You may be considering a deferred income annuity (DIA) account for your retirement. These policies are popular for the safe and reliable income streams they provide in the short and long run.
There are few better ways to guarantee a lifetime stream of income after your working years. Plans are more flexible than ever and can be used to diversify and solidify your investment portfolio from market fluctuations.
Deferred income annuities are insurance contracts usually established with a one-time, single premium payment. Most plans accept both post or pre-tax dollars. Both joint and single-life policies are available.
DIA accounts have two stages. The first is the deferral period and the second is the income phase. The deferral period can be as short as one month, but years are more common. Most companies offer flexibility in the deferral period. This way you can control when your income begins. The longer the deferral stage, the greater your future income.
After the deferral period, the income phase begins. Income can be for a set number of years or for your lifetime. Most owners withdraw income monthly or annually, but semi-annual and quarterly payments are available as well.
Deferred income annuities are popular for many reasons. First and foremost is the guaranteed income they provide. Few investments can make and keep these promises. They also allow for more diversified, less volatile portfolios with decreased market exposure. These annuities also account for longevity. People are living longer and future income is a top priority for many after retirement.
The short answer is: Yes. There are several riders that can be added to a DIA to insure increasing future income.
All insurance companies offer inflation protection. Some will guarantee an annual step-up each year while other riders will increase your income based on changes to inflation indexes like the CPI.
Annual step-up riders will guarantee growth of between 1%-5% depending on your selection. CPI-type riders will grow only when the Consumer Price Index increases which may be more or less than 5%. Either way, your income can increase each year – even after it’s already begun.
Some of these options might illustrate smaller payments at onset, but over the long haul, aggregate distributions can be much higher. And if you have a lifetime annuity, some companies allow for increasing income streams even after the account value has been exhausted.
You might need more income to pay for travel, living expenses, family needs, or healthcare costs. In fact, some can multiply your income 2x over if long term care is needed. Inflation riders can help account for such expenses while also providing peace of mind.
Our clients often ask what happens to any remaining principal in their account at death. The answer depends on how the annuity is set up. We see most of our policies created with either a Cash or Installment Refund feature. This simply means that all remaining funds will transfer to the named beneficiaries at passing. The insurance company does not keep your money.
With a Cash Refund, the remaining funds in the annuity account are paid to your beneficiaries in a lump sum at passing. An Installment Refund continues the income stream for the established time period. If, for instance, the insured passed away in year 15 of a 20-year payout, the remaining 5 installments would be distributed to the account beneficiaries over 5 years.
It’s important to note that payments might be a little smaller when these features are added, but our clients like the peace of mind these riders provide. It’s not a requirement that you add a refund option, however. When maximum income is desired, our clients choose a Life Payment Only option. This strategy offers the largest payments but ends when the insured(s) have passed away. There are no refunds at death. This strategy is more appropriate for someone who needs more income and is less concerned with leaving an inheritance.
Traditional, guaranteed fixed annuity accounts are considered to be some of the safest accounts available. There are several rules and regulations insurance companies must abide by to offer these policies. Large state Guaranty Associations exist in every state to insure deposits for policy owners. That being said, it’s always wise to research the rating and reputation of the insurance companies you are most interested in. We can help you find a stable company that will deliver on their promises.
In June 2014, the Treasury Department changed the tax code allowing consumers to defer required minimum distributions on a portion of their retirement accounts. Called Qualified Longevity Annuity Contracts (or QLACs), these accounts allow you to defer taxable income for longer periods of time and create a future income stream.
The special deferred income annuities are in a class of their own. You can only deposit pre-tax (IRA, 401(k), 403(b), etc.) dollars into these accounts. And there are different rules about deposits and withdrawals. Contributions are limited to the lesser of $200,000 or 25% of your qualified assets. Distributions must begin once the owner is 85 years of age, but can begin sooner.
Like a regular DIA, income streams can be established for single or joint life. Cash refund options are also available to insure all accumulated funds, plus interest, are returned to named beneficiaries in the event of an early death.
The primary advantage to a QLAC is the additional time RMD payments can be postponed. This allows for compound growth, tax savings, and larger future payments. Many investors benefit from postponing RMD payments and deferring a portion of these forced payments. Consumers are working well into their 70s and have little need for more taxable income. Qualified Longevity Annuity Contracts allow for longer deferral periods creating additional income when it might be more useful later in retirement.
There are several insurance companies offering deferred income annuity accounts and some will differ in very small ways. We can help you sort through the minutiae and find the policy(s) that best suits your needs now and in the future. Our policies offer significant flexibility as we understand that your needs may change in the future. Contact us today for a consultation.