Retirement can be scary. A deferred annuity can serve as a safety net. Image source: Ian Burt, Flickr.
If you're familiar with annuities, you may know about variable annuities and immediate annuities, but not a certain other kind, which is well worth considering as part of your overall financial strategy for your life. That's the deferred annuity -- sometimes called a longevity annuity or longevity insurance -- which can serve as a welcome safety net, keeping retirees from going broke.
Running out of money is a widespread concern for Americans. According to a recent survey by the Transamerica Center for Retirement Studies, having insufficient finances is the biggest fear for 44% of workers. It applies to the wealthy, too: When the American Institute of CPAs surveyed financial planners, whose clients tend to fall on the wealthier side of the income spectrum, 57% reported their clients' top retirement worry to be running out of money. There are clearly many people who might benefit from a deferred annuity.
Defining terms
When buying an annuity, you typically hand over a lot of money to an insurance or investment company in exchange for a bunch of regular payments over time. Annuities come in a wide variety, though. For example, there are immediate annuities and deferred annuities. The former start paying you immediately, while the latter will start paying at some defined point in the future.
Annuities can generate valuable income in retirement, and -- best of all -- if you opt for a lifetime one, once the payments start, you will keep receiving them for the rest of your life. This is a big deal for the many people who worry about running out of money.
Annuities can serve couples well, too, because they come in the single-owner or jointly owned varieties. A single individual (of any marital status) can buy an annuity that's just for him or her. But couples often choose to jointly own one, so that when one partner dies, the other will continue receiving payments until both partners have passed away.
If you're in danger of running out of money in retirement, a deferred annuity might save you.
Meet the deferred annuity
Deferred annuities generally cost less, because the insurance company gets to hold on to your money -- the price you paid for the annuity -- for a while before paying you anything, and it can invest that money, growing it. They're called deferred because they're designed to begin paying you later in life, such as beginning at age 80, in order to help prevent your running out of money before you run out of life.
If you're pretty sure that your nest egg will last you from the beginning of your retirement until you're 80, you might buy a deferred annuity now that begins paying you at age 75 or age 80. That's a great way to ensure that you never run out of money.
Alternatively, if you're still many years from retirement and you've saved a lot of money already, you can buy a policy now that begins paying when you expect to retire. You'll forfeit a big chunk of change to do so, though, and that money will no longer be growing for you. Still, after crunching some numbers, you may find it's worth it.
With deferred annuities, the longer the time span between when you buy and when you begin collecting, the lower the price will likely be. They can pay you in regular installments or with a lump sum, and they can feature fixed or variable payments, with variable ones tied perhaps to the performance of the overall market or a particular index. (Variable ones can be extra complex and not always a great deal, due to high fees or restrictive terms. Favor fixed annuities.)
A particular plus of the deferred annuity is that it pays you at a time in your life when your interest in managing your money -- or your ability to do so -- has shrunk. As we age, many of us become at least somewhat cognitively impaired and the decisions we make may no longer be as sound as they used to be. Even if we reach old age with all our faculties intact, we may no longer want the responsibility of making lots of financial decisions regarding which stocks or bonds or funds to buy or sell and when to do so. Enter the deferred annuity. It will just kick in at a time you have designated, paying you regularly.
A deferred annuity can also serve as a kind of long-term care insurance. If you want to have some guaranteed income available should you need it for that beginning around, say, age 75, you can buy a deferred annuity. There's a good chance it will be a better value than long-term care insurance, which can be very costly and which doesn't deliver unless you actually end up needing the care. With a deferred annuity, you'd receive the income to spend on long-term care or whatever you'd like.
We will all need cash in retirement, and a deferred annuity can provide a guaranteed income stream.
Buyer beware
It's important to understand that annuities are not protected by an agency such as the Federal Deposit Insurance Corporation (FDIC), so a failed insurance company can wipe out that guaranteed income. That needn't be a big worry for you, though -- if you seek out the highest-rated companies and perhaps divide your annuity money between several companies.
The payments that you sign up for today will be lower than you might have gotten in a higher interest rate environment. If you can delay buying, interest rates are likely to rise and so will payouts -- though waiting can defeat the whole point of the deferred annuity.
Note that there can be fees and commissions associated with annuities you consider. So get the details and compare, seeking the best deal. You can avoid commission charges by buying your annuities through companies that sell them directly, such as many major low-cost brokerages, insurance companies, and other financial institutions.
Remember, too, that once you buy an annuity, that money is gone. If you want to cash out and exit an annuity, it can be costly, due to fees and possible penalties.
Overall, a deferred annuity is well worth considering, as it can deliver a lot of peace of mind -- and dependable income -- in retirement.
