Future Income and a Deferred Income Annuity (DIA)

Define the Composition of Your Financial Frame
Define the Composition of Your Financial Frame. small-frog / E+ / Getty Images

You are a Financial Consumer with a Plan

A financial plan is a system that allows all the parts to contribute to the success or failure of the whole plan. Planning is the act of projecting forward to what we want to build financially. There are eight components for constructing a financial plan, but I want to address the two that most often get overlooked. The first is becoming a financial consumer, and the second is defining the purpose of each goal.

In the purchasing process, as a financial consumer, emotions and logic play a major role. These can be boiled down to fear and greed. These create internal conflict during the purchasing process. Advertisers focus more on the sizzle than the steak to get you to buy. They want to stir your emotions and mitigate your logic. This explains why the most common phrases used to sell products are financial loss and performance. Knowing what you want makes it easier to filter through the sizzle and find the steak. Only then will the planning process take on clarity of purpose instead of emotions.

Define the Purpose of Your Plan. Is it Future Income?

One of the greatest challenges in planning is the uncertainty of the future. In order to achieve your financial plan, you have to purchase products that meet the purpose defined. One purpose in a financial plan is future income.  A Deferred Income Annuity (DIA) is one consideration that brings some concrete answers to the projection of income.

By definition, a DIA is a contract with an insurance company to which you pay a lump sum or premium, and in return, the insurance company promises to pay you a specific amount monthly for the remainder of your life starting on a specified future date. A DIA is also referred to as a longevity annuity.

Deferred Income Annuities provide Future Income

By definition, you can now determine if a DIA fits in your financial plan. The goal is to create income from your accumulated money to guarantee a monthly income at a future date. A DIA fits the purpose of producing future income starting on a specified date and continuing for the remainder of your life. The simplicity of this contract allows you to incrementally increase your income over the balance of your life - guaranteed.

Your Decision is in the Details

Learning the details of the product is where your emotions may take over. Thankfully, a DIA contract has limited options and each is very definable in conjunction with your purpose. Asking yourself the following questions will provide the needed insight for making a clear decision:

  • Do you know when you want your income to begin?
  • Do you want to ladder your income for scheduled increases over your lifetime?
  • Do you want the income for both yourself and your spouse’s lifetime?
  • Do you want the income stream to account for inflation?
  • Do you want the money to go to a named beneficiary if you die prematurely?

It is important to define exactly what you want from the contract to determine if it fits your purpose.

DIA Benefits

It is important to define the advantages and contractual benefits of a DIA:

  • Deferred income guarantees
  • Options how the income is structured (single or joint)
  • Ability to customize the income relative to inflation
  • Guaranteed principle
  • No fees
  • Simple structure
  • Transfer of Risk

The contractual benefits result in a pure transfer of risk. You transfer the risk of managing your money to the insurance company in exchange for the guaranteed future income. If the transfer of risk, in exchange for guarantees, satisfies your logical and emotional thought process, then a DIA may be a perfect fit.

DIA Drawbacks

It is equally important to define the disadvantages of a DIA

  • The biggest drawback is the lack of liquidity.

You transfer a lump sum of money to the insurance company for guaranteed future income payments.

This brings up the issue of fear and greed. Can you emotionally make that decision? And, can you logically and financially make that decision? If the answer is “no” and you are willing to take on the risk of managing your own money, then a DIA will not fit your logical and emotional needs. It is then best to pursue other avenues.

Weighing out the advantages and disadvantages is part of the process as a financial consumer. Knowing your purpose makes the process of achieving your financial plan doable. If you fail to pacify both sides of your brain, the final decision will be impossible to make or result in poor decisions. Know what you want, define your purpose, learn the details, and then make the decision. Most importantly, don’t allow fear or greed to be the determining factor. Buy the steak because it fits your needs and plans… Don't buy the sizzle.

Try the Annuity P.I.L.L. Strategy. It is a helpful process Stan developed to help you determine if you need an annuity.

Read more about DIAs in Stan's article called Longevity Annuities. It's just another name for DIAs. 

Read and Ride the Annuity Train into the Future. Stan's article Longevity Annuities: The Good, The Bad, The Truth