Deferred Income Annuities Provide Security to Retirees

Written by Hersh Stern Updated Saturday, April 13, 2024

One of the fastest growing sectors of the annuity world is the "guaranteed lifetime income starting at a future date" product line. These are commonly referred to as Deferred Income Annuities (DIAs).

As the life expectancy for current and future retirees continues to increase, lifetime income products have become a primary interest for retirees. Dwindling defined benefit pension options, uncertain market conditions and waning confidence in the social security system have each contributed to this growing popularity.

In the past, financial advisors offered solutions like the 4% withdrawal rule and partial annuity conversions using qualified plan dollars. The goal of a 4% withdrawal strategy is to increase the probability that your assets will produce enough income over the duration of your lifetime. With a partial annuity conversion, you convert a portion of your qualified plan savings into an annuity that will provide a level, guaranteed income benefit.

The remaining retirement funds are left in an account designed to produce investment growth. While both of these strategies have merit, they may not provide enough guaranteed income to cover your fixed and variable household expenses. And they don’t always provide you with the peace of mind of knowing that you won’t outlive your retirement assets.

For these reasons, deferred income annuities have been rising in popularity. A deferred income annuity ("DIA") calculates a lifetime income stream that begins at a specified future starting date based upon a single premium deposited today. Because they start to make payments later in life these annuities are also commonly referred to as longevity annuities or longevity insurance. Deferral periods for these annuities range anywhere from 2 years to 40 years, with the most common selection set at 15 years. And in some cases, these contracts permit additional contributions.

In addition to the basic benefit of lifetime income, these contracts also offer optional riders. For example, inflation riders offer income growth at a specified percentage annually in order to keep up with rising inflation; thereby protecting the annuity owner’s purchasing power throughout retirement.

Another popular optional rider is commonly referred to as enhanced death benefit. This rider provides beneficiaries with a guaranteed death benefit in the event of the contract owner’s premature death.

If you are interested in securing all or a portion of your future household income you should review the benefits offered by this type of annuity contract. With future income guaranteed for life a deferred income annuity can provide the financial peace of mind you may be in search of.

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Stanford University