Economic growth, the rate of job creation, incomes, and the stock market have all been improving, but this doesn’t mean the good times will roll indefinitely amid an exceedingly old economic expansion. Analysts widely anticipate slower growth in 2019 and consumer confidence – a good barometer of future retail sales – has been deteriorating sharply in recent months.
So maybe you’re not quite ready to lock up a chunk of money in your first or second annuity because you feel you might need to keep your liquidity higher, longer. Might there be a palatable middle ground?
In fact, there is – and it’s called a deferred-income annuity (DIA). This increasingly popular product is designed for folks who want guaranteed income payouts down the road – but not now – and it costs substantially less than a traditional annuity because the insurance company is not on the hook for payments as long.
LIMRA, an insurance industry trade group and tracker of annuity data, estimates that sales of deferred income annuities will soar 50% this year, primarily because interest rates that calculate payouts have increased. There is also concern about the longevity of the nearly decade-old bull market in stocks.
Better than other annuities, a DIA protects you from outliving your savings. Specifically, it provides a financial shot in the arm in the later stages of retirement, when supplemental income, such as a part-time job, is less likely and medical expenses are typically higher. Prospective buyers are wise to view the purchase of a DIA as a financial insurance policy. Should they need the money, they are far ahead of the game.
In addition to a basic DIA, people can also buy a tax-advantaged Qualified Longevity Annuity Contract, or QLAC, with funds in their IRAs or 401 (k) plans. These defer the Required Minimum Distribution (RMD), starting at age 70 ½, on a portion of your IRA until as late as age 85. You can defer the RMD on 25% of your retirement savings account or $130,000, whichever is less.
Just how attractive is a DIA? Consider, for example, a single man who buys an immediate annuity at age 68 and starts collecting $1,000 a month for life. According to CANNEX, that would cost about $170,000. But if the same man instead bought the annuity 10 years earlier, at 58, and waited 10 years to collect, he would pay only $120,000 for the same lifetime income of $1,000 a month. If he waits longer, he will pay still less.
Some DIAs allow buyers to make multiple contributions to their account before the income stream start date arrives. Some also allow you to change the dates in which payments begin. Still others offer a cost-of-living adjustment as an option, although this would only make sense if longevity is on your side. In addition, you can purchase a cash refund policy that will pay your premium for a while if you die before getting all the income you paid for.
Still, the reality that you may die before collecting a hefty number of payouts is a negative. So DIAs are best for folks in relatively good health and from families with a good longevity background. Another potential drawback is that DIAs, unlike other annuities, don’t offer the option of withdrawing 10% of principal a year penalty-free (this is because your principal is gone).
Nonetheless, the purchase of a DIA often makes good sense these days. Before your buy, however, make sure it is best for your particular situation and, as always, shop around to ensure you get the best deal possible.
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