A pension, loosely defined, is a regular stream of income.  Can you change some of your ‘assets’ into an ‘income stream’?  Absolutely.  Ideally, 100% of someone’s most basic living expenses would be covered by guaranteed income sources such as employer pensions and social security retirement benefits after retirement.  However, not everyone is covered by an employer pension. Have no fear.  You can create a guaranteed income stream with the help of an “annuity”.

There are many different kinds of annuities.  We are only talking here about Single Premium Income Annuities [SPIA].  These are insurance contracts that guarantee a certain stream of income in exchange for a specific (usually one-time) premium.  A SPIA can be a very helpful and low cost retirement tool for the average person.  [Do not confuse these with variable annuities which are althogether different.]

The first thing to understand about a SPIA is that you are literally and figuratively “giving up” your cash.  You cannot change your mind later (after the usual ‘free look’ period, anyway).  The second important thing to understand is that the ‘guarantee’ is coming from the insurance company and only the insurance company.  Insurance companies are “rated” by different organizations, like “A.M. Best Company,” “Moody’s” and Standard & Poors”.  Picking a company with high ratings should therefore be your top priority.

Unless you are familiar with insurance contract provisions, it pays to have an agent (who will make a commission from the company selected) or a fee advisor (who will search for no-commission products).  This professional can can screen for all companies meeting your ratings criteria.  S/he can then review each company’s SPIA products in regards to payout amounts, payout options and contract provisions.

If you select an insurance agent, try to determine how truly “independent” they are.  Are they willing to ‘contract’ with new companies or do they have their own short list?  One way to find out is to ask for a list of companies that they have ‘access to’.  You also have a right to ask about the commissions being offered by the various companies that meet your criteria to help you determine if you are getting objective advice.

You will need to understand about payout options.  Here are a few examples:

  • Single Life Only – the income stream will continue until your death.
  • Joint with 100% to Survivor – the income stream will continue until the death of both you and your Survivor.
  • Joint with 75% to Survivor – the full income stream will continue until your death, then 75% of the income stream will be paid to your Survivor until his/her death.
  • Single with 10 years certain – the income stream will continue until your death HOWEVER if you die before you receive 10 years worth of payments, the balance of the 10 years worth of payments will be paid to a beneficiary that you designate.

There are many different combinations and permutations of the above.  Make sure that the payout option that you want is available on the specific contract that you select.