You may be considering a deferred income annuity (DIA) account for your retirement. These policies are popular for the safe and reliable income streams they provide in the short and long run.
There are few better ways to guarantee a lifetime stream of income after your working years. Plans are more flexible than ever and can be used to diversify and solidify your investment portfolio from market fluctuations.
Deferred income annuities are insurance contracts usually established with a one-time, single premium payment. Most plans accept both post or pre-tax dollars. Both joint and single-life policies are available.
DIA accounts have two stages. The first is the deferral period and the second is the income phase. The deferral period can be as short as one month, but years are more common. Most companies offer flexibility in the deferral period. This way you can control when your income begins. The longer the deferral stage, the greater your future income.
After the deferral period, the income phase begins. Income can be for a set number of years or for your lifetime. Most owners withdraw income monthly or annually, but semi-annual and quarterly payments are available as well.
Deferred income annuities are popular for many reasons. First and foremost is the guaranteed income they provide. Few investments can make and keep these promises. They also allow for more diversified, less volatile portfolios with decreased market exposure. These annuities also account for longevity. People are living longer and future income is a top priority for many after retirement.
The short answer is: Yes. Several riders can be added to a DIA to ensure an increasing future income.
All insurance companies offer inflation protection. Some will guarantee an annual step-up each year, while others will increase your income based on changes to inflation indexes like the CPI.
Annual step-up riders will guarantee growth of between 1%-5%, depending on your selection. CPI-type riders will grow only when the Consumer Price Index increases, which may be more or less than 5%. Either way, your income can increase each year – even after payments have already begun.
Some of these options might illustrate smaller payments at onset, but over the long haul, aggregate distributions can be much higher. And if you have a lifetime annuity, some companies allow for increasing income streams even after the account value has been exhausted.
You might need more income to pay for travel, living expenses, family needs, or healthcare costs. In fact, some can multiply your income 2x over if long term care is needed. There are many types of hybrid long term care annuities for those planning on future health needs and expenses. Long term care and inflation riders help account for future income needs while also providing peace of mind.
Our clients often ask what happens to any remaining principal in their account at death. The answer depends on how the annuity is set up. We see most of our policies created with either a Cash or Installment Refund feature. This simply means that all remaining funds will transfer to the named beneficiaries at passing. The insurance company does not keep your money.
With a Cash Refund, the remaining funds in the annuity account are paid to your beneficiaries in a lump sum at passing. An Installment Refund continues the income stream for the established time period. If, for instance, the insured passed away in year 15 of a 20-year payout, the remaining 5 installments would be distributed to the account beneficiaries over 5 years.
It’s important to note that payments might be a little smaller when these features are added, but our clients like the peace of mind these riders provide. It’s not a requirement that you add a refund option, however. When maximum income is desired, our clients choose a Life Payment Only option. This strategy offers the largest payments but ends when the insured(s) have passed away. There are no refunds at death. This strategy is more appropriate for someone who needs more income and is less concerned with leaving an inheritance.
Traditionally, guaranteed annuity investments are considered to be some of the safest accounts available. There are several rules and regulations insurance companies must follow before offering annuity policies. State Guaranty Associations exist in every state to insure deposits and income payouts up to for policyholders. That being said, it’s always wise to research the rating and reputation of the insurance companies you are most interested in. We can help you find a stable company that will deliver on their promises.
The primary difference between a Deferred Income Annuity and an Immediate Annuity is time. Most immediate annuities start payments after just one month of deferral. Conversely, DIAs typically begin income sometime in the future – usually years away. The deferral period creates much larger future income streams for owners.
The right one for you will depend on when you need income, now or later. Many of our clients use both types of policies as they want immediate income now, but are also planning on future income later. It’s not uncommon to use an annuity laddering strategy with both immediate and deferred annuities when planning for retirement.
In June 2014, the Treasury Department changed the tax code, allowing consumers to defer required minimum distributions on a portion of their retirement accounts. Called Qualified Longevity Annuity Contracts (or QLACs), these accounts allow you to defer taxable income for longer periods of time and create a future income stream.
The special deferred income annuities are in a class of their own. You can only deposit pre-tax (IRA, 401(k), 403(b), etc.) dollars into these accounts. And there are different rules about deposits and withdrawals. Contributions are limited to the lesser of $210,000 or 25% of your qualified assets. Distributions must begin once the owner is 85 years of age, but can begin sooner.
Like a regular DIA, income streams can be established for single or joint life. Cash refund options are also available to ensure all accumulated funds, plus interest, are returned to named beneficiaries in the event of an early death.
The primary advantage to a QLAC is the additional time RMD payments can be postponed. This allows for compound growth, tax savings, and larger future payments. Many investors benefit from postponing RMD payments and deferring a portion of these forced payments. Consumers are working well into their 70s and have little need for more taxable income. Qualified Longevity Annuity Contracts allow for longer deferral periods, creating additional income when it might be more useful later in retirement.
There are several insurance companies offering deferred income annuity accounts and some will differ in very small ways. We can help you sort through the minutiae and find the policy(s) that best suits your needs now and in the future. Our policies offer significant flexibility as we understand that your needs may change in the future. Contact us today for a consultation.
Your guaranteed future income is calculated using a few important factors: your age and gender at the time payments begin (which determines life expectancy), the total premium you deposit, the length of your deferral period, and the current annuity rates when you purchase the contract.
Pro Tip: The longer you defer your start date, the higher your future payouts. This is because the insurance company has more time to invest your funds and a shorter projected timeline to pay you lifetime income. These payouts are based on acturial tables.
Generally, no. Deferred income annuities (DIAs) are designed for maximum future income. This means most are irrevocable and cannot be changed. Once the contract is established and the free-look period passes, the account is set up for life.
By giving up access to a lump-sum cash value, the insurance company guarantees you a much higher lifetime payout than you can typically find on your own. If liquidity is a priority, a Multi-Year Guaranteed Annuity (MYGA) – or an annuity with a guaranteed income GLWB annuity might be a better fit. These types of policies also allow for penalty-free income withdrawals, but also allow for more access to your invested principal.
Yes, many insurance carriers offer new features that allow owners to make a one-time adjustment to their income start date. Depending on the company’s specific rules, you can often accelerate or delay your first payment. This allows consumers to adapt to unexpected life events, such as early retirement or changes in health.
If you select a Cash Refund or Installment Refund feature when setting up your policy, 100% of your principal is protected. If you pass away before the income phase begins, or before your total payouts equal your initial deposit, all remaining funds are transferred directly to your named beneficiaries. The insurance company does not keep your money unless you explicitly choose a “Life Only” structure to maximize your payout. We rarely see Life Only policies purchased at our brokerage.
While both are deferred income annuities, a Qualified Longevity Annuity Contract (QLAC) is specifically funded using pre-tax retirement accounts like a traditional IRA or 401(k). The primary advantage of a QLAC is tax optimization: it allows you to defer your Required Minimum Distributions (RMDs) on those funds up to age 85, effectively lowering your current taxable income during early retirement. Standard DIAs can be funded with either pre-tax or post-tax (Roth/non-qualified) dollars, but do not carry the same strict IRS RMD-deferral rules.