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Deferred income annuities (DIAs) refer to annuities that provide guaranteed income payments to annuitants that start in the future. DIAs require the annuitant to purchase the contract and make payments over some time. The income payments the annuitant receives are then deferred until a specified date in the contract. This is typically seven years after the purchase date.
Annuitants can also choose the date on which income payments begin. It can be as early as the year after the purchase date or several decades later. These income payments should last for the entirety of the annuitant’s life, even if they exceed the initial premium the annuitant pays.
The most obvious advantage to DIAs is the advanced retirement income plan they create. However, they can also protect from longevity risk. Longevity risk describes the risk that someone lives longer than their savings last.
Still, because the income payments get deferred, the annuitant won’t have access to their funds when the annuity builds. This means the annuitant must be able to manage their finances correctly. This also means the annuitant should consider inflation. This is because the income payments might not keep pace with the cost of living.
Longevity Insurance
Deferred income annuities are also known as longevity annuities or longevity insurance. This is because they provide a guaranteed stream of income for the entirety of the annuitant’s life. Funds have longer to accumulate between the purchase of the annuity and the start of the income payment. This translates to higher income payments later.
The other reason these types of annuities are called longevity annuities is that they provide a guaranteed stream of income for life. The longer the deferral period, the higher the income payments are likely to be.
All deferred income annuities are fixed annuities. This means the income payments are determined when the annuitant purchases the annuity. Fixed annuities are not subject to any market fluctuation or interest rate change. This is one of the key benefits of a deferred income annuity: they provide certainty regarding future income.
Deferred income annuities can also be used in unison with retirement accounts, such as Social Security and a pension. Combined, these accounts will create a diversified income portfolio. Income payments from DIAs are also not included in the annuitant’s taxable income until the annuitant starts receiving payments. When the annuitant starts receiving payments, they will be able to reduce tax liability.
Who Should Use a DIA?
Deferred income annuities aren’t suitable for everyone, and they might require a long-term commitment of funds and limited liquidity during the deferral period. The income payments might also not be able to keep pace with inflation. This failure to keep pace with inflation will erode purchasing power over time.
At the end of the day, deferred income annuities can be a valuable source of guaranteed streams of income for life. Still, they should be considered as part of a broader retirement plan. You should always consult with a financial advisor to determine whether DIAs are suitable options based on your circumstances.
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