SPIA versus DIA: The Basics
Single Premium Immediate Annuities (SPIAs) are a great choice for financial planners or retirees who covet long term predictability and security throughout retirement.
In exchange for a lump sum premium payment, a SPIA provides a fixed monthly payout for the lifetime of the annuitant. The payout amount is based on the current age and life expectancy of the annuitant, so the older you are when you start a SPIA, the higher your monthly payout. Although you cannot access your principal once you start a SPIA, your principal is paid out over your lifetime as part of the monthly payout. Payouts can be based on a single life, joint life, or a period certain.
Deferred Income Annuities (DIAs) are especially attractive to financial planners or retirees who want to maximize future income while protecting against extended longevity. DIAs can be especially effective for retirees who have no need for an immediate income stream, but who anticipate a bigger need for income in the future.
A DIA is sometimes referred to as “longevity insurance” because it can be set up to turn on an income stream at a much later age, for example age 85. One advantage of a DIA over a SPIA is that the same amount of monthly payout can be purchased with less capital because of the time that passes between the premium deposit and the payout. Using current interest rate and actuarial assumptions, the amount of future payout can be substantially higher than current monthly payouts. You may purchase an option upfront that provides for a death benefit to be paid to a beneficiary if an individual dies before receiving any of the payout.
Whether you fancy a SPIA or a DIA, our general view at ALEX.fyi is that you should allocate a third or less of your retirement assets to an income annuity purchase.