What are deferred income annuities? Deferred income annuities, or DIAs, are a type of annuity contract that can provide you with a steady and guaranteed income stream in retirement. Unlike immediate annuities, which start paying you right away, deferred income annuities allow you to defer your income payments until a future date of your choice.
This can help you plan ahead for your retirement income needs and enjoy some tax benefits along the way. In this article, we will explain what are deferred income annuities, how they work, what are their pros and cons, and how to buy them.
How Do Deferred Income Annuities Work?
Deferred income annuities are contracts between you and an insurance company. You pay a lump sum or a series of payments to the insurance company, and in exchange, the insurance company promises to pay you a regular income for a certain period of time or for the rest of your life. The income payments can start as early as 13 months or as late as 40 years after your initial purchase, depending on your contract terms. The longer you defer your income payments, the higher your income payments will be.
Deferred income annuities are different from other types of annuities, such as fixed, indexed, or variable annuities, which offer more flexibility and growth potential, but also more risk and fees. Deferred income annuities are designed to provide a simple and reliable source of income in retirement, without any exposure to market fluctuations or investment decisions.
What Are the Benefits of Deferred Income Annuities?
Deferred income annuities can offer several benefits for retirement planning, such as:
- Guaranteed income. Deferred income annuities can provide you with a guaranteed income that you cannot outlive, regardless of how the markets perform or how long you live. This can help you cover your essential expenses in retirement and reduce the risk of running out of money.
- Tax deferral. Deferred income annuities can help you defer taxes on your annuity earnings until you start receiving income payments. This can allow your money to grow faster and reduce your current tax liability. However, once you start receiving income payments, they will be taxed as ordinary income at your marginal tax rate.
- Protection from inflation. Some deferred income annuities offer inflation protection, which means that your income payments will increase over time to keep up with the rising cost of living. This can help you maintain your purchasing power and avoid losing value to inflation.
- Flexibility and customization. Deferred income annuities can offer some flexibility and customization options, such as choosing when to start your income payments, how long to receive them, and whether to include a beneficiary or a joint annuitant. You can also choose from different types of deferred income annuities, such as fixed, indexed, or variable, depending on your risk tolerance and return expectations.
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What Are the Drawbacks of Deferred Income Annuities?
Deferred income annuities also have some drawbacks that you should be aware of, such as:
- Illiquidity and fees. Deferred income annuities are illiquid investments, which means that you cannot access your money easily or without penalties. If you withdraw your money before the income payments start, you may have to pay surrender charges to the insurance company, as well as a 10% tax penalty if you are under age 59 ½. You may also have to pay fees and commissions to the insurance company or the agent who sells you the annuity, which can reduce your returns.
- Loss of principal and opportunity cost. Deferred income annuities are irreversible contracts, which means that once you buy them, you cannot change your mind or get your money back. If you die before or soon after the income payments start, you may lose some or all of your principal, unless you have a death benefit or a refund option in your contract. You may also miss out on higher returns from other investments, especially if the interest rates or the market performance improves in the future.
- Credit risk and inflation risk. Deferred income annuities are backed by the financial strength and claims-paying ability of the insurance company that issues them. If the insurance company goes bankrupt or fails to meet its obligations, you may lose some or all of your income payments. You should check the ratings and reputation of the insurance company before buying an annuity. You may also face inflation risk if your income payments do not increase with inflation or if the inflation rate exceeds the inflation protection rate in your contract.
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How to Buy Deferred Income Annuities?
If you are interested in buying deferred income annuities, you should follow these steps:
- Determine your retirement income needs and goals. You should calculate how much income you will need in retirement, how much income you will receive from other sources, such as Social Security, pensions, or investments, and how much income gap you need to fill with an annuity. You should also consider your life expectancy, your risk tolerance, your tax situation, and your legacy wishes.
- Compare different types and features of deferred income annuities. You should compare different types of deferred income annuities, such as fixed, indexed, or variable, and see how they differ in terms of returns, risks, fees, and guarantees. You should also compare different features and options, such as income start date, income duration, inflation protection, death benefit, refund option, and joint annuitant option.
- Shop around and get quotes from multiple insurance companies. You should shop around and get quotes from multiple insurance companies that offer deferred income annuities. You should compare the quotes based on the income amount, the fees, the ratings, and the reputation of the insurance companies. You should also read the annuity contract carefully and understand the terms and conditions before signing it.
- Seek professional advice if needed. Buying a deferred income annuity is a major financial decision that can have a lasting impact on your retirement income and security. You should seek professional advice from a qualified financial planner, an annuity specialist, or a tax advisor if you have any questions or doubts about buying a deferred income annuity. They can help you evaluate your options, assess your needs, and recommend the best annuity for you.
Final Thoughts!
Deferred income annuities are a type of annuity contract that can provide you with a guaranteed and steady income stream in retirement. They can help you plan ahead for your retirement income needs and enjoy some tax benefits along the way. However, they also have some drawbacks, such as illiquidity, fees, loss of principal, and credit risk. You should weigh the pros and cons of deferred income annuities and compare them with other retirement income options before buying them. You should also shop around and get quotes from multiple insurance companies and seek professional advice if needed.
