts in
New York. “So if you have a medical emergency or something like that, you don’t
have that money available.”
Some insurance companies do offer SPIAs that
allow for a limited emergency withdrawal or a similar arrangement, although
contracts with any extras generally will not pay as much each month.
All you’re left with is an income stream. So if you have a medical
emergency or something like that, you don’t have that money available. David Mendels Director Of
Planning At Creative Financial Concepts
You also can get one that allows for a joint
owner. Or if you name a beneficiary, the payments would shift to that person if
you were to die before the end of the contract.
Additionally, it’s important to know the
annuity’s income will be taxed. If you use money from a tax-deferred account —
say, an IRA or 401(k) — to fund the SPIA, you’ll pay taxes on it as you receive
it over the length of the annuity contract.
If the funding source was from accounts that are
not tax-advantaged, such as a brokerage or savings account, you’ll only pay
taxes on the portion of SPIA income that wasn’t already taxed through what the
insurance company calls an exclusion. (Keep in mind, though, that liquidating
funds from a brokerage account comes with its own tax implications.)
Your money also won’t be earning much. For
example, earlier this year, Ronald Palastro, a CFP with Cobblestone Wealth
Advisors in Brooklyn, New York, had a client who wanted guaranteed monthly
income of $2,750 for five years. This was so he could delay taking Social
Security until age 70, at which point his benefits would reach their maximum.
To get the monthly income needed, the insurance
company required $156,500 upfront. While the math gets a bit tricky, the rate
of return cited by the insurer was just over 2.1%.
“It’s not a great rate, but for the purposes of
giving him guaranteed income, it made sense in this situation,” said Palastro.
Some advisors say that instead of using SPIAs,
people looking for income that isn’t subject to the whims of the stock market
could consider certificates of deposit.
While the interest earned also isn’t high — you
can find one-year CDs offering up to about 2.15% currently — the option can
provide you with more liquidity than SPIAs, along with a guaranteed rate of
return. It also generates more interest than a regular savings account.
Similarly, U.S. Treasury bonds, which are backed
by the government, can also provide a type of guaranteed income. The one-year
Treasury yield is currently about 1.5%. The five- and 10-year yields are
slightly higher but below 2%.
Regardless of other options, advisors say SPIAs
are largely about peace of mind for some clients. And SPIAs often can help
protect assets, depending on the individual’s spending habits.
“A lot of people aren’t good at managing their
money, so if left with the option of withdrawing more than they should, they
will,” Myers said. “A SPIA won’t let you. It can protect people from
themselves.”
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