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
- 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.