In a recent article for The Street, “4 Paths to Future Annuity Income Guarantees,” Stan Haithcock explained your options for delaying annuity income until a later date. Many people incorrectly assume that all annuities are immediate, when a large number of them actually defer your income payments. The article says that there are four different ways you can create guaranteed income from an annuity product that will start at some predetermined point in the future. Annuities are the only products that guarantee a stream of income that will last for as long as you live through a contractual agreement. You will know the exact amount of your income payment even if you don’t activate your payments immediately. The main factor determining your annuity payment is your life expectancy at the time that you will start receiving payments. Interest rates are the secondary factor determining your payout.
Income riders are the option that most people use to create an income stream from a deferred annuity product. They are often used with indexed and variable annuity products and are calculated separately from the accumulation value. Before you start receiving income, most income riders pay a guaranteed annual growth percentage. This percentage seems high in this time of low interest rates, so it’s important to note that it is not accessible as a lump sum or transferable. It is simply used to calculate your future income payment.
Deferred income annuities are a product that have recently been gaining popularity for their higher income payments that start far into the future. These DIAs are sometimes called longevity annuities or longevity insurance as well. With a deferred income annuity, you create your own pension by transferring your longevity risk to an insurance company. Payments can start anywhere from one year to 45 years in the future. The longer you defer your payments, the higher those payments will be but payments are still based mostly off of your life expectancy just like they are with income riders. You select your future payment date when you purchase your deferred income annuity, but can often change that date once during the deferral period if your needs change. There are no annual fees or market correlation with DIAs and they do not grow at all during the deferral period.
QLACs are the next option for creating a lifetime income stream. They have been used in defined contribution plans for the past two years after government regulations made that possible. They are structured like a deferred income annuity, but you are able to delay your payments all the way until age 85. Payments can be taken as early as age 71 though. The Treasury Department and IRS rules allow you to use 25% of your total account value or $125,000, whichever is less, to purchase a Qualified Longevity Annuity Contract. There is also the option to add a spouse on and have a joint-life payout. QLAC payments count towards your required minimum distributions, a benefit that could help lower your taxes when RMDs become active at age 70 1/2.
The final income creation option would be to manage your money, or have a representative do it, and then purchase a SPIA in the future. When you need to start receiving income payments, you would buy a single premium immediate annuity. This allows you to grow your money in the markets and keep it easily accessible. It does come with market risk and also the risk that you’ll spend more money that you would if it was less accessible. You have to be diligent with your planning when using this method of future income creation.
Every American that will receive Social Security payments during retirement already has an annuity. Oftentimes, Social Security income is not enough and people need another source of guaranteed income to carry them through retirement. Four options to create a future income stream using an annuity are to add income riders, use a DIA or a QLAC, or manage your funds until you are retired and then purchase a SPIA. Shop around with multiple annuity carriers to ensure you are getting the best contract for your individual annuity income needs.
Written by Rachel Summit