An expanded life expectancy is a blessing, but it could also be a curse, if you run out of money and there’s no way to generate any new money. Deferred annuities are an option.
A study from the Employee Benefit Research Institute recently appeared in Fed Week in the article “Deferred Annuities Can Protect against ‘Longevity Risk,’ Study Says.” It paints a somewhat dismal picture of what life might look like for someone who lives so long that they outlive their retirement savings.
Only a very small percentage of defined contribution and individual retirement account balances are annuitized. The Employee Benefit Research Institute report notes that a significant percentage of defined benefit accruals have been taken as lump-sum distributions, when the option was available.
A deferred annuity is a kind of annuity contract that delays income—which is paid out either in installments or a lump-sum payment—until the investor chooses to receive them.
This type of annuity has two main phases: (i) the savings phase, when you invest money into the account; and (ii) the income phase, when the plan is converted into an annuity and starts to pay out to the account owner. A deferred annuity can be variable or fixed.
A deferred annuity works like it sounds, it is deferred or delayed. Instead of an immediate payout beginning at retirement, the payout starts much later, such as 20 years after the purchase.
The report said that many people can be hesitant to buy these annuities, because they’re giving up control of part of their retirement savings for a long period. However, the Employee Benefit Research Institute report emphasized that due to the delay in the payout, deferred annuities can cost much less than those annuities designed to pay out immediately.
Based on an analysis involving four age groups, the study found that purchases using less than 20% of retirement savings improved the retirement finances after payouts begin for each, versus keeping them in IRAs or other retirement savings vehicles during that time.
That wasn’t necessarily true of using larger percentages, the research noted, because of factors like the higher potential for needing to finance long-term care, before the annuity would begin payouts.
Deciding on whether or not to convert funds to a deferred annuity requires taking a look at your entire retirement investments and how they are currently structured. Your estate planning attorney may have further ideas of how to plan for longevity.
Reference: Fed Week (April 17, 2019) “Deferred Annuities Can Protect against ‘Longevity Risk,’ Study Says”