If you’re approaching retirement, then I must warn you about something…
Don’t buy a SPIA.
I get it. You’re probably facing a dilemma…
You require a new source of income if you’re ever going to stop working… and maybe you’re years away from being able to take Social Security.
Under those circumstances, a single-premium immediate annuity (SPIA) can seem like a good way to bridge the income gap.
However, while SPIAs can seem to represent a quick and easy solution, they’re far from perfect. In fact, you have better alternatives.
Pros And Cons Of SPIAs
Lifetime annuities date back to ancient Rome. In Latin, “annua” means “annual payments.”
Roman soldiers, for example, received lifetime annuities to compensate them for their service in the Roman army.
Back then, and up until the 20th century, SPIAs were actually the only annuity option available.
That’s understandable when you consider the simplicity of this kind of program.
You hand an insurance company a lump sum of money (a premium), and, in exchange, it provides you with a regular income for your lifetime.
Moreover, there are no setup fees or annual expenses to worry about.
Simple, right?
On the surface, but it can get complicated…
Once you pay the premium, you can’t get it back, except in the form of the annuity. All you have left is an income stream.
This can turn into a big problem if you have a medical emergency or your home damaged by a natural disaster, for example.
Some insurance companies offer SPIAs that allow emergency withdrawals, but their annuities are much smaller.
The same holds true if you want to add a joint owner or name a beneficiary to receive the payments in case of your premature death.
Hence, SPIAs, while straightforward, might not be the right solution… especially with so many other annuity options out there.
5 Better Alternatives To A SPIA
SPIAs return on average only about 2%.
That’s extremely low.
And why I think you should consider these alternatives instead.
One-year CDs (certificates of deposit), for example, currently offer up to about 2.15%, about the same as an SPIA. However, with a CD, you get your investment back in a year or even sooner if you pay a fee. You could, of course, decide to reinvest the capital, but you’re much more in control.
Similarly, you can receive a 1.84% return on a U.S. 10-Year Treasury Bond or 1.52% on a 1-year bond, which, again, you could sell prematurely if you needed or wanted to.
Furthermore, if you’re willing to take more risk, you could invest the money in the largest U.S. stock market index—the S&P 500. Its dividend yield is currently 0.61% per month, and you get the added benefit of value appreciation, which averages about 10% per year.
An even better option is subscribing to my True Retirement Wealth. Right now, the True Retirement Wealth portfolio yields 2.83% per year in dividends. Significantly more than the S&P 500.
One final alternative worth considering could be to buy an apartment and rent it out. You can expect to earn at least 3% net per year from such an investment.
Alternatives to SPIAs are many, and they all offer better returns and access to your initial investment.
So, for the sake of clarity, I’ll say it again… don’t buy a SPIA.
Good investing,
Leon Wilfan
