A deferred income annuity, or DIA, provides a guaranteed stream of income for as long as you live — starting at some future date. They’re not investment products.
They are contracts with an insurance company. You contribute money now and receive guaranteed lifetime income starting at a date that you select.
How does it work in a retirement portfolio?
A deferred income annuity helps retirees define their time horizon. Without a DIA, you can never know for sure how long you need your savings to last.
As a result, you don’t know how fast you can safely spend down your IRAs, 401(k)s and other retirement assets. This uncertainty represents a massive source of both risk and stress for millions of retirees.
With a DIA, however, you can define how long your other savings must last. DIAs serve as “longevity insurance.”
With a relatively small premium, you can spend down your other retirement assets knowing that if you live longer than expected, your deferred annuity will kick in with income for the rest of your life.
For this reason, these products are sometimes called “longevity annuities.”
Benefits
A DIA can help with the following:
Reducing market risk. With a DIA, the insurance company — not you — takes on all the risk of a market downturn. You will receive the income promised, regardless of stock or bond market performance or interest rates.
Eliminating the risk of outliving your money. A DIA reduces the risk of running out of money during your retirement.
Creating a “personal pension plan.” If you don’t have access to an employer pension, the guaranteed lifetime income a deferred income annuity can provide will do the same thing: Create a reliable income stream you can never outlive, regardless of what happens to the stock market.
Planning points
Combine deferred income annuities with Social Security and guaranteed pensions to cover your expected essential expenses in retirement.
The longer you defer the guaranteed income stream, the higher your guaranteed income will be.
You can choose a joint-and-survivor payout. This means that the guaranteed income will continue for as long as either you or your spouse or other beneficiary is alive.
If you’re concerned about dying soon after you buy the annuity, you can choose a refund option. Your guaranteed income stream would be lower. But if you die before benefits are distributed, the remaining contributed premium will be paid out to your beneficiary.
No bank or federal guarantee: All annuity promises are subject to the claims-paying ability of the insurance company issuer. So chose a company with strong ratings for financial stability.
No fees
While some annuity products have a reputation for high fees and expenses, a deferred income annuity normally has no fees whatsoever.
When you buy a deferred income annuity, you simply specify how much premium you want to contribute to the annuity, choose a payout option (life-only, joint-and-survivor, refund, etc.), then compare quotes from many competing highly rated annuity companies and pick the one that offers you the most guaranteed income.
