Deferred income annuities have become an important and popular retirement tool over the past couple of years. In Sandy Block’s Kiplinger article, “When a Deferred-Income Annuity Makes Sense,” she helps people determine if this type of annuity product is right for their personal financial plan. It’s important to consider your family history when you are looking at deferred income annuities. If you have a lot of relatives who have lived into their 80s, 90s and even 100s, there is a good chance that you will live a long life as well. This is especially true if you have good health and have taken care of yourself throughout your lifetime by avoiding smoking, eating healthy and exercising.
Purchasing a deferred income annuity guarantees you a lifetime source of income that will start at some point in the future. Many deferred income annuity products, also referred to as longevity annuities, start payments late in life around age 80. But there are newer DIAs that allow you to start payments younger. The longer you delay receiving your payments, the higher your income payments will be in the future. The article offers the example of a 65 year old man purchasing New York Life’s Guaranteed Future Income Annuity with $100,000. If the man defers payments for 15 years until he is 80, he will receive $28,695 in income annually for the rest of his life.
One of the downsides to deferring your income for so long is that there is the possibility that you will die before you start receiving your income payments. Deferred income annuities offer higher payouts than other annuities because the insurance company knows that some people will die before receiving their income payments. Most of these annuities offer “return of premium” death benefits that will pay your heirs if you die before collecting your income. Opting for this cash refund feature will lower the man in the above example’s annual income down to $21,601. Since it is not recommended to put all of your money into one investment, it might be to your benefit to “risk” losing your money if you die early so that you will have higher annual income if you live a long life.
There a few other additional options that can be chosen with deferred income annuities. Some insurance companies will let you withdraw money in the case of an emergency even if you have not started receiving income yet. Many insurers allow you to put money into your annuity account periodically rather than having to invest in a lump sum. New York Life’s DIA allows you to start with a $5,000 investment and add $100 at a time up until you are two years away from receiving income. The amount of income you will be paid out is adjusted each time you make a deposit. There are other deferred income annuities that adjust for inflation. If the man in the above example added a 3% annual increase to his Guaranteed Future Income Annuity, his annual payout would change to $24,300. If he combined that with the cash refund option as well, his payout would go down to $18,140 a year. Keep in mind that retirees’ expenses usually decrease each year during retirement, so you may not need that inflation rider after all.
The Treasury Department has made it easier to purchase a deferred income annuity with your 401k and IRA savings. You can use either 25% of your savings or $125,000, whichever is smaller, to buy a deferred income annuity and avoid taking required minimum distributions on that money when you are 70 1/2. This ruling is likely going to bring a lot more insurance companies into the deferred income annuity market and increase competition. More competition will bring better products and innovation to consumers, so it is a win-win. Deferred income annuities are a good way to generate more income in your later years of retirement. Speak with an expert about your personal situation to see if they are right for your retirement planning.