You Can Offset Longevity Risk with a Deferred Income Annuity

Your money should go the distance with you-Look into Deferred Income Annuities
Your money should go the distance with you-Look into Deferred Income Annuities. By: Mike Powell/Stockbyte/Getty Images

Deferred income annuities (DIAs) are loved by actuaries, engineers and math professors… why? Because they understand the benefit provided when it comes to planning for longevity risk, otherwise known as outliving your money. A vast majority of working people have a defined contribution plan which is not the same as a pension plan that pays them a monthly income until they die. The most common contribution plan is a 401-k which puts the burden on account holders to determine incremental withdrawals from these accounts for the rest of their lives… however long that may be.

Therein lies the  risk of living too long and the need for planning to solve this problem.

You Want a Lifelong Income Stream

The challenge of a defined contribution plan is longevity risk, and it is the number one concern of retirees today. “I don’t want my children to be burdened with me as I grow older!” The concern for individuals over the age of 60 today is outliving their money and not having enough to pay for healthcare.  When you look at the recent studies on the rising cost of healthcare you can understand the challenge this presents mentally and figuratively to those heading into retirement.

Annuitized Defined Contribution Plans can Ensure Lifelong Income Payments

This raises the question, "Why would retirees not annuitize their 401-k or other type of defined contribution plan?"  If they did, it would be equivalent to the old retirement plans offered by large companies.  After 15 years of employment you were vested in a pension that would pay you a monthly income starting at age 65 for the remainder of your life.

And, even better, the more years vested into the plan the higher the payment. So now, if you retire and annuitize your defined contribution plan money into an immediate annuity (SPIA) it would begin paying you a pension type investment for the remainder of your life. Most individuals will not do this.

Even worse they are advised not to do this, but that is another story all together… let’s get back to the longevity issue.

Deferred Income Annuities Ensure You Minimize the Risk of Outliving Your Money

Let’s look at what happens with a couple who are both age 65 and retiring with $750,000 in a 401-k plan. If they took a five percent income stream from the asset they would have $3,125 per month of income before tax. They would still have market risk, longevity risk, and asset risk to contend with every year of retirement. If however, they deferred $100,000 in a deferred income annuity contract they would be guaranteed to have approximately half of that income at age 80 or two-thirds at age 85. Planning for the risk of outliving your money is becoming a concern and goal for more and more retirees. A deferred income annuity provides an option for insuring against longevity risk based on your objectives.

Run Quotes Based on Your Specific Needs to See if a DIA Would Work for You

This same process works for planning to offset inflation, paying for long term care, or just about any financial concern you may have relative to longevity risk. The key to dealing with income anxiety or longevity risk is to deal with it.

Once you have a plan in place to manage or mitigate the risk you can then focus on what is important to you now. One way to plan is to play what if… that entails running deferred income annuity quotes and you will soon be able to do that on without an advisor/agent interfering in the process of determining what works for you and your family.

With a little effort and education maybe more than just actuaries, engineers, and math professors will embrace deferred income annuities.