It’s a conflict faced by pre-retirees: they are still working full time, but that’s going to end soon. They will need income, but they want to delay taking their Social Security benefits for as long as possible. There are assets in place, but what about volatile markets? One option is to look to the world of annuities, says CNBC’s article “Here’s one way to get guaranteed income while delaying Social Security.”
If assets are available, some financial advisors recommend that rather than taking gradual amounts out of retirement accounts, including IRAs, 401(k)s, pensions, savings, etc., the money be used to purchase a single premium immediate annuity, also known as a SPIA.
Annuities offer guaranteed income, either for a set time period or for life, vary widely in their features and can be tricky to understand. They’re also expensive. Annuities are also polarizing — people either hate them or they love them.
SPIAs are a bit more straightforward than other annuities. They make up only a fraction of annuities sold every year, $9.7 billion versus $233.7 billion last year, as reported by the LIMRA Secure Retirement Institute.
The SPIA may be part of the retirement income puzzle, but there are cautions from financial advisors. For one thing, it’s a place to secure a payout over a period of time and not a tool for asset growth.
In exchange for guaranteed income over a set period of time, which could be for the rest of your life, you hand over a lump sum to an insurance company. There’s no set up fee, and it comes with no annual expenses. However, once the transaction is done, you can’t get your money back. You have an income stream, but that’s it. If you or a family member have an emergency, you have no flexibility to get that money back. There are rare exceptions, where insurance companies allow for a limited emergency withdrawal.
The annuity’s income is taxed. Therefore, if you use the money from a tax-deferred account, like an IRA or 401(k), you’ll pay taxes on the income as you receive it over the life of the annuity. If the funding comes from sources that are not tax advantaged, you’ll pay taxes only on the portion of the SPIA that was not taxed through what the insurance company calls an exclusion. Don’t forget that liquidating funds from a brokerage account will generate tax liabilities.
Some financial advisors recommend going with an old-school Certificate of Deposit (CD) instead, or U.S. Treasury bonds, which are backed by the government. The yields are low, but they are secure.
Who is the best candidate for a SPIA? It is for someone who simply cannot manage their money and are best having it be given to them in a highly controlled monthly fashion. In this way, it can protect some people from themselves in retirement.
Reference: CNBC (April 4, 2019) “Here’s one way to get guaranteed income while delaying Social Security”