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What Is a Deferred Income Annuity?

Stan Haithcock
January 11, 2024
What Is a Deferred Income Annuity?

Welcome back. I'm Stan The Annuity Man. Today's topic is: What is a Deferred Income Annuity? Deferred Income Annuities are relatively new products, but after this blog, you're going to understand them in full, and you're going to know if they work for your specific situation.

‌We're going to cover a lot today on Deferred Income Annuities. We will cover a deferred income annuity and what it solves for. How does it work, the history of it. We're also going to go through benefits and limitations, the quoting process, and at the end, we'll also talk about where it fits in your portfolio and if it even fits at all. Also, I've written an owner's manual on Deferred Income Annuities. I would love for you to download that for free. Click on this link to see all my owner's manuals, including Deferred Income Annuities.

‌A Longevity Annuity

‌So, what is a Deferred Income Annuity? A lot of financial journalists call it a longevity annuity. What's longevity risk? It's outliving your money. Deferred Income Annuities solve the problem of outliving your money because they provide an income stream you can outlive. Now, it's the cousin of the Single Premium Immediate Annuity. A Deferred Income Annuity has the same exact structure as a Single Premium Immediate Annuity. The difference is that the income stream starts 13 months up to 45-plus years later. So, an Immediate Annuity is income right now up to about a year. A Deferred Income Annuity is when you want to defer, say, 13 months up to 45 years. And remember, a Deferred Income Annuity solves for contractually guaranteed income. It's a transfer of risk that you're giving to the annuity company to pay you or you and your spouse for the rest of your life.

‌What do Deferred Income Annuities solve for? I call it income later. You need income guarantees at a later date. Remember, there are two questions you ask for any annuity purchases. What do you want the money to contractually do? And when do you want those contractual guarantees to start?

‌Let's say you said, "Hey Stan, I need income to start in two years for me and my wife, and this is the amount we need." Okay, great. That's a Deferred Income Annuity quote.

‌Client Example

‌I got a call the other day from a guy who said, "Stan, I need income in three years for me and my wife." I said, "Fine. Do you want to use IRA or non-IRA money?" He said, "IRA money." Okay, great. So, we did that. With Deferred Income Annuities, you can defer up to age 70 and a half with an IRA. He was 65. We deferred to 68, and it was a joint life income stream for him and his wife. I told him when he dies, the income stream continues uninterrupted and unchanged for the rest of his wife's life. And then, when she died, 100% of any unused money would go to the beneficiaries. He was pretty happy with that.

‌It's important to go back over the fact that a Deferred Income Annuity and a Single Premium Immediate Annuity are pretty much the same structure. In fact, they are the same structure. The difference is when you want the income to start. Always remember if it's 30 days to a year and you need the income to start, it's a Single Premium Immediate Annuity. After that, it's a Deferred Income Annuity, but both work the same; both are simplistic transfer risk products that provide a lifetime guaranteed income stream.

‌Handcuffing Strategies

‌Let me give you an example of deferring a long time with a Deferred Income Annuity. Sometimes I call this handcuffing strategies. You're handcuffing your children or people you don't want to give a lump sum. One of my sayings, I always tell people, that your children and your family members are going to show up in a Ferrari at your funeral. You want them to make payments. You don't want them getting a lump sum.

‌The other day, I had a client who had two wandering, ambiguous kids that he didn't think would ever be employable. Hopefully, that's not true, and they're just meandering through life. And he said, "You know what? Let's buy Deferred Income Annuities on both of them. Let's defer it for 30 years." They can't touch it or cash it in, but 30 years from now when they turn 50, they were in their 20s, they're going to get a lifetime income stream that they can never outlive. "Even though they'd hate me," he said. "That income's going to hit every single month." And they will say, "Yeah, it's not that bad because that income stream's coming." I call it handcuffing the beneficiaries. But it's an excellent way to plan for the future if you want income streams to start for a child, a grandchild, or someone in your family that you don't want to have access to the lump sum. That might be a thought for you if you have that situation. We can quote that and handcuff them, yet take care of them from a lifetime income stream standpoint.

‌Understand this: with Deferred Income Annuities and Single Premium Immediate Annuities, lifetime income is based on your life expectancy at the time you take the payment. So, the older you are, the higher the payment.

‌The Benefits

‌Let's talk about the benefits of Deferred Income Annuities. They're simplistic products. They're easy to understand. No offense to nine-year-olds, but I always tell you, if you can't explain it to a 9-year-old, you either shouldn't sell it or buy it. It's very simple. It's a transfer of risk. You're transferring the risk to the annuity company to pay you for the rest of your life. I love the fact that Deferred Income Annuities are customizable. You can customize the quote however you want, and if it's something crazy and you can't, I'll tell you. But there are 30-plus ways to structure a Deferred Income Annuity. Also, with Deferred Income Annuities, you can use it in an IRA. You can use it in a non-IRA account. You can use it in a Roth account. There are rules within the IRA that we can explain to you. You can't defer past age 70.5, but you can use a Deferred Income Annuity before that.

‌And one last thing with a Deferred Income Annuity, let's say you purchase one and say, "I need the income to start seven years from now." Most carriers allow you to change that income start date once after the policy is issued. Life might've changed. You might say, "Hey, I need it to start in seven years, but now I need it to start in five or nine years." Remember, the older you are, the higher the payment. The younger you are, the lower the payment. The payments are a combination of return of principal plus interest, but they're primarily based on life expectancy. Understand there is flexibility. You can change that start date. The only caveat is that if it's life only, most carriers won't allow you to do that. But most of the Deferred Income Annuity quotes that we run are not life only. They guarantee that 100% of the money will go back to the beneficiaries if something happens to you before the money's gone. And with that, you can change the income start date one time.

‌The Limitations

‌With all annuities, there are limitations. Nothing's different with Deferred Income Annuities. They have limitations. Number one, they're rigid contracts. They're not really liquid. You can't call me and say, "Hey, send me X amount of money out of that contract." It will pay you back, but it will pay you back in payment form.

‌Another limitation is that there's no market growth potential. So, many people say, "Well, I need my money to grow by X%." That's not a Deferred Income Annuity.

‌Another limitation of a Deferred Income Annuity is that there's no trackable interest rate you can follow during those deferral years. In other words, you put it in seven years from now, there's no interest rate. The annuity companies reward you for the longer you allow them to hold the money, the more they're going to enhance and increase the payment. So, there is somewhat of a return in there. It's just not a trackable return. And some people feel that's a limitation.

‌The Structure

‌Let's talk about structuring Deferred Income Annuities. You can set it up in a myriad of ways. Again, what do you want the money to contractually do? When do you want those contractual guarantees to start? Those are the two questions that you have to answer. From that, you can set up for your life. You can set up a joint; you could set it up with you and your grandchild; you could set it up however you want. Remember, though, that it's primarily priced on your life expectancy at the time the payments start. If your spouse is 10 years younger than you, then their age and life expectancy will drive most of the pricing. Interest rates play a secondary role, but life expectancy drives the train. With structuring the annuity quotes, just tell me how you want it to work. I'll tell you if it's possible and if it is possible, we'll quote all carriers for you. There are a bunch of carriers out there that quote deferred income annuities, so you need to quote all carriers. Remember, these are commodity products. Annuities are commodity products; not one is better than the other. And quotes change like a gallon of milk. They expire every 7 to 10 days. So, you need to quote all carriers, be specific with the parameters you want to quote, and then go with the highest contractual guarantee with a carrier that you feel most comfortable with.

‌So, where do Deferred Income Annuities fit in your portfolio? Or do they fit at all? If you don't need future income, you don't need one. But if you need future income or want to provide future income for you or someone in your family, then they may fit. It's a future pension plan. It's a transfer of risk. And I encourage you to do your homework on your portfolio and your needs and say, here's the income stream I need in the future. And then let's reverse engineer that quote to provide that guarantee.

‌Boy, we've covered a lot today on Deferred Income Annuities. I hope you have enough information to make a very good decision. But there's one last piece that you need. You need the Deferred Income Annuity Owner's Manual. Click on this link to download it for free. That's right, for free! Thank you for joining me today, and I will see you on the next blog.

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.

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