SPIA Annuities: The Only Asset Class That Pays You for Dying Early
SPIA Annuities: The Only Asset Class That Pays You for Dying Early
EXECUTIVE SUMMARY
- The Mechanism: A Single Premium Immediate Annuity (SPIA) is a simple contract. You give an insurance company a lump sum (e.g., $100k), and they guarantee you a monthly check for life (e.g., $600). No hidden fees, no market linkage.
- The Alpha: Bonds pay you Interest + Principal. SPIAs pay you Interest + Principal + Mortality Credits. These credits are funded by the pool of annuitants who die early, subsidizing those who live long.
- The Role: A SPIA acts as a “Super Bond.” It replaces the fixed income portion of your portfolio, allowing you to hold the rest in equities for growth. It raises the “Safe Withdrawal Rate” of the entire portfolio.
- Authority Baseline: This analysis utilizes the research of Dr. Moshe Milevsky, who mathematically proved that for a risk-averse retiree, a portfolio with a SPIA is always superior to a portfolio of just stocks and bonds.
“Annuity” is a dirty word because commissioned salesmen push complex, expensive products (Variable/Indexed Annuities). But the SPIA is different. It is the vanilla ice cream of retirement. It is the only financial instrument capable of manufacturing a “pension” out of thin air. According to Team BMT Analysis, allocating 20-30% of your portfolio to a SPIA can “floor” your essential expenses, rendering stock market crashes irrelevant to your survival. Source: Wharton Pension Research Council / Milevsky “The Implied Longevity Yield”
Scenario: 70-Year-Old Male invests $100,000.
- Option A (Bond Fund – BND): Yields 4.5%.
Income: $4,500/year. Principal remains (but fluctuates).
Risk: You might outlive the money if you draw down principal. - Option B (SPIA): Payout Rate ~7.5%.
Income: $7,500/year (Guaranteed for Life).
Composition: ~4.5% Interest + ~3.0% Return of Principal & Mortality Credits.
Verdict: You get 66% more cash flow today than bonds can provide.
BMT Verdict: Buying a SPIA is not an “investment” decision; it is a “longevity hedging” decision. Mathematically, no bond portfolio can match the payout of a SPIA for a long-lived retiree because bonds do not confiscate the principal of those who die early. That subsidy is the ‘Free Lunch’.
Survival Probability vs. Income Sustainability
| Age of Death | Bond Ladder ROI | SPIA ROI (Internal Rate of Return) |
|---|---|---|
| Dies at 75 (Early) | 4.5% (Heirs get remainder) | -15% (Loss of Principal) |
| Dies at 95 (Late) | 4.5% (Money ran out) | 8.5% (Mortality Credits Kick In) |
*Chart Note: SPIAs are a bet on your own longevity. If you live past the “breakeven age” (usually ~83), the return on investment skyrockets because you are spending “dead people’s money.”
“But the insurance company keeps my money when I die!” Yes, that is the price of the higher income. If you want to leave a legacy, use life insurance or the rest of your portfolio. Do not use the SPIA money for heirs; use it for you. Attempting to add “refund” features to a SPIA just lowers the payout and destroys the mortality credit advantage.
CRITICAL SCENARIO: The “Inflation” Vulnerability
The check is fixed, but prices rise.
| Strategy | Pros | Cons |
|---|---|---|
| Standard SPIA (Flat) | Highest initial payout. Maximizes lifestyle today. | Purchasing power drops by 50% in 20 years (at 3% inflation). Risky for young retirees (60s). |
| COLA SPIA (Inflation-Adjusted) | Protects purchasing power. | Initial payout is 20-30% lower. Often better to buy a flat SPIA and keep stocks for inflation protection. |
Execution Protocol
Total Monthly Essential Spend (Housing, Food, Healthcare) minus Social Security = The Gap. Only buy enough SPIA to cover The Gap. Do not buy more.
Payout rates vary wildly. Use a broker who checks the Cannex database to compare quotes from 10+ carriers (e.g., NY Life, MassMutual). Do not just buy from your local bank.
Don’t buy all at once. Buy a chunk at age 70, another at 75, another at 80. As you age, the mortality credits increase (payouts get higher), and you hedge interest rate risk over time.
If you have a terminal illness or short life expectancy, stay away. SPIAs are strictly for those who fear living too long, not dying too soon.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a portion of your IRA to buy a QLAC (Qualified Longevity Annuity Contract). It is a deferred SPIA that starts at age 85, providing massive longevity insurance while reducing current RMDs.
- Avoid This: Buying “Variable Annuities with Income Riders.” They charge 3-4% fees for a guarantee that a simple SPIA provides for almost zero explicit cost.
Frequently Asked Questions
What if the insurer goes bust?
State Guaranty Associations cover annuities up to a limit (usually $250k-$500k per insurer). Diversify carriers if buying large amounts to stay under these caps.
Can I cash it out?
Generally, no. A SPIA is irrevocable. You traded the lump sum for the income stream. There is no cash value. Liquidity is the price you pay for the yield.
Is the income taxable?
If bought with IRA money, 100% is taxable ordinary income. If bought with Cash (Non-Qualified), only the interest portion is taxed; the return of principal is tax-free (Exclusion Ratio).