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The Value of a Deferred Income Annuity


In an article for Marketwatch, our own Andrew Murdoch said that “A deferred-income annuity may help you get more cash later.” Deferred income annuities have increased in popularity over the past few years. Recently, they were overshadowed in the news by fixed indexed annuities as their popularity soared. While indexed annuities are still popular, there is a slight concern after they were unexpectedly included in the DOL fiduciary rule’s BICE guidelines. This might open up the market for deferred income annuities and other annuity products that don’t base their payouts on stock market indexes. Murdoch said that the ideal candidate for a deferred income annuity is someone looking to maximize their future income, income that they don’t need to turn on for a good chunk of time still. These annuities are actually immediate annuities that delay your payments for years. If you’re in your 50’s or 60’s and not looking to retire for awhile, buying a deferred income annuity will get you much higher income payments in the future.

DIAs protect you from running out of money in retirement better than other annuities because they almost always cost less. They are an insurance policy against living a long life that you’ll have to finance with your savings. One type of deferred income annuity that offers tax advantages is a Qualified Longevity Annuity Contract. These DIAs are held within a qualified retirement plan like a 401k or IRA and give you the ability to defer required minimum distributions on a portion of your retirement savings until you are 85. DIAs and QLACs are very popular right now because they really maximize your income stream during retirement. There are 17 companies in the DIA market today, which is twice as many as there were four years ago.

There are a lot of skeptics when it comes to products like annuities who ask what the catch is when the benefits are so great. You have no way of knowing how long you will live, so you don’t know if you’re going to receive what you may consider a good deal on your annuity payments. With DIAs, there is the risk that you will die sooner than you anticipated and you won’t end up receiving your income payments. For this reason, many people opt to add on a rider that will pay your beneficiaries your premium if you die before getting the income. This does lower your payments slightly, so some people prefer to carry their DIA as insurance, knowing there is a small possibility that they won’t need that insurance.

The article included a simple financial example to demonstrate how beneficial a deferred income annuity can be. If a man were to purchase an immediate annuity at age 68 to receive $1,000 per month for the rest of his life, it would cost $170,000. That same man could have bought a deferred income annuity at age 58 (10 years earlier) and paid $120,000 for the same $1,000 monthly lifetime income stream. Deferred income annuities offer strong financial value and benefits, but it’s important to make sure that the benefits they offer match your specific retirement income planning needs. You are not able to access your principal after purchasing a DIA. It would not be the right product for you if you need access to those specific funds. As part of your overall retirement planning, a deferred income annuity can be a valuable way to guarantee lifetime income in the future. You also have the the option to change the start date of your income payments with most DIA products at no added cost. Do your research and compare different DIAs before making a purchase for your personal retirement plan.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

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