What Are Deferred Income (Longevity) Annuities and Who Should Consider Them?
Deferred income annuities are types of deferred annuities that guarantee lifetime monthly incomes starting at a future date specified in their contracts. The chief purpose of a longevity annuity is to efficiently protect a portion of your assets that are dedicated to providing income later in life (typically at ages 70-85). One of the key benefits of a deferred income annuity comes from the specified lifetime income the annuity provides. You also know the exact date on which you will begin to receive income payments.
Longevity annuity payments can either be based on a single life or on a joint life basis (typically with a spouse). You can buy these annuities with a lump sum payment or a series of premium deposits. In exchange for these deposits, the insurance company guarantees a lifetime income to begin at a certain age defined in advance and selected by the contract owner. The longer you defer your income payments, the more substantial payout you will receive when you reach the specified age in the contract.
Why Are Deferred Income Annuities Also Called Longevity Annuities?
Deferred income annuities are also referred to as longevity insurance or longevity annuities because they guarantee your income late into retirement and insure you against the financial risk of living a longer than expected life and running out of money. This can help you plan more adequately for retirement. With a portion of your retirement portfolio allocated to providing income guaranteed for the later years of life, you can focus more intently on the earlier stages of your financial retirement plan. Rather than dealing with the uncertainty that can result from planning for thirty or forty years of retirement, you can reduce this planning period to around 15 years (age 65-80) for example.
How Does a Deferred Income (Longevity) Annuity Work?
Deferred income annuities feature a deferral period, during which the assets you deposit accumulate. You can make deposits in a lump sum or series of premium payments, but the intention of these deposits is that you accumulate for guaranteed income later in life.
When trying to understand deferred income (DIA) annuities, you can break the product name down into its components. First, let’s start with the purpose of a deferred income annuity. The purpose of a deferred income annuity is to provide you with income.
Next, let’s consider the deferred portion of a DIA. Deferred income describes a scenario where the annuity begins payments at a specified future date. During the deferral period, the insurance company invests your money on your behalf. The longer your deferral period and the more advanced your age, the more income you receive once payouts begin.
Qualified, Nonqualified, and QLAC Longevity Annuities
Qualified annuities are purchased with pre-tax money from 401(k), traditional IRAs, or other qualified plans. Longevity annuities purchased with qualified funds are subject to RMD distribution rules, meaning you must receive income by age 73.
One of the benefits of purchasing a longevity annuity with nonqualified funds is that these annuities aren’t subject to RMDs. Therefore, you can start income at any age you want rather than at the maximum age of 73 as is the case when using qualified funds. The taxes on the distributions are also lower because income payments are considered partially a return of the money used to purchase the annuity which has already been taxed.
Qualified Longevity Annuity Contracts (QLACs) offer a middle ground between qualified and nonqualified longevity annuities. You can use qualified (IRA) pre-tax savings to purchase them and they aren’t subject to RMDs, so you don’t have to begin income payments at age 73. You can eliminate RMDs on the portion of money allocated to a QLAC and defer income payments up to as late as age 85. However, the IRS does impose limits on the amounts that can be allocated to a QLAC.
Who Benefits From a Longevity Annuity?
Longevity annuities are an effective way to ensure a guaranteed source of income in retirement. That doesn’t mean they are the best annuity for everyone. You also shouldn’t purchase an annuity with your entire portfolio. Diversification is a critical component of any retirement plan and annuities can help support a well rounded retirement portfolio. The following financial considerations indicate when a longevity annuity might be the right decision for you:
- Social Security and/or pension benefits won’t cover your expenses.
- You plan on retiring early and need a strategy for guaranteed income later in life.
- You’ve accumulated a large amount of retirement savings (typically exceeding $500,000).
- You are in good health and there is a history of longevity in your family.
- You’re seeking an insurance product to add security to your retirement portfolio.
- You don’t need immediate access to a portion of your retirement funds.
On the other hand, if the following factors sound like you, a longevity annuity might not be the ideal decision:
- You’re comfortable with your pension benefits and social security covering your expenses.
- You’re younger than 45 or over 75 years old.
- You’ve accumulated retirement savings below $500,000.
- You’re more focused on growth in your retirement savings rather than income.
- You need immediate or near term access to your money.
When considering longevity annuities, it’s important to remember these financial products should not be viewed as an investment, since they’re not designed to return your premium deposit in a lump sum with an interest return. You are essentially surrendering your funds to the issuing insurance company in exchange for a guaranteed future stream of income. Other annuities, such as MYGA annuities, can accumulate interest earnings and return your full premium deposit, with added interest, in a lump sum if desired.
Longevity annuities are intended to provide a dependable source of income in the later years of retirement. Using only a portion of your retirement funds to purchase a longevity annuity still frees the majority of your assets to provide liquidity and market upside.
The Qualitative Financial Value of a Longevity Annuity
When examining whether a longevity annuity is right for you, you should ask yourself about the value you can expect to receive. More often than not, pre-retirees take a quantitative approach to this value. In other words, they look for an internal rate of return (IRR) or their ROI. The value of a longevity annuity cannot be seen when looking at it from this perspective. The reason for this is that you can only calculate your IRR and ROI based on a lifespan estimate. The longer you live, the higher the IRR becomes over time. When considering longevity annuities, you should examine the quantitative return in addition to the qualitative risk reduction these products provide.
Diversifying With a Longevity Annuity
Most people agree that a diversified investment portfolio is superior to a one-dimensional plan. This doesn’t change in retirement. During your younger years, most financial advisors will tell you your portfolio should gravitate toward equity investments. As you prepare for retirement, your portfolio should shift to more fixed income assets. These assets provide stable, reliable income that is either uncorrelated or inversely correlated with equity markets. Longevity annuities accomplish this aim. On top of that, they provide income for as long as you live.
By adding the security of a longevity annuity to your retirement portfolio, you can achieve a higher rate of return in other areas. Longevity annuities accomplish this by potentially generating enough income to cover all of your retirement expenses. This gives you the flexibility to continue investing in equities for longer periods of time. Longevity annuities also give you the benefit of being able to invest and manage the rest of your portfolio for a set time period, knowing that you have a future income stream locked in and guaranteed.
Let AnnuityAdvantage Guide You To the Annuity That Suits Your Retirement Plans
Longevity annuities can be an excellent decision for anyone looking to guarantee their income during late retirement. These annuities let retirees budget more thoroughly and free them to focus on growth opportunities in early retirement.
Choosing the correct annuity for your retirement takes careful deliberation. The annuity agents at AnnuityAdvantage are here to answer all of your annuity questions. You should consider a longevity annuity if you plan on retiring early, already have a substantial amount of savings, need to secure guaranteed future lifetime income, and don’t need immediate access to this portion of your retirement funds.
Contact us today to find out if a deferred income annuity is right for you.