Would You Build an Income Stream Based on SPIAs If you are 30?

With pensions becoming as common as the Dodo bird, annuities are losing their negative connotation and are even becoming more and more popular in the main stream financial media.  Despite the fact that I am only 30 I have started giving real thought to purchasing small staggered Single Premium Immediate Annuities as part of my multiple income stream strategy.

What is a Single Premium Immediate Annuity (SPIA)?

At its most basic form an annuity is nothing more than,

a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment.

The easiest type of annuity to understand is the Single Premium Immediate Annuity.  In the simplest form you give an insurance company a lump sum and then they return a monthly, quarterly or yearly check for the rest of your life.  There a few variations or riders you can add but aren’t that important to this conversation such as:

  • If you want to protect your Spouse you can do Joint Lives
  • If you want to protect against the fact that you may die in year 2 you can guarantee a beneficiary will receive a payout for either 5 or 10 years from the contract date
  • If you want to protect against inflation you can add a COLA rider

Building My Own Pension Using Single Premium Immediate Annuities

I must be obsessed with insurance product based retirement income because I have discussed building a pension using whole life insurance in the past.   So my thought process is that I could purchase small chunks of guaranteed lifetime income sort of like setting myself up with a pension that starts tomorrow.

For example I ran a quick quote and $10,000 (way more than I am willing to test for this experiment) buys a 30 year old male (i.e. me) about $100 per month of income (some of which isn’t taxable as it is return of basis).  The company I ran the quote with is not as competitive as others but is a VERY safe company.

Pros of Using SPIA for a Younger Person

  • Simple
  • I can use Different companies depending on who provides the best quote at that time
  • Completely Transparent
  • Easy to think about income in terms of chunks like $5K, $10K rather than waiting till I have a full nest egg
  • Since I don’t need the income yet, I can reinvest it into this experiment
  • I have shifted some market risk to the insurance company

Negatives of this Type of Strategy for a 30 Year Old

  • The quote I used didn’t include an inflation rider – this will obviously take down the monthly income.
  • Not all companies sell or quote for 30 year olds
  • I will not participate in upswings in the market which hopefully there will be a lot of in the next 30 or so years

Right now I am entirely focused on the goal of home purchase so free floating cash is not going anywhere but my savings account, however, I think this would be a cool option one day.

Think about if every year for the next decade I purchase a $10,000 SPIA I could  effectively provide 40+ Year old Evan with a grand a month pension (some of which will be income tax free for a bit of time).

Of course I’ll share what I choose to do with everyone, but I am curious what you think about just the idea of it?

 

UPDATE: I DIDN’T RUN THE ILLUSTRATION CORRECTLY.  TO GET ABOUT $110 FROM THE COMPANY I RAN I NEED TO PUT IN $30,000.  WAY MORE THAN I ORIGINALLY THOUGHT! THE DEFAULT BIRTH DATE WAS NOT SAVED TO MY BIRTHDAY LEADING TO THE CONFUSION.  I WILL NOT BE USING THIS STRATEGY ANYTIME SOON.  

 

9 Responses to Would You Build an Income Stream Based on SPIAs If you are 30?

  1. Am I right in calculating that the $10K would be an immediate 12% return? If so, that sounds pretty incredible! If you don’t mind me asking, who did you use for a quote? My investment bucket-list includes learning more about annuities. I always thought most annuity income was off limits until you were 59-1/2. Is that not the case here?

    • You calcs were right but my illustration were wrong! Doh.

      As to your other points – you are confusing Immediate Annuities and Deferred Variable Annuities.

  2. Thanks for sharing on this Evan. Having this would give you a fixed income of 12% annually and can be quite an attractive deal. However, since this is for the very long term, having it as inflation link would be a must. Do you mind contacting me on this so we can further discuss on the pros and cons on this? I’m curious on how this works, and how it can supplement my portfolio as opposed to holding low beta dividend paying stocks or bonds.

    Cheers,
    Mathias

  3. That quote seems incredibly favorable. A 30-year T-bond (a reasonable benchmark for long term rates) only returns about 3% right now, while that returns 12%. Even with tax complexity etc that seems like a huge win.

    There must be more to the story…

  4. How would this product apply to a senior? I am 65. I had considered naming a son as joint annuitant on my fixed benefit pension but that would result in a reduction of about 780/month, that is about 25% of my estimated monthly benefit. (no cola adjustment) Not attractive. I have considered his buying an insurance policy on my life … but it seems that I’m too old given premiums:payout (though I do understand there would be tax favorable treatment of proceeds).

    Given a 12% payout in your example is this an immediate annuity? Tax consequences?

    This post has stimulated my thinking, however belatedly. Thanks.

    • You have a lot of different questions in here, we can start the convo slow. The 12% payout was wrong for a 30 year old (See the update). Notwithstanding you are not talking about a SPIA you are talking about a pension options which could be very different depending on the actuary calcs it was built upon.

      However, I think the more fundamental question is why are trying to put put your son’s life as a joint annuitant? Are you even allowed to since he is obviously not a spouse? You need to discuss this topic with your HR.

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