You could say that Joseph Tomlinson practices what he
When he took early
from an insurance company a number of years ago, he bought an
income annuity to provide a guaranteed income stream.
Along with some savings, it was meant to help cover his and
his wife's basic living expenses.
Evidently, the strategy worked. Tomlinson, a retirement
funding researcher, advises retirees to seek a guaranteed income
The strategy involves covering ongoing basic retirement needs
with predictable income from Social Security and any pension.
If they aren't enough, he advocates filling the gap with an
income annuity. He specifies a single premium immediate annuity
(SPIA), which is typically paid for from savings. Once their core
needs such as food and rent are met, retirees can spend or invest
remaining savings as they see fit.
"People are living longer in retirement, and ever fewer of
them have a pension," said Tomlinson, who lives in Greenville,
Maine. "To reduce the risk of running out of money in old age,
they need to find other sources of guaranteed income, such as
Surveys show widespread concern about outliving one's money
and fear that Social Security might not cover the basics. Signs
show rising interest in supplementing those with income
annuities. Experts say these are comparatively simple and low
Sales reflect rising popularity. From 2009 to 2013, sales of
SPIAs and deferred income annuities (DIAs) surged almost 40% to
$10.5 billion, the LIMRA Secure Retirement Institute says.
"By 2018, LIMRA projects that income annuity market (SPIAs and
DIAs) will probably double to $22 billion," said Jafor Iqbal, the
institute's associate managing research director. He links that
growth to the rising tide of retirees, who increasingly will lack
But annuities inspire questions. As
adviser Jonathan Duong of Denver puts it, "Annuities can be a
good tool, but they aren't right for everyone."
Among their potential drawbacks: SPIAs can't be cashed in
early. And payouts from income annuities hinge on current
interest rates as well as a buyer's age. In today's low interest
rate environment, SPIA investors can expect more modest
What might that amount to today? Tomlinson illustrates: If an
unmarried 65-year-old woman buys a $200,000 income annuity, with
a 10-year period-certain provision -- meaning that if she dies
before age 75, a specified heir would receive the payouts until
the 10-year period ended -- she would receive $1,014 a month,
equal to an annual 6.08% payout rate.
If she had bought the same policy in late 2008, when corporate
bond rates were higher, she'd have received $1,286 per month, or
a 7.7% annual rate of payout, he says.
Age of the SPIA buyer is another factor. As Jonathan Duong
points out, the older the SPIA buyer, the higher the income
stream he'll get. Duong suggests potential SPIA buyers wait until
reaching their 70s.
Financial planner Paula Hogan of Milwaukee suggests a way to
deal with low interest rates. Ordinarily she suggests SPIA buyers
stretch out purchases over five years.
By buying SPIAs even more gradually, retirees have a better
chance of getting higher annuity payouts later if rates rise.