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Tuesday, October 19, 2010
Suppose you have a parent with a sum of money, or even yourself, at retirement who is fearful of running out of money. You aren't sure how much to draw down, you're fearful of markets, and you understand that inflation eats away at purchasing power over time. What to do?
A Single Premium Immediate Pay Annuity (SPIA) is a way to lessen the fear of running out of money in old age. Basically. the annuitant (you) pay an insurance company a sum of money, and the insurance company will pay you a given amount for as long as you live. There are a couple of negatives: (1) you lose control of the money, (2) there is nothing typically left for heirs, (3) you take on the credit risk that the insurance co. goes bust.
To get a quote is easy and takes about 5 minutes. Call Vanguard at 800-357-4720 and speak to an annuity rep. I did this yesterday and said I wanted a quote for a man and a woman aged 62 and 58 respectively on a SPIA for $530,000 that had a beneficiary payout as well. The $530,000 is the amount I would pay the insurance company. They came back and said they had one quote from American General at $1,490/month that had a death benefit. I asked for a quote with no death benefit that adjusted for inflation. They said 3 companies provided quotes, listed the companies and the amounts which ranged from a low of $1,445/month to $1,559/month, from American General again.
Quotes depend on age and interest rates. Two factors holding down the amount quoted here are the relative young ages of the annuitants and the low level of interest rates. I, for one, would prefer and recommend at this time to invest conservatively and watch interest rates. If, as I expect, interest rates are higher two or three years from now and my clients are older (this is a given!) then revisit the annuity possibility.
This illustrates that quotes are easy to get and that they range fairly widely; and, therefore, it is important to shop around. The Vanguard site has some useful educational materials on annuities that cover the positive and negative features and describe the bells and whistles that can be added on. As a general point of information, bells and whistles cost, i.e. lower the payout.
Just as a matter of arithmetic $1,559 * 12 = $18,708 and 18,708/530,000 = 3.53%.