Comparing Deferred Income Annuities
Hi. This is Stan The Annuity Man. You must be getting dead serious about this Deferred Income Annuity thing because you're looking at how to compare them. How do you compare Deferred Income Annuities? Well, the short answer is I want you to stay through the whole blog, but the short answer is you have to quote all carriers because Deferred Income Annuities are like all annuities; they're commodity products. It's very competitive out there. Quotes change, so you must quote all carriers and be specific about what you're trying to achieve. With that being said, we're going to dig in a little further because to compare them correctly, you need to know about them. You need to know how they work, where they came from, how to structure them, the good, the bad, the limitations, where they fit, etc. We're going to cover that, and at the end of the blog, I want you to hang in there with me because you'll learn a lot at the end. I'm going to tell you how you can get my book, the Deferred Income Annuity owner's manual, and you'll get it for free. It's about a 55-page read. It's easy, but I'll tell you how to get that and what steps to go through. So, with that, let's talk about Deferred Income Annuities.
A Pension Product
Deferred Income Annuities are the cousin of the Single Premium Immediate Annuities, and Immediate Annuities have been around since Roman times. It's, in essence, a pension product. A Deferred Income Annuity is a pension product that you can defer as short as 13 years and as far out as 45 years. You're asking yourself, "Who in the heck would want to defer for 45 years?" Me. I have two daughters. They're in their twenties; they're in college forever. Hopefully, they get multiple degrees, but my concern as a loving father is that they have a lifetime income stream down the road. So, I bought them each a Deferred Income Annuity, and we're going to turn on the income stream for both of them at around age 50, and they'll have a lifetime income stream. I'll be dead and gone, but every time they get that monthly payment, they'll look lovingly upon that check and go, "Man, Stan The Annuity Man, my dad provided that." Essentially, I was handcuffing them so they wouldn't blow the lump sum.
For all of you investors out there, you're probably going, "Hey, Stan. You could have bought an S&P 500 index fund and done much better." You haven't met my daughters. My daughters need guarantees. They need a guaranteed lifetime income stream at a future date, and that's what I did, and that's where Deferred Income Annuities would fit for you. It might not be 45 years down the road. It might be five years, seven years, ten years, or 12 years, and you can use a Deferred Income Annuity inside of an IRA up to age 73, outside of an IRA, in a Roth IRA. If you want tax-free income and if you want to use your traditional IRA and go past 73, that's a Deferred Income Annuity as well, but it's called a QLAC, Qualified Longevity Annuity Contract.
Understand that Deferred Income Annuities are primarily priced based on your life expectancy at the time you take the payment. Don't try to time interest rates. Interest rates play a secondary role in the pricing, but the primary benefit proposition is that you will get paid a lifetime income stream that you can never outlive. You can also structure it where a spouse is attached and receives a lifetime income stream that they can never outlive, and when you die, the income continues for them uninterrupted and unchanged.
Benefits and Limitations
Now, benefits and limitations, they all have them. So, let's talk about the benefits. Obviously, it is easy to understand. Even a nine-year-old can understand it, no offense to nine-year-olds, but what does Warren Buffett say? "If you don't understand it, don't buy or sell it." Makes sense. A Deferred Income Annuity is a very simple product. There are no moving parts, there are no annual fees, and there are no market attachments. It's just a straightforward future pension product. In other words, if you say, "Stan The Annuity Man, I need a quote 13 years from now, seven years from now, whatever, on a Deferred Income Annuity, and I want to know the payment to the penny," I can get you that. And when you buy it and the contract's going to say, "To the penny, this is what it's going to pay."
Now limitations, all products have limitations. Deferred Income Annuities are not any different. Limitations: a rigid contract. It's really not that flexible. Liquidity is an issue if you want to attach that to a Deferred Income Annuity. Just a few have them. Nothing's for free in the annuity industry. There's not a lot of liquidity, and there's no growth component during the deferral year. So, if you said, "Stan, I want to defer for ten years, and then in ten years, I want to turn on the income stream." But in seven years, you die. Your Learjet hit the mountain; what do your beneficiaries get? They get what you initially put in. There's no trackable interest rate, but the annuity company does reward you for allowing them to hold onto the money. The longer you allow them to hold onto the money, the more they will enhance the payout. It's not perfect. No products are perfect, but you must understand the benefits and the limitations.
