If you retire from your current employer, will you receive a monthly payment for life? If yes, then go ahead and do a little jig. This is a rare arrangement these days.
As of March 2020, 67% of employees in the private sector had access to employer-sponsored retirement plans, states the Bureau of Labor Statistics. Of these, 52% were defined contribution plans. Additionally, 12 percent had access to both defined contribution and defined benefit pension plans, while 3 percent had access only to defined benefit plans.
Even if your company doesn’t offer such plans, you can still have your own pension through an annuity that you fund yourself. In either case, when it comes to your retirement plan, you’ll have many choices to pick from. And, one of these annuity types will be a single-life annuity.
What is a Single Annuity?
A single-life annuity is similar to other annuities in that it guarantees a set amount of income over its lifetime. In other words, this guarantees that you won’t run out of savings in retirement. And, as with any other annuity, it’s a contract with an insurance or annuity company.
So, what makes a single-life annuity stand out from other retirement options?
A single-life payout is an annuity or pension that only pays out to one person. In turn, this means a single-life payout will be received by one individual. The’ll receive these payments for the rest of his/her life. But, the payments will stop upon his/her death.
Because payments will cease upon your death, you can receive higher payments. As such, this makes this type of annuity appealing to anyone who doesn’t have any family members or heirs.
Even though payments can be bigger, there is also a greater chance that you will lose your investment if you die before receiving your annuity payments, since payments do not continue past your death. Also, this option may not be viable if you intend to provide financial security for others after you pass away.
In short, a single life annuity is essentially a guaranteed income stream for you and you alone.
How a Single Life Annuity Works
Single-life annuities are a pretty simple concept to grasp. In exchange for a lump sum of money, an insurance company will send you a payment for life — usually on a monthly basis.
If a 65-year-old man invests $100,000 in a single life annuity, for instance, he will immediately start earning 6%or about $6,000 per year for the rest of his life. That may not sound like a lot. However, it’s still higher than the 4 percent withdrawals that most advisors urge people not to exceed in order to prevent outliving their nest egg.
Due to the fact that they return some of your principal investment and interest, annuities can generate a higher payout. You also end up subsidizing people who live longer because of the way your money is pooled with others.
Who Should Consider a Single Life Annuity
People who are not married are better off with single life annuities since they have the highest payout. They’re also a good choice for singles getting ready to retire soon.
What about younger investors in their 20s or 30s? It may be better to invest in stocks than to buy an annuity if you fall into this category. Their portfolios will be less sensitive to market cycle changes since they have decades before retirement. In short, they have plenty of time to make-up any potential losses.
Overall, most people benefit from guaranteed income from an annuity when they are 55 to 75 years old. Mainly because their income is not affected by market movements. For those in their late 70s and 80s, however, annuities could not be a good investment. In comparison with other retirement financing tools, annuities are relatively expensive.
A single life annuity could increase a couple’s retirement income if they have a pension or other savings that can provide retirement income. An annuity holder’s surviving spouse would probably have lower living expenses after his or her death.
Who Should Not Consider a Single Life Annuity
When married people have few other retirement savings sources, single life annuities are the least viable option. Even so, for couples with other retirement income options, a single life annuity may be suitable.
You may want to consider a single life annuity if your spouse can live on other income. But if the annuity’s the only source of retirement income, then a joint and survivor annuity might be better.
In addition, you can’t leave a bequest to someone other than your spouse with a single life annuity. You might consider another type of annuity that makes a lump sum payment or pays survivors regular monthly if you’re worried about bequeathing assets.
Single Life Annuity Payout Options
There are different options for payouts with single life annuities, like with other types of annuities. These include;
- Single life payment. Monthly payments for this type of payment are typically higher. There are no more payments to beneficiaries following your death. In most cases, a single life annuity can either be;
- Immediate. You’ll receive payments soon after purchasing the annuity.
- Fixed. Since the interest is set, this is the most predictable option.
- Fixed indexed. Annuities like this are linked to a specific index, like the Nasdaq.
- Variable. With this annuity, your income is determined by your investment portfolio.
- Single life with term certain. Your monthly payments decrease a little, but if you die before the specified term ends, your beneficiaries will receive payments for a predetermined period.
- 50% joint and survivor. Your monthly payment is lower to ensure your spouse receives 50% of the annuity payments for the rest of their lives.
- 100% joint and survivor. The payments are often the lowest, But in return, your surviving spouse gets 100% of his or her original annuity payments.
It’s important to consult with a retirement planner or financial planner before making a decision since various payout options with impact your retirement.
What’s the Difference Between a Single Life Annuity and a Joint-and-Survivor Annuity?
As a retiree, you have the option of choosing either payments that last just for you – or either payments that last both for you and your spouse, explains CNN Money. A single-life annuity is a type of sole coverage. A joint-and-survivor annuity is what you choose if you want it to be a family affair. During the course of your lifetime, if one of you dies, the survivor will continue to receive the benefit.
Since the payout period is longer with a single-life annuity than if you opt for a joint-and-survivor benefit, you can expect a higher monthly payout. Regardless if you have a company-sponsored plan or one you purchased yourself, contact whoever is managing the company. Using both scenarios, they will produce a report that outlines precisely what you will get.
You should consider a joint-and-survivor benefit to protect your surviving spouse if you have limited retirement savings outside of your pension. One important thing to keep in mind is that you cannot usually modify a payment plan once you decide on it.
Monthly or Lump Sum?
When a person retires, they may be asked to choose between receiving lifetime income (an annuity) and receiving a lump-sum payment to take care of their day-to-day living expenses. A lifetime income stream is provided by an annuity, while a lump sum payout is made only once.
Due to the fact that this decision will impact your financial future, we want to provide some information to assist you in making the right choice. It’s crucial to carefully consider many factors before choosing an appropriate option, such as the following factors.
Life expectancy.
A simple way to analyze it is to compare the annuity payments offered with what you could earn by investing the lump sum yourself. Three assumptions are crucial in this equation;
- Life expectancy
- How much you’ll make from your investments
- The risk (or certainty) of that return
Often, life expectancy is considered as the most important assumption.
If you’re in good health or believe you or your spouse will live past the average life expectancy, you’re more likely to want monthly payments instead of relying on your ability to extract income from a portfolio over a similar period of time. On the flipside, while people with poor health who don’t expect to live long will probably prefer a lump sum.
A retiree’s life expectancy is one of the most significant risks they can face. An annuity generally becomes more attractive over the course of your lifetime because the payment is guaranteed regardless of how long you live.
Caring for others.
You might consider having other investments that can provide a comfortable retirement for your spouse after you pass away if you have a spouse who will need support after your passing. As a replacement option, one of the survivors benefits listed above can help you (and them) feel more secure and at ease.
Current income needs.
Your annuity or lump sum payments to use in the future or include in your gift and estate plan may be an option if you have sufficient sources of retirement income (a large portfolio, Social Security, other lifetime income sources, etc.).
Risk.
For many retirees, cash flow reliability is important in retirement. Keep track of your investments no matter what’s happening in the markets with a steady monthly check.
Consider first what proportion of your retirement income will be at the mercy of markets, and how much is guaranteed, such as Social Security, pension, or an annuity? How comfortable are you with this balance? An annuity may be an option if you are uncomfortable with this balance. If you are comfotable, opt for the lump sum.
Inflation.
Unless your annuity includes a cost-of-living adjustment, your purchasing power will decline. As part of an investment plan, a lump sum might be allocated among stocks and TIPS (Treasury Inflation-Protected Securities) to maximize assets’ ability to keep pace with inflation. Or, you could explore an inflation protected annuity (IPA) or attahcing a rider that does the same.
Convenience.
In retirement, it will be nice to receive a check that automatically arrives in your bank account, particularly if you plan on doing things other than managing your portfolio. When you don’t want to create your own income from your portfolio, rely on a financial advisor. He or she can implement a total-return strategy that generates income for you.
Cost comparison.
There are likely to be some investment fees associated with managing a lump sum, like management and transaction fees. These costs are already accounted for in annuities, but they may not always be clearly spelled out.
Comparing the income paid from several low-cost, high-quality providers can help you determine which is the best option for you.
Taxes.
One option for a lump-sum payout is to roll it over to a traditional IRA and defer taxes until the payout is received. In case you don’t roll over a lump sum, a large tax bill will result. Discuss the advantages and disadvantages of rolling over a plan to an IRA with a financial advisor and a tax expert.
Gift and estate planning.
You lose your annuity when you die unless you choose a guaranteed term or survivor benefit option. If there is a balance, the lump sum could be passed on to heirs. When contemplating whether to take a lump sum or an annuity, make sure you take into account your gift and estate planning goals.
Can you have both?
You may choose to take a lump sum and then use a portion of it to purchase an immediate fixed annuity of high quality. After all, having a passive income source in place can increase comfort and confidence for retirees and help them manage other investments more effectively. Take into account your financial situation, risk tolerance to market, longevity, and other risks associated with retirement.
Frequently Asked Questions About Single Life Annuities
1. What is a single life annuity?
The single-life annuity (SLA) is a type of annuity which pays out for the rest of the owner’s life. Depending on how much money is invested and when they start taking payments from the SLA, the payout amount will be different. You’re guaranteed to receive payments until you die under an SLA. You can receive payments monthly, quarterly, semi-annually, or annually.
A single-life annuity is also known as a straight-life annuity.
2. Do I pay taxes on a single life annuity?
Taxes are not due on your annuity until you withdraw funds or begin receiving payments. When you withdraw money from an annuity acquired with pre-tax funds, the funds are taxed as income. You would only pay taxes on the earnings if you purchased the annuity with post-tax funds.
3. What happens to a single life annuity when I die?
With this type of annuity, you will receive lifelong payments. It doesn’t have a death benefit, meaning upon death payments will cease. Alternatively, you can buy an annuity with beneficiary provisions.
4. Are there alternatives to single life annuities?
Annuities with a single payout may not make sense for many people. It may make more sense to choose another type of annuity if you have family or heirs that you are responsible for financially.
For couples, a joint or survivor annuity may be a good fit. The surviving annuitant receives payments from this type of annuity after the death of the other.
Alternatively, a period-certain annuity might be an option. The payment period of a period annuity is fixed, regardless of how long you live, as opposed to a straight life annuity, which is tied to your lifespan. After you die, your spouse, family member, or other beneficiary will receive the remaining payments.
5. Is a single life annuity a good choice?
Among payout annuities, a single life annuity is not one of the most popular choices. Most people choose to get their immediate annuity payments in a different way due to its limiting features and the lack of cash value at death.
As a retiree ages, this product becomes more valuable. However, if you intend to continue paying your spouse or other beneficiary after your death, a single life annuity might not be the best option. To find the best fit for your needs, compare all the annuity plans you are considering.
There are many options for annuity payouts and death benefits offered by insurance companies. In light of this, make sure you ask specific questions of your agent or financial advisor based on your personal financial circumstances.
