A new study from the Employee Benefit Research Institute found deferred income annuities (DIAs) held within a 401(k) could be a critical component to a secure retirement. According to a recent ThinkAdvisor article, individuals who purchased a DIA at age 65 with no death benefits improved retirement readiness regardless of the age of death if the purchase reflected retirement account percentages on the lower end of the spectrum.
The report, titled “Deferred Income Annuity Purchases: Optimal Levels for Retirement Income Adequacy,” analyzed simulated retirement savings outcomes that were based on the percentage of the 401(k) balance used to buy a DIA. The study also simulated age of death and household income. DIAs are designed to reduce the likelihood of running out of money in retirement by providing monthly payments later in life.
“Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement,” the research, written by EBRI Director of Research Jack VanDerhei, says.
The study found that at current rates, a 65-year-old who purchased a DIA deferring 20 years improved retirement readiness, but specifically when those purchases were 5%, 10%, 1
5% and 20% of a 401(k) balance. The data held true for DIAs with no death benefits. EBRI’s “Retirement Readiness Rating” or RRR was used to calculate the results.
The RRR fell overall when these purchases were equal to 25% and 30% of a 401(k) balance. Long-term care costs are partially responsible for these results, according to the report. Decreases on RRR were found for those passing away before benefits begin, in the 85 to 89 age group. However, for those reaching age 90, the RRR increased, as did the percentage of the 401(k) used to buy a DIA.
Another significant factor on the percentage of a retirement plan used to fund a DIA was the wage bracket of households. Those with higher wages fared better in their RRR for all DIA purchases through 20% of 401(k) values. However, households in the lowest age-specific wage quartiles generally experienced a drop in RRR from the purchase of a DIA without a pre-commencement death benefit, the study found.
Written by Rachel Summit
