Is A Deferred Income Annuity Right for Me?
Today's topic: "How do I know if a deferred income annuity is right for me?"
While this kind of annuity does provide for a more secure future, it may not be right for everyone. So how do you know if it fits in your situation?
Here are three important factors I consider when discussing deferred income annuities with my clients:
A deferred income annuity is best used to create a future income stream. This makes it ideal for someone who is planning for retirement, and would like income to begin at a specific age.
There are other types of annuities for people at different stages of life. Someone who wants their income to start right away should consider an immediate annuity instead.
When you buy a deferred income annuity, your future payments are level for your lifetime (except if you add a cost of living rider). Your annuity quotes are determined by how old you are when you buy your annuity and how old you'll be when your payments begin.
This difference is called the deferral period. During the deferral period your premium (or, investment) earns interest. So the longer you delay the income start date, the larger your ultimate payments will be when you start receiving income.
For example – if you buy your annuity at age 55 with payments beginning at age 65, your payments will be greater than if you bought the annuity at age 60 and started receiving income at 65. This is because you have benefited from 10 years of deferral instead of 5.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Ultimately, the rate of return on your annuity is also directly tied to how long you live. It really cannot be calculated ahead of time. If you live significantly beyond your normal life expectancy the rate of return would exceed the return on other traditional investments.
Your current liquid assets
A deferred income annuity converts a lump sum of money into a guaranteed regular payment. It’s like a do-it-yourself pension plan.
For this reason, the first requirement for an annuity is having the cash to invest. For many clients, this may take the form of converting a portion of savings, moving money from the sale of a residence or a business or transferring funds from a 401k or IRA.
Unlike a savings account, the money that goes into an deferred income annuity cannot be withdrawn (except under special circumstances). So when considering how much to invest, it is important to calculate how much money can truly be put “out of sight, out of mind.”
For example, you may choose to set aside money for a fabulous vacation or to help a loved one with education. That money should not go toward the purchase of a deferred income annuity.
There are a number of ways to provide for your beneficiaries either outside of an annuity or by purchasing a deferred income annuity with a term certain or refund provision. Nevertheless, for a basic Life Only deferred income annuity, when you pass away, the lump sum you invested dies with you.
For this reason, it is critical to consider how you want to provide for your beneficiaries in both selecting the details of your annuity and considering how much cash to set aside.