If you plan to live to a ripe old age, a deferred income annuity, or DIA, could provide you with the income you need later in life. In fact, if you’re in relatively good health and your life expectancy is in the healthy double-digits, a DIA could be a great addition to your overall retirement income plan.
Given our longer life expectancy today, many people are concerned about outliving their savings. On top of that, as we age, we tend to incur higher healthcare-related expenses – even with Medicare insurance coverage. A DIA can help you to solve these concerns.
What exactly is a deferred income annuity, or DIA, and why are these financial vehicles becoming more enticing as a component of retirees’ income plans?
Deferred income annuities, which are sometimes referred to as “longevity annuities,” are similar to other types of annuities in that they represent a contract between you and an insurance company.
In this case, you typically contribute a lump-sum premium in exchange for a guaranteed lifetime income that starts at a date in the future – in some cases, up to 40 years in the future!
Why would someone want income that doesn’t start right away?
One reason is that the income payment is typically higher as compared to a regular immediate annuity that starts the income stream immediately (or within a year of making your contribution).
As an example, let’s say that at age 60, you have an anticipated life expectancy of 30+ years. So, you purchase a deferred income annuity with a lump sum of$100,000, and you schedule the income payments to begin when you turn age 80 (which is 20 years in the future).
Based on current projections, you will be able to receive $3,500 per month in income from the annuity (or $42,000 per year). If you live to age 95, and you end up receiving 15 years of payment from the deferred income annuity, you will have taken in a total of $630,000. ($42,000 x 15 years = $630,000). Not a bad return for your initial $100,000 contribution!
On the other hand, if you had instead waited to purchase an immediate annuity when you were age 80, the result would come out a bit differently. In this case, you could have taken your $100,000 at age 60 and invested it for 20 years into a “safe” investment vehicle that returned 3% per year.
At age 80, your original $100,000 would have grown to $180,000 – so you use that $180,000 to purchase the immediate annuity at age 80. Given your life expectancy at that time (approximately 15 years), the immediate annuity would pay out roughly $1,500 per month, or $18,000 per year.
At age 95, you would have received a total of just $270,000 – less than half of what you had received from the deferred income annuity. This is a far cry from the total income received with the DIA.
Some Considerations Before Purchasing a Deferred Income Annuity
While the income stream that is generated from a deferred income annuity can oftentimes be significantly higher than that of a regular immediate annuity, there are still some items to consider before you commit to this type of financial vehicle.
First, with many DIAs, if you pass away before you receive income, you end up forfeiting your contribution to the insurance company. With that in mind, a deferred income annuity might not be a wise choice for those who are not in good health. (Although there are some deferred income annuities today that offer an optional death benefit rider where a named beneficiary will receive either the amount of premium you contributed or an income stream for a set period of time).
Plus, as with any type of annuity, although the benefits can be substantial, it is always best to place just a portion of your savings into the annuity, while carefully diversifying the rest of your funds in order to meet your specific short- and long-term financial objectives.
Is a Longevity Annuity Right for You?
The purchase of any type of annuity is considered a long-term financial commitment. This is particularly the case when it comes to deferred income annuities, because the income may not begin for 30, or even 40, years.
In addition, not all deferred income annuities are exactly the same. Because of that, the first step you should take is talking about your objectives and your options with a retirement income specialist.
That’s were Annuity Gator comes in.
At Annuity Gator, we make up a team of experienced annuity professionals with a mission to educate consumers about annuities, and whether or not these financial products have a place in their retirement portfolios.
Want more information about deferred income annuities – or any annuities – and how they may or may not work for you?
Just contact us via our secure online contact form and set up a time to chat with one of our annuity experts. You can also contact us directly, toll-free, by calling (888) 440-2468. We’re here to help clear up any of the questions or concerns that you may have about making your retirement income last.