A single-premium immediate annuity (SPIA) is a financial product aimed at providing a guaranteed income for the rest of your life or a set period. It’s especially popular among retirees seeking predictable cash flow without the volatility of market fluctuations.
But is a single-premium immediate annuity the right move for you? We’ll walk through what single-premium immediate annuities are, how they work and the potential benefits and drawbacks to owning one so you can decide if it’s a good addition to your retirement portfolio.
What is a single-premium immediate annuity and how does it work?
A single-premium immediate annuity (SPIA) is a contract between you and an insurance company. Since it’s a single-premium annuity, you make a one-time, lump-sum payment to fund the contract, versus a series of payments over time. Then, the insurer guarantees your payments continue, even if you live longer than expected.
SPIAs tend to be a straightforward, no-frills option compared to other types of annuities, such as variable annuities or index-linked annuities. Fees also tend to be lower. With an immediate annuity like a SPIA, payments start one month to one year after funding the contract.
The amount of income you’ll receive depends on several factors, including your age, gender, the size of your lump sum and the prevailing interest rate.
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How does a SPIA pay out?
SPIAs are tied to prevailing interest rates. Higher interest rates generally result in higher monthly payments. For example, in February 2025, payouts were higher than they were from 2012 to 2020, when interest rates were at or near historic lows.
Annuities are often touted as a way to provide income for life. But these financial products can also be structured to last a specific number of years. If you select a SPIA with a set term — such as five or 10 years — your monthly payments are higher than those from a lifetime annuity because the insurance company pays out for fewer years. The shorter the term you select, the higher your payouts will be.
You can also structure your SPIA in the following ways:
- Life-only: Pays out for as long as you live.
- Joint-life annuities: Continue payouts for your life as well as your surviving spouse after you pass away. Surviving spouses can receive 50, 66.6, 75 or 100 percent of the payment their late spouse received. The higher the survivor benefit, the lower the monthly payout will be for the other spouse
- Annuities with a guaranteed period certain: This structure ensures beneficiaries continue receiving payments from the insurer even if you die within a certain term, such as the first five, 10 or 15 years of the contract. This option slightly reduces monthly payouts.
How much money do you need to buy a SPIA?
While there’s no hard-and-fast rule on how much money is needed to purchase an annuity, in practical terms, you’ll need a hefty sum to generate a meaningful payout from a SPIA.
Consider this example.
A 65-year-old Florida woman purchasing a $500,000 SPIA for her life only with lifetime payouts can expect to receive between $2,858 to $3,219 per month in retirement, according to quotes obtained from Income Solutions, an online annuity marketplace, in January 2025.
However, if that same woman purchases a $100,000 SPIA instead, her monthly payouts shrink to between $575 and $643 per month.
Financial experts typically recommend using an annuity only to cover essential expenses not already covered by Social Security, pensions or retirement plans.
Many retirees may find it difficult to commit so much of their savings to an annuity. This initial cost also comes with losing access to the principal because once the income annuity is purchased, most don’t allow withdrawals.
How do you buy a SPIA?
Numerous online marketplaces, such as Income Solutions, let you compare SPIA quotes from top-rated insurers side-by-side without entering a phone number.
You can also speak to a third-party financial advisor, who can help you vet different offers or work with an insurance broker to gather quotes on your behalf.
Comparing immediate annuities is relatively straightforward. Look at how much income you’ll receive each year based on the lump-sum you invest, your age and chosen payout type (e.g., life only or joint life). Alternatively, you can also enter your desired monthly payout and see how much money you’ll need to bring to the table to fund the contract.
Shopping around is crucial because rates and features can vary widely between providers. Some annuity companies have stronger financial ratings than others, which can affect the insurer’s ability to make good on those guaranteed payouts over time.
Pros and cons of SPIAs
SPIAs aren’t a silver bullet cure-all for retirement planning, but they can be a good solution for the right person. These annuities have their advantages, but if you’re in the market for one, it’s also important to understand their drawbacks.
Pros
A SPIA can simplify financial planning by providing consistent, predictable payments, ensuring funds are available every month. Because of this, SPIAs are often nicknamed self-funded pensions or paycheck replacements, and many consider them a low-risk investment. They can also serve as an alternative to building a CD ladder, and take the guesswork out of managing withdrawals yourself.
SPIAs don’t tie their performance to a stock market index or underlying investments. That means they sidestep the confusing jargon — such as investment subaccounts, participation rates, floors and buffers — commonplace with more complex options. With a SPIA, your monthly payout is set by the insurer when you purchase the contract, so what you see is typically what you get.
Finally, SPIAs tend to have fewer fees and lower commissions compared to other annuity options, so your payouts won’t be stunned by onerous costs like mortality and expense fees or investment management fees.
Cons
Perhaps the biggest downside of SPIAs is the sheer amount of capital needed to generate a sufficient monthly payment.
Another downside is it’s difficult — if not impossible — to get your money out once your payouts begin, putting SPIAs out of reach for retirees with modest savings or those who require flexible access to their cash.
Finally, SPIA payout amounts generally aren’t adjusted for inflation. You’ll need to factor this into your retirement plan, especially if you’re purchasing a lifetime SPIA, since the payout you receive today will be worth considerably less in 20 years.
Is a SPIA right for you?
If you’re nearing retirement or already retired and want to avoid market volatility, purchasing a SPIA can be a suitable fit. It offers a fixed income stream you can’t outlive, which is reassuring if you’re worried about the possibility of running out of money as you age. Knowing your monthly payments are guaranteed by an insurance company can be comforting and provide peace of mind.
SPIAs can also be appealing if you have a low risk tolerance. You likely won’t earn high returns like you would by investing in the best-performing stocks, but you don’t need to stomach the potential losses that accompany those potentially higher returns.
Likewise, if you prefer a “set it and forget it” approach to retirement income and don’t want to manage investments yourself, a SPIA is a straightforward option. You don’t need to oversee a complex portfolio or devise a retirement withdrawal strategy — the insurance company takes care of it all for you.
However, if flexibility or access to your principal is a top priority, a SPIA isn’t a good fit. Once you pay the lump sum, you generally can’t access that money. If you think you may need the funds for an emergency or future opportunities, look elsewhere.
For younger buyers or those expecting a long retirement, a SPIA might provide lower monthly payouts due to the additional years the insurer expects to make payments.
Before making any decisions, consider your financial goals and risk tolerance. Consulting with a financial advisor can help you determine whether a SPIA is the right move for you.
Bottom line
A SPIA offers the opportunity to convert a lump sum into a predictable stream of income, similar to a pension. However, SPIAs come with trade-offs, such as a lack of liquidity and potential inflation risk. Before purchasing a SPIA, weigh the pros and cons carefully to ensure it fits your financial goals. Be sure to compare quotes and consult with a financial advisor to find the option that works for you.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
