Managing Cash Flow In Retirement: SPIAs
The Role of SPIAs
Okay, so let's talk about single premium immediate annuity's acronym, SPIA, S-P-I-A. They are the oldest annuity type on the planet and were introduced in Roman times as a pension gift, a lifetime income stream gift to the dutiful Roman soldiers and their families for laying it on the line for the empire. And that's kind of the same structure you'll see with immediate annuities. The pricing is primarily based on your life expectancy when you make the payments. Interest rates play a secondary role. Let me give you a correlation because you probably don't believe me.
When you go to take your Social Security, is the income stream higher when you're 70 than as opposed to when you're 65? Of course, you have less life expectancy because you’re older, which means the payments will be higher, the same thing with immediate annuities. Even if you think you hate all annuities, you already own one. It's called Social Security. It's the best inflation annuity on the planet. Why do I say that? It is because of our friends who supposedly ease the payments if they need your vote.
Furthermore, there are some other sites where when they write immediate annuity quotes, they put a percentage beside the payment to mislead you to think that you're getting that rate of return. So, for instance, when you run a quote with The Annuity Man®, I'm quoting all carriers for the highest contractual guarantee. We can figure out what your monthly number is and if you want it annually or monthly. Then, we list the carriers from top to bottom. The top will be the highest payout, and we can sift through the claims, payment ability, et cetera.
But we have some people bending the truth and trying to get you to believe it's something it's not. If someone has the payment, 5.6% or 6.1% or 7.2%, or whatever that percentage, that does not yield. That's a reflection of your life expectancy, numerically. That's all it is.
Here's the other one that drives me crazy. What misleading agents are doing is they're saying, "This is 5.63 or 6.1%," and they're trying to make you believe that it's a bond. It's not a bond. Do not make that Correlation. I know there are people out there writing about it and brilliant people who supposedly went through excellent universities that now need to be checked because annuities are not bonds.
I've managed bonds before. I understand bonds with Morgan Stanley and all those people I used to work for. They're not bonds. Now the percentage can be used if you're looking at multiple immediate annuities and want to see the difference. But even then, I don't like it because it's misleading, and people don't know what they don't know. And believe me, the other sites know that. So they're throwing that percentage up there going, "Wow, I'm getting 6.12% return." No, you're not.
With bonds, you have a percentage that you can peel off and not touch the principal. With immediate annuities, the income stream is the return of principal plus interest. Let me repeat that. It's the return of principal plus interest. So you're getting your money back. The value proposition of immediate annuity is that when it gets to zero, you're in the annuity company's pockets, and it will pay for you for the rest of your life, regardless of how long you live. There’s no ROI ‘till you die, as I like to say.
Immediate annuities are contracts primarily based on your life expectancy, or if you run a joint, life expectancies, at the time you make the payment, period.
The bottom line is that Immediate annuities are commodity products. There's no one better than the other. Sometimes I like to compare them to a gallon of milk. What I mean by that is the quotes expire every seven to 10 Days. The only way that you can lock in that quote is to go through the application process. And no, that's not a sales pitch. That's just reality.
But that brings us back to the cash flow issue. That percentage cash flow is a reflection numerically of your life expectancy. Should immediate annuities be part of your retirement cash flow strategy? Absolutely because it's a transfer of risk, contractual, guaranteed lifetime income stream. Then when you die, whatever money's left in the account goes to the beneficiary. Even though they’re on the hook to pay, the evil annuity company doesn't keep a penny.
Never forget to live in reality, not the dream®, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.