How should I evaluate a single-premium immediate annuity (SPIA) for a retiree?

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AcadiFi · Accepted Answer

A SPIA converts a lump-sum premium into guaranteed lifetime income starting within 12 months of purchase. Evaluation rests on four factors: payout rate, mortality credit capture, inflation protection, and bequest impact. Payout rate compares favorably with safe withdrawal: a 70-year-old SPIA might pay 7.5% annually versus a 4% safe withdrawal on the same capital. That premium reflects mortality credits — the insurer pools risk across thousands of 70-year-olds. Inflation erosion is the main weakness of fixed SPIAs; a 7.5% payout looks great in year one but is worth half after 25 years of 3% inflation. Inflation-adjusted SPIAs pay lower initial rates (perhaps 5.2%) in exchange for CPI-linked growth. Bequest impact: a SPIA extinguishes principal value on death unless a period-certain or cash-refund rider is purchased, which reduces payout. Concrete evaluation: $400K SPIA for a 70-year-old paying 7.5% = $30K per year, lifetime. A 4% rule withdrawal on $400K = $16K per year, adjusted for inflation, with 95% probability of lasting 30 years in Monte Carlo. The SPIA dominates on income if longevity is expected. Partial annuitization is common: convert $200K into SPIA for essential spending, keep $200K liquid for discretionary and bequest. Integration with Social Security: claiming SS at 70 effectively provides an inflation-adjusted SPIA from the government at very favorable rates, so commercial SPIAs are often second-best after maximized SS.

How should I evaluate a single-premium immediate annuity (SPIA) for a retiree?

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