Living a long, healthy life is a blessing anyone would hope for. It can allow you to spend more cherished time with your loved ones and have more fun life experiences. However, since no one can know the future, it may be difficult to nail down how much you should save to keep you comfortable for the rest of your life.
Do you have a financial strategy for retirement that you feel good about but wonder what might happen if you live longer than you expect to? A deferred income annuity (DIA) is designed to address this concern. DIAs can help provide income to support you and your family over the course of your hopefully long and joyful life.
What is a deferred income annuity?
A deferred income annuity is a type of
It may also allow you to strategize more confidently for the rest of your retirement income. For example, due to your health and family history, you may decide it's reasonable to save enough money to last through age 85. If you have a DIA with payments that begin on your 85th birthday, you can confidently spend according to your financial strategy without worrying about how long you live after that.
DIAs aren't just for protecting income on the back side of retirement, though. You can defer payments for as little as one year, so DIAs can also be a good option if you want a fixed income source to supplement your Social Security or other pensions sooner in retirement.
How do deferred income annuity premiums work?
You can purchase a DIA with a lump-sum payment called a single premium or through a series of payments.
Because the payouts you receive are delayed, deferred income annuities can be a more cost-effective way to purchase similar levels of income than an immediate annuity with a payout that begins as soon as you purchase it.
You can choose from a few payout options when you purchase a deferred income annuity. The details of those options should be outlined in the annuity paperwork and explained when you enter into the contract before you make your selection. In some cases, you may be able to modify your choice later but before payments begin.
Here are a few of your options:
- Life income with a cash refund. This payout option provides payments for life, either to an individual or joint annuitants. After the death of the annuitant(s), the beneficiaries receive a lump sum equal to the premium paid minus any payouts the annuitant(s) have already received.
- Life income with an installment refund. With this option, the annuity pays out at least as much as the initial premium required to purchase the policy. If you (and your joint annuitant, if applicable) haven't received a full return of the premium, then payments continue to beneficiaries.
- Life income with a certain period. Life payouts with a certain period also continue for the life of the annuitant(s). However, if the annuitant(s) die before the certain period specified in the contract, then payments continue to the beneficiaries until that period is reached. For example, say the annuitant(s) pass away after receiving payments for six years on a 10-year certain period contract. Beneficiaries should continue to receive payments for four years.
How are DIAs related to qualified longevity annuity contracts (QLACs)?
The IRS rules state that you must take
If you want payments from your deferred income annuity to begin after you turn 72, it's important to make sure it qualifies as a QLAC so you don't end up with RMD penalties. To qualify as a QLAC, your DIA must:
- Be purchased with money in your tax-deferred retirement account
- Cost no more than the lesser of $145,000 or 25% of your account balance
- Begin making payments to you no later than age 85
What are the pros and cons of deferred income annuities?
Every financial decision you make has pros and cons. DIAs are no exception. Here are some common ones to consider as you evaluate whether to purchase a DIA.
- The income you receive from a DIA is fixed. You don't have to worry about investment losses impacting the amount you receive.
- The lifetime payment protects you from the risk of living too long and running out of money. Even if you deplete your savings, you still have the income from your DIA.
- Depending on the type of payout you choose and any payments you receive, it may provide death benefits to your beneficiaries.
- Deferred income annuity purchases are irrevocable.
- Unlike Social Security payments, the payouts you receive from an annuity are fixed and generally don't benefit from a
cost of living adjustment(COLA) unless you also purchase an inflation rider.
- Annuities are less liquid than other investments, like stocks or mutual funds. The contract limits your withdrawals.
Enjoy a stream of retirement income with a DIA
A deferred fixed income annuity can be a great choice for providing a stream of retirement income. With this income supporting you, you can enjoy more precious moments with your family and friends over the course of your life.
If you're interested in getting a DIA but don't know where to start, connect with a