Should I Buy a Deferred Income Annuity—and When?
Q: I’m interested in buying a deferred income annuity to supplement my income in my later retirement years. What is the best age to buy one? – Jeremy, Austin, Texas
A: As worries about running out of money in retirement grow, so has interest in deferred income annuities. Also known as longevity insurance, sales of these products hit $2.2 billion last year, double the amount in 2012, which was the first year of significant sales, according to Beacon Research and the Insured Retirement Institute.
Deferred income annuities are popular because they give you a hedge against outliving your money. They work like this: You give a lump-sum payment to an insurance company and in return, you get a guaranteed stream of income for life. In that way, deferred annuities are similar to immediate annuities. But with immediate annuities, the income kicks in right away. With deferred annuities, as the name suggests, the benefit payments don’t start until much later, perhaps 10 or 20 years down the road. Because the payments take place so far in the future, you can buy a bigger benefit with a deferred annuity compared to an immediate annuity.
Say you are a 65-year-old man today, and you deposit $50,000 into a longevity annuity that doesn’t start making payments for 15 years. You would get payments of about $1,300 a month starting at age 80. That’s another $15,000 a year in income. The longer you wait for the payments to kick in, the more you’ll get. In that same example, if you wait till age 85 for the payment to start, your monthly income jumps to $2,475. By contrast, a 65-year-old man who invests $50,000 in an immediate annuity today would get monthly payments of about $280 a month.
Of course, the downside is that if you don’t make it to 85 or whatever age you select for payments to start, you get nothing. You also need to consider that the benefits are not inflation-adjusted, so their purchasing power will have declined.
As for when to purchase the annuity, the younger you are, the better the deal. If you make the $50,000 purchase at age 55, instead of 65, with benefits that kick in at age 85, you will get 50% more income—$3,800 a month.
But first, you need to decide whether this move makes sense for you. That depends on your other sources of guaranteed income. If you already have a pension that covers most of your essential costs, you probably don’t need one. And the longer you can delay taking Social Security, which increases each year until age 70 and is adjusted annually for inflation, the less attractive it is to lock up money in an annuity. “Social Security is the best annuity income you can buy today,” says David Blanchett, director of retirement research at Morningstar Investment Management.
Beyond protection against outliving your money, however, deferred income annuities can give you peace of mind by reducing the stress of making your money last till you're 100. “Longevity annuities remove a lot of uncertainty and that’s very valuable to retirees,” says Blanchett.