With Americans living longer these days, the thought of it is very comforting to the extent of knowing that we will be around a lot longer for our families, friends, and loved ones. With many of us though, the trade off is worrying about the possibility of outliving the savings we built up for our retirement years.
Between healthcare expenses and inflationary cycles of the economy, it can be financially crippling. You may be able to offset this financial quandary by looking in to immediate annuities or SPIA’s – single premium immediate annuities. While most annuities are designed for building retirement value, SPIA’s were specifically developed to provide immediate income once you enter into your retirement years.
As with other annuities, immediate annuities are contracts between your insurance company and you. Additionally, the more conservative investor tends to invest lump sums of money in these so that they can cover their retirement expenses over a long period of time. In return for the lump-sum investment, you are paid a monthly income until you pass away.
The advantages and disadvantages of immediate annuities
Immediate annuities require that the account holder or annuitant deposits a lump-sum payment and in most cases, they start receiving scheduled payments almost immediately after setting up the contract with their insurance company. The annuitant also has the option to receive those payments over their lifetime or a fixed period of time. The following is a list of the advantages and disadvantages of investing in immediate annuities.
Benefit of Exclusion ratio- refers to the non-taxable portion of the annuity and defined as the repayment principal amount
Better returns on investment – immediate annuities provide offer very attractive repayment rates especially during economic times when values are spiraling downwards with other investment instruments
Protection from creditors – even during times of financial hardship, immediate annuities will provide you with an income. Many states offer protection from creditors attaching the account. They are an excellent option should you have to declare bankruptcy.
Regular income stream – probably the primary benefit is the regular income that an immediate annuity provides the investor with. This is especially true for those individuals who do not have the luxury of a regular revenue source.
A double-edged sword – realize that if you choose the lifetime payment option, that insurance company is obligated to make those payments for the duration of your lifetime. However, if you should pass away in the first 30 days, that insurance company will take what you have contributed and your heirs will never receive any benefits.
Fair returns on investment – when compared to the returns that you could realize with stocks, these are considerably less. If you are looking for a higher rate of return, this is not an investment to pursue.
Inflationary weaknesses – statistically, the income value of annuities has always been eroded by inflation and immediate annuities are no exception, so you should be cautious if you choose to invest in any of these.