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A Deferred Income Annuity Offers Guarantees

The recent Treasury Department changes to deferred income annuities have been all over the news this past week.  Kiplinger’s Kimberly Lankford was asked whether it makes sense to buy one of these annuities now and her answer offers “Good Reasons to Buy a Deferred Income Annuity.”  These annuities are the best way to guarantee that you won’t run out of money during your retirement.  The Treasury Department announced last week that it was changing its tax rules so that deferred income annuities could be better utilized in 401k plans and IRAs.  You no longer have to worry about taking required minimum distributions before you are ready.  There are a few reasons why it is beneficial to use a deferred income annuity in your retirement planning.

Deferred income annuities, also known as longevity annuities or longevity insurance, help to eliminate longevity risk from your retirement.  You purchase an annuity with a lump sum before retirement age and defer your payments until later in retirement.  You’ll receive lifetime income payments that are guaranteed.  Some people use a deferred income annuity to finance only their later years.  They make withdrawals from their savings until age 85, then use their deferred income annuity to provide income for the rest of their years.  When a couple is both alive at age 65, there is a 60% chance that at least one of them will live to be 90 and a 30% chance that one will make it to age 95.  You don’t have to defer your annuity payments that long though.  You can start receiving payments earlier in life if that’s how you set up your financial plan.  It’s important to note that the longer you defer receiving annuity payments, the higher your payouts will be.

Before the Treasury Department changed their rules, the required minimum distributions at age 70 1/2 were not allowing people to take full advantage of deferred income annuities in 401k’s or IRA’s.  Their investment values were limited because they couldn’t have long deferral periods if they wanted to.  With MetLife’s 401k deferred income annuities, you no longer have to take money out at age 70 1/2 to meet the required minimum distributions.  In the past, you could only avoid that by having some of your money in a Roth IRA because those don’t have RMDs.  Insurance companies are now extending the withdrawal ages to 80 and 85, depending on the company and annuity.  Now that you can defer your payments longer and receive a better payout, more companies will start selling deferred income annuities and competition will increase.

Deferred income annuities are worth a look for your retirement plan, especially now that required minimum distributions in 401k plans and IRAs have been eliminated.  You can guarantee income payments that will last as long as you live with a deferred income annuity product.  Now that you can defer your payments past age 70 1/2, you have the option to receive larger payouts in retirement.  Ask an expert if deferred income annuities are right for you.

Written by Rachel Summit

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

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