Structuring of the Policy
Comparing Deferred Income Annuities, how do we do that? You're wanting to possibly buy one. Number one, you have to get a quote and quote all carriers. But first, you have to decide on the structuring of that policy. It could be on your life and someone else's life. It could be a period certain where it pays for a specific period of time. It really leads back to the two questions I ask everybody, what do you want the money to contractually do, and when do you want those contractual guarantees to start? From those two answers, we can pinpoint exactly what you need to look at and how the quote is structured.
But if you want to ensure that you get a lifetime income stream and any remaining money in the contract when you diagnose your beneficiaries, we can structure it like that. If you give a rip about your beneficiaries, and they've made you mad for the last ten years, and you're not going to put them down, we can structure it so it's life only. You'll get the highest payment, and nobody gets anything when you die; you can do that. But most people structure it so that 100% of any unused money will go to the family, whether in a payment form or in a lump sum form. That's your call. We can quote both.
Great story. A guy called me the other day, and he said, "Stan, my second chapter of my life is starting at age 70." I'm like, "Congrats. That's phenomenal." He's like 63. I said, "What happens at age 70?" He goes, "Number one, I quit work. Number two, I turned on Social Security payments. Number three, I need more income. So, what do we do?" We took the Deferred Income Annuity, deferred it for seven years, and had it turn on exactly when he would start taking his Social Security payments. When he retired, I wondered if he had a pension from where he worked; many companies no longer do pensions. These types of Deferred Income Annuities are now pensions. That's how you develop your own pension.
We had the income starting right at when he turned on his Social Security, so he's going to have that income stream, that income floor coming every single month, and he structured it joint with his wife and made sure that 100% of any unused money went to the beneficiaries.
Now, I did tell him, I said, "Hey, I know you love your wife," and we all love our wives. Nod your head, or if your wives are out here, you love your husbands, nod your head. "But if you structure the policy joint life, it's going to be a lesser guarantee lifetime income stream than if you just did on your life." And it just makes sense. The annuity company is guaranteeing payments for two life expectancies instead of one. You should run the numbers and see what makes sense. Many people buy Deferred Income Annuities, one for the male, one for the female, and vice versa. It really comes down to what you want the money to contractually do because the quotes are customizable.
Hey, you've hung in there with me, and I really, really appreciate it. Make sure to go to this video if you have a second and watch it. It's MYGA's Versus Fixed Annuities. It's informative on how CD-type products work. One more thing about the quotes, and I was just talking about that. You can quote Deferred Income Annuities in a couple of ways. You can say, "Hey, here's the lump sum. How much will this lump sum create at this specific period of time, a specific date in the future that I want the income stream to start?" Or you can reverse engineer the quote and say, "Hey, Stan, we need $2,750 a month starting in seven, eight, or ten years," whatever you want. And we can then quote for that amount, meaning we'll find the carrier out there that will guarantee that amount using as little amount of money as possible.
One of the biggest mistakes I see people make with any annuity purchase, and I know this will sound anti-salesy, and I'm anti-salesy. I mean, these are products. These are contracts that you need to take your time on. But what I was going to say is too many people put too much money into an annuity, and I know the annuity gods just turned over in their graves. In the annuity industry, they're stabbing themselves. Don't say that, Stan, but it's true. You really need to solve for the gap with these types of products. Whatever gap you need to fill from a guaranteed income standpoint, let's start there. There's no perfect solution for inflation. So, let's start with the gap fill, and if we need more money and a lifetime income stream in the future, we can cross that bridge when we get there.
Now, I appreciate you hanging in there. I will tell you how to get the book at this point in time. First of all, subscribe to my YouTube channel because it's fantastic. And number two, I'm releasing videos weekly for infinity. And if you don't believe it, you should subscribe just to call my bluff to catch me on a week that one's not released. I guarantee you won't.
Now, to get the book, it's very simple. Click on this click, and it will take you to our site to download my six annuity owner manuals for free. Yes, for free. And if you want to engage us, get a quote, and discuss your specific situation, book a call with us and we'd be more than happy to talk to you about Deferred Income Annuities. And with that, thanks for joining me. See you next time.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.