Deferred Income Annuity
A successful retirement requires proper planning and preparation. You can guarantee a pleasant future by saving money and having a reliable financial product for your retirement years. This makes it possible for you to have financial independence and avoid depending on others for support in the future.
A deferred income annuity is one of the greatest financial assets you can use to save money for retirement. Deferred income annuities are like pension plans in that you can save funds over time and get payments at a later date. It can be the best option for you if you’re searching for a long-term, guaranteed source of income in your golden years.
With a deferred income annuity, you can ensure payments for the rest of your retirement and set aside regular monthly income for the future.
Deferred Income Annuity: What Is It?
A deferred income annuity, or DIA, is an insurance contract that promises the annuity owner either a large sum of money or a steady income in the future. In other words, it’s a way to invest money that could grow tax-free and comes with a few insurance benefits, like the option to turn your account into a stream of recurring payments.
Most people buy deferred annuities to add to their Social Security payments and other sources of retirement income. You can utilize a flat amount or several purchases with a deferred income annuity to get a guaranteed retirement income usually, 13 months to 40 years after the original purchase. The DIA offers guaranteed income that will start at a future period of your choosing.
How Does a Deferred Income Annuity Work?
With deferred annuities, your initial investment might grow before the stream of payments starts. A deferred income annuity allows you to select the time in the future when payments will start to flow in. Two key stages comprise a deferred annuity:
- Accumulation Period: It is when you invest your money. The annuity account balance increases as you make payments into it. When you make consistent payments into the annuity, your retirement savings increase tax-deferred. Until you begin receiving future benefits in retirement, you are not required to pay income taxes on the profits.
- Payout Period: The payout period is when you start getting payments from the annuity. In this period, you can withdraw a lump sum or receive payments every month. The annuity conditions and the length of time you have made payments will determine how much money you will get each month during retirement.
Types of Deferred Income Annuities
The annuity’s composition has an impact on how interest accrues throughout the accumulation phase. The best type of deferred annuity for you will depend on what you want to do with your money and how you want to invest it. Here are different types of deferred income annuities you can choose from to meet your needs.
Fixed Deferred Annuity
A fixed annuity has a minimum yield that the insurer guarantees. The guaranteed minimum makes these investments the ideal choice for people with a reduced risk tolerance even if the return on this sort of annuity might be lower than other types. In general, a fixed deferred annuity has a fixed interest rate for the initial period. Then, interest rates could change yearly. Additionally, after the yearly interest rate is set, this type of annuity guarantees you a fixed minimum interest rate regardless of the state of the market throughout the year.
Variable Rate Annuity
The value of a variable annuity can change depending on how well an underlying portfolio of sub-accounts performs. Compared to fixed annuities, variable annuities do not have an ensured minimum rate of return. Your funds are invested in structures known as sub-accounts that include securities like stocks, bonds, and money market accounts.
With a variable rate annuity, the return on your investment is based on the success of the investments; if they perform well, you may be able to earn more than you would with other annuities. They could, therefore, serve as an inflation hedge. A variable rate annuity comes with some risk, but if your assets do well, it can give you more money for retirement.
Indexed Rate Annuity
With an indexed annuity, your returns are based on the performance of a certain market index, such as the S&P 500, which is a stock market index that tracks the stock performance of 500 large companies listed on stock exchanges in the United States. Your returns will be higher if the index performance is better. As a result, indexed-rate annuities can also act as an inflation hedge. In contrast to fixed annuities, which always pay the same interest rate, index annuities give you the chance to profit when the financial markets are doing well.
The insurer will update the value of the account at certain intervals to reflect any gain realized during that period. In addition, indexed annuities are a secure kind of investment that may offer lifelong income and inflation protection. These annuities provide a greater potential for returns than conventional fixed annuities without the danger of principle loss, which is their key selling point.
Deferred Income Annuity Payout Options
Every person has different preferences and aspirations for how they want to spend their retirement years. Consequently, there are several ways to receive retirement income from a deferred income annuity. A DIA offers you a variety of payout options to satisfy your demands throughout your retirement years. Here are some of the payout options you can choose from:
- Only Life Income: For the duration of the annuitant’s life, you will get a guaranteed income. However, following the annuitant’s passing, there will be no payments.
- Contingent Life Income: A contingent annuitant is a person the annuitant names to receive their income after their passing. For the duration of the annuitant’s or contingent annuitant’s life, income payments are received. The full joint-life income payment will thus be made while the annuitant is still alive.
- Fixed Period Income: When you apply for your deferred annuity, you can select any months or years to get an income for a specific amount of time. The payments are based on the amount paid into the annuity, the length of the payout period, and — if it is a fixed annuity — an interest rate that the insurance company believes it can sustain for the duration of the payout period.
- Life Income for a Guaranteed Amount of Time: A life annuity with a period guaranteed is a hybrid option that offers lifelong payments with guaranteed income for a fixed number of years. However, you or your beneficiary will get the remaining guaranteed payments if the annuitant passes away while the guaranteed period you choose is in effect. For example, if you buy a 20-year single-life annuity and pass away 10 years later, your beneficiary will continue to receive income benefits for the remaining 10 years.
- Life Income With Installment Refund: This is a form of annuity that includes a provision stating that if the annuitant does not get paid equal to the premium charged on the contribution, the recipient will receive the difference in monthly installments.
- Life Income With a Cash Refund: You may count on receiving payments every month for the rest of your life starting on the income start date. If the annuitant passes away before receiving total annuity payments that are at least equivalent to the purchase price, the remaining balance will be given to the designated beneficiary in a lump sum.
Advantages of Deferred Income Annuity
For anyone preparing for retirement, deferred income annuities provide several significant advantages. One benefit is the exception of tax while paying for your annuity. If you have a deferred annuity, you only pay taxes when you start receiving income from the account, make a withdrawal, or take out a lump sum. However, here are some of the advantages that a retiree can acquire with a deferred income annuity.
Creates Guaranteed Future Retirement Income
Building your funds now for guaranteed income later is possible with a deferred annuity. The annuity offers reliable lifelong income that can either be guaranteed for a set amount of time or can never be exceeded. For annuitants who may have previously worried about outliving their resources, this benefit is quite significant.
Multiple Payout Options
When you decide to annuitize, your insurance company will give you a number of payment options that can meet your needs in retirement and in the future. For example, if your partner’s life is longer than yours, you can choose to have the funds cover both of your lifetimes.
You can choose an investment strategy for a deferred annuity based on your goals and how much risk you are willing to take. If you want to make a safe investment, a fixed annuity will give you a guaranteed minimum interest rate, no matter how the market is doing. You can choose a variable and indexed annuity if you desire higher risk with higher rewards.
Get Connected With a Deferred Income Annuity Professional
The conventional approach to saving money and paying for retirement is becoming more difficult every year; however, using a deferred income annuity as your personal pension plan can make it simpler and help you live the life you desire in your retirement years.
The experts at Safe Wealth Plan can help you set up a personal pension plan that gives you a steady stream of income for the rest of your life and gives your spouse the same benefit. We give you the chance to make a personal pension plan that is tailored to your needs.
Get connected with a Safe Wealth agent and learn more about how you can achieve your retirement goals.