Consumers and retirement plan sponsors alike are always looking for ways to lower the cost of funding retirement. A new paper by Michael Finke and Wade Pfau says that deferred income annuities used in retirement planning can do just that. This information comes from Insurance News Net’s article “New Academic Research Finds Deferred Income Annuities Reduce Overall Cost of Funding Retirement.” Wade Pfau is a Professor of Retirement Research at American College. Michael Finke works at Texas Tech University as a Professor and the Director of Retirement Planning and Living. These researchers joined forces with Northwestern Mutual on the paper “The Retirement Income Challenge: Deferred Income Annuities Before Retirement.” Deferred income annuities have been drastically increasing in sales and popularity over the past couple of years. While they still account for only a small percentage of overall annuity sales, their sales increase is significant and is likely to continue its explosion in the market.
Finke and Pfau presented their findings last month at the LIMRA LOMA Secure Retirement Institute and Society of Actuaries 2015 Retirement Industry Conference. The conference focused on strategies to succeed in our current and ever-changing retirement reality. Their research included more than 50,000 different simulations that changed longevity, market performance and inflation variables. They researched the changes in an investment portfolio using a deferred income annuity and not using one. The research found that retirement portfolios including a deferred income annuity reduced the overall cost of funding retirement. In addition to that benefit, DIAs also offset risk and provided more flexibility with asset allocation.
Northwestern Mutual’s senior vice president of life and annuity products points out that there are two major risks in retirement: market risk and longevity risk. There is no way of knowing how either of these risks will effect your retirement finances, so you have to plan for both. Defensively, a deferred income annuity protects you from the longevity risk that you could run out of money at some point during your retirement. Offensively, DIAs allow you the flexibility to get added growth and income from other parts of your investment portfolio. You can invest aggressively elsewhere when you know that you have guaranteed income coming later in life from your deferred income annuity. An expert at Annuity FYI can help answer your questions about using a deferred income annuity to lower the cost of funding your retirement.