It’s Easy to Account for Longevity Risk with a DIA

It might seem like we’ve been blogging a lot about deferred income annuities recently and we have.  That’s because deferred income annuities, aka longevity annuities, are all over the news lately.  One of the most recent articles about these products was written for The Huffington Post by Terry Savage.  Savage is a very well known financial expert.  Her article, “Don’t Run Out of Money in Old Age,” discussed the use of deferred income annuities to protect your financial future.  She says that the only way to guarantee income other than with Social Security is to purchase a deferred income annuity.  It pays a lifetime income stream starting at a later age, typically between age 70 and 85.  You pay your premium to an insurance company upfront and they are able to offer higher payouts because they can earn returns on your money while payments are deferred.  She offers an example in the article of a 60 year old man investing $100,000 in a deferred income annuity.  If he takes payments starting at age 70, he will receive $1,001 per month.  He would get $1,596 per month if he waits until age 75, $2,930 if he waits until 80 and $5,880 if he defers payments until age 85.  If you are deferring payments until age 85, you are certainly betting on your longevity.

There are a number of things to consider when you are looking to purchase a deferred income annuity.  Each concern raised by consumers can be addressed, but adding on additional protection will lower your monthly payments.  You have to balance exactly what needs you want covered by your annuity with the costs associated with and the value that additional riders will bring.  Savage says that the optimal age to purchase one of these annuity products is in your 60’s.  Since you will not be receiving payments for awhile, it is crucial to find a reputable insurance company so that you know they will remain strong into the future.  For those who are worried about inflation, some deferred income annuities offer an inflation rider that will increase your payments 3% each year.  This cost of living rider would take the monthly payment in the aforementioned example from $1,001 at age 70 to $873.  If you don’t want to pay the extra cost for this rider, you can ladder your annuity purchases over time to take advantage of interest rate increases.  Many people are hesitant to buy an annuity because they worry that their money will be lost if they die before receiving any or all of their income payments.  Adding on a cash refund guarantee insures that your heirs will get any remaining payments after you die.  This rider would take the $2,930 payment down to $2,455 per month for the 80 year old in the above example.  Spouses can also set up their annuity with a joint income stream that pays out over both of their lives, which also will reduce your payment.

Although you might not have heard of deferred income annuities before, the government has and they have been making it increasingly easier to use these products within retirement plans because of their importance for the future.  Some agents don’t even mention these annuities because they pay very low commissions.  Annuity expert Stan Haithcock has predicted that deferred income annuities will actually be the top selling annuity product in 2020, despite only accounting for 2% of all annuity sales currently.  You can now use DIAs as Qualified Longevity Annuity Contracts within 401k plans and IRAs to shield 25% of your retirement account from being subject to required minimum distribution laws when you turn 70 1/2.  We expect many more 401k plans to offer these deferred income annuity options in the near future.  How long we will live is probably the biggest unknown in our lives and something over which we don’t have complete control.  Deferred income annuities offer peace of mind in retirement that you will not run out of money.

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