Direct Purchase of SPIA
My wife and I are both in our early sixties. We currently each have a single traditional IRA. My plan is to use each IRA to purchase a Single Premium Immediate Annuity with Joint Life Income (100% to the Survivor). I want to do this so I don’t have to be concerned about IRA RMDs or stock market fluctuations in the future and the idea of a guaranteed monthly paycheck for life is appealing. My question is can I purchase a SPIA directly from an Insurance Company avoiding large agent commissions?
Permalink Submitted by Al Fry on Wed, 2008-05-28 18:31
No. However you don’t pay the commissions anyway, they are paid by the Company and are derived from various loads, fees and surrender charges. Only a licensed agent or home office employee can get a “no-load” annuity. That said, however, there can be a wide variance from one annuity to the other. If you are choosing a SPIA, the comparison should be on the payout, not necessarily the fees or commissions. Annuity A can have lower fees than annuity B, yet have a lower payout because of using different tables and/or assumptions. I would use an independent advisor or agent that can show you more than one annuity, or at least compare payout rates. Al
Permalink Submitted by Mark Devlin on Wed, 2008-05-28 20:47
Thanks for your response. I planned on choosing an SPIA by first reviewing the ratings from A.M. Best, Standard & Poor’s, Moody’s, etc. of various insurance companies. Then I would compare payouts from the top companies. I wouldn’t be interested in a poorly rated company with a higher than normal payout. Is this approach sound?
Permalink Submitted by Alan Spross on Wed, 2008-05-28 21:40
It is an excellent idea to check the insurer ratings since the financial stability of the insurer is the only thing standing behind your annuity payouts. In some states there might be some level of protection from an insurance guarantee fund.
That said, be aware that Social Security is also a life annuity, as is any traditional pension income. If you move all of your IRA funds into an SPIA, unless you have other retirement funds, you will have little flexibility to address emergencies or other needs because your entire income will be fixed other than what are typically inadequate COLA formulas. The single largest factor in an SPIA payout is the company assessment of future interest rates. When longer term rates are low you will get less than when they are higher. With the current interest rate cycle nearing the end, it may pay to wait until inflation becomes a greater concern (and it likely will) and rates rise to address that. Remember that your decision to annuitize is irrevocable other than selling it at a massive discount to sharks waiting to capitalize on people’s desires to get out of an annuity.
IRA RMDs are very easy to calculate and you can easily get assistance from your IRA custodian. If you have -0- exposure to stocks, you will have a tough time beating inflation and may well not be able to keep up with it, particularly since retiree inflation is driven by medical costs.
If you want to check with a low cost annuity provider check with Vanguard along with any others. They are also very large and financially secure. While an SPIA can be a good idea for a portion of your retirement funds if you are in good health with a history of family longevity, but not for your entire basket of retirement funds, even though SPIAs do come with certain options.
Remember, you can never outlive your annuity income, however it is often overlooked that the largely fixed income amount can become insufficient to pay for rapidly increasing costs over many years. Therefore, you CAN outlive the adequacy of the annuity income stream.
Permalink Submitted by Mark Devlin on Thu, 2008-05-29 00:35
Thanks Alan for your detailed reply. Much appreciated. I am aware that Social Security and traditional pensions are both life annuities. My wife and I have worked all of our lives and will receive Social Security based on our own individual earnings, when we apply. We also are each are receiving pensions from previous employers. My wife is still working, I am not. The IRAs we currently have are about 50% of the money we have saved for retirement not including our home. We have no debt. Longevity runs in both of our families and I figure we could both see 90 at which time a dollar will be worth only 50 cents or with the ways things are going maybe only a dime.
While I consider myself financially knowledgeable and computer literate my wife is not. I wouldn’t have any problems with RMDs but she would have no idea. My goal is to make our finances as simple as possible so if something happens to me things are as easy for her as can be. I don’t want her to get conned in to something that I wouldn’t do. I might be guilty of analysis paralysis but I don’t make decisions unless I clearly understand what I am getting into. Maybe I am trying too hard to take care of her from the grave. I would be looking to purchase an annuity in the next six to eighteen months when hopefully interest rates have risen. Thanks again for your comments.
Permalink Submitted by Alan Spross on Thu, 2008-05-29 00:51
Having the other 50% certainly provides you with flexibility. Perhaps Al Fry has more suggestions, as he works with annuties regularly. I do not. Good luck.
Permalink Submitted by Al Fry on Thu, 2008-05-29 15:42
I would only add that there are products available that allow market returns with floor guarantees.
Permalink Submitted by Bruce Steiner on Fri, 2008-05-30 03:09
There are also a few that adjust the payments for inflation, though the initial payments will start out lower.
Another choice is to provide for her (as to your non-IRA assets) in trust rather than outright, with a bank or trust company as a trustee (either alone or together with one or more individual trustees).