We’ve talked before in this blog about the increasing popularity of deferred income annuity products. Since 2011, their sales have increased from $211 million to around $2.8 billion last year. The increasing sales of deferred income annuities have come partly from a decrease in variable annuity sales. Investment News’ Darla Mercado discussed the changing retirement income plan landscape in her article “Deferred-income annuities grab spotlight from traditional variable annuities.” DIAs are very similar to single premium immediate annuities (SPIAs) because you pay a lump sum of money to an insurance company in exchange for a lifetime stream of income during retirement. The difference is that your income is paid almost immediately with a SPIA and is often delayed for decades with a DIA.
Two forms of legislation from the federal government last year made deferred income annuity products even more relevant. Qualified Longevity Annuity Contracts within retirement plans are no longer subject to the required minimum distribution rule under certain guidelines, so more qualified plans are including deferred income annuities as QLACs. There was also clarification on how DIAs can be used within target date funds. While the deferred income annuity industry has seen tremendous growth, the sales still pale in comparison to those of variable annuity products. In order to capture more of the annuity market, DIAs have to reach out to and get the attention of more advisors at broker-dealers and wirehouses.
Northwestern Mutual, New York Life and Mass Mutual had almost all of the deferred income annuity sales back in 2011. But now there are 13 companies selling 16 different DIA products. A lot of the increase in DIA sales has come from Principal Financial Group and American International Group, Inc. selling new QLAC products. The earliest versions of deferred income annuities were not as appealing as the products we have now just a few years later. The introduction of death benefits and payment increases to account for inflation have also greatly contributed to increasing DIA sales. There has been increasing flexibility in the product offerings overall, including a flexible income start date on many of the options. The longer you wait to receive income from your annuity, the larger your income payments will be. DIAs are important because they allow you to take advantage of mortality credits if you happen to live a very long life.
Deferred income annuities are often thought of as being used very late in life, but the industry is evolving towards products with earlier income start dates. Mass Mutual says that their DIAs often have income start dates around age 65. Many products are still used for income later in life though. One financial advisor recommended using deferred income annuities around age 75 or 80 to either supplement other income or help pay for long term care. Deferred income annuities can also be used in conjunction with variable annuities without any living benefits. This is an alternative to variable annuities that contain GLWBs, an option that is now being offered less and less. Those variable annuities are more flexible when it comes to control of your money, but they cost more as well. Using a DIA for your income will give you a better payout in exchange for some flexibility.
Researchers like Wade Pfau and David Blanchett have found compelling arguments for the use of deferred income annuities as well. Pfau recommends that people concerned about the markets use a combination of TIPS and DIAs to finance retirement. Blanchett found that it is optimal to use around 30% of your retirement portfolio to purchase a deferred income annuity. While researchers tout the use of deferred income annuities and the government is making them easier for Americans to use in their retirement planning, advisors and clients still have a lot to learn about these products. Some advisors are waiting for more products to enter the marketplace, while some consumers still don’t want to delay their income so long. Deferred income annuities are well used in combination with other income sources, so that each product provides income during a different stage of your retirement.