S recently received 500k lump sum retirement buyout from employer.

S recently received 500k lump sum retirement buyout from employer. She wants to buy an annuity that will immediately furnish her with guaranteed income for life
What is best annuity for this situation

The Correct Answer and Explanation is:

The best type of annuity for S’s situation is a single premium immediate annuity (SPIA).

Explanation:

A single premium immediate annuity (SPIA) is designed for individuals who have a lump sum of money, like S’s $500,000, and want to convert it into a stream of guaranteed income for life. In this case, the annuity would begin providing payments immediately after purchase and continue for as long as S lives.

Here’s why an SPIA is ideal for S:

1. Guaranteed Lifetime Income: An SPIA guarantees payments for life, which provides S with financial security and ensures that she will not outlive her money, addressing her need for predictable, ongoing income. This is particularly important for retirement planning.
2. Immediate Payments: Since S desires income “immediately,” an SPIA is structured to begin paying shortly after the lump sum is invested. Most SPIAs begin payments within a month or so after purchase.
3. Customization: SPIAs offer various options to customize the income stream, such as the addition of a cost-of-living adjustment (COLA) to help keep pace with inflation, or a joint and survivor option that can extend payments to a spouse or beneficiary upon death.
4. Risk Reduction: By purchasing an SPIA, S will reduce the risk of outliving her savings. The annuity company assumes the risk, providing predictable income regardless of how long S lives.
5. Simplicity and Predictability: Since S wants a simple, guaranteed income for life, the SPIA offers straightforward, predictable benefits with minimal complexity.

In contrast, other types of annuities, such as variable annuities or fixed deferred annuities, might not suit S’s goals as they either don’t start payments immediately or involve investment risks. Therefore, an SPIA is the most appropriate choice for S’s needs for guaranteed income in retirement.