SPIAs, The Pension Paycheck
SPIA stands for Single Premium Immediate Annuity. Here is how it works. You give the insurance company a lump sum of money. They start sending you a paycheck every month, for the rest of your life, or for a specific number of years. That's it. That's a SPIA. This is the closest thing you can buy today to a pension. Your employer used to give you one of these. Now you have to buy your own. A 65-year-old man puts $200,000 into a SPIA today. He gets roughly $1,300 a month for the rest of his life. If he lives to 95, he collects around $468,000 in payments on his $200,000 deposit. If he lives to 75, he collects $156,000. The insurance company is betting on averages. Some clients win. Some don't. The catch: once you put the money in, in most cases you cannot get it back. It is gone. What you have instead is the paycheck. You have several choices for how the paycheck is structured. Life only. The largest monthly payment. Pays until you die. When you die, payments stop. If you die in year two, your family gets nothing else. Life with 10-year certain. Slightly smaller monthly payment. Pays until you die, but if you die before ten years, your beneficiary keeps getting payments for the rest of the ten years. Life with 20-year certain. Smaller still. Same idea, but the guarantee runs twenty years. Joint life. Pays until both spouses have died. Smaller monthly payment because the insurance company is on the hook for two lifespans.
Cash refund. If you die before the payments equal your original deposit, your beneficiary receives the difference in a lump sum. Payment is smaller than life-only. Period certain only. Pays for a set number of years (5, 10, 15, 20) and then stops. No life component. The right choice depends on your health, your spouse, whether you want to leave something to heirs, and how much of a paycheck you need. Who a SPIA is right for:
A retiree who wants a paycheck they cannot outlive Someone using it to cover their basic monthly expenses (housing, food, utilities) so they can never go below zero Someone supplementing Social Security who wants a second guaranteed source of income Anyone who wakes up worried about running out of money in retirement Someone who wants to spend down assets without the discipline problem of managing withdrawals Who a SPIA is wrong for: Anyone under 60. The payout ratios are too low. Someone who might need access to the money for a big expense Someone without other liquid savings. Do not put your whole net worth into a SPIA. Someone who wants to leave the money to their kids. That is not what a SPIA is for.
A SPIA is one of the most misunderstood and undersold annuities on the market. The commission is small. Agents don't push them. But for the right retiree, they solve a problem no other product solves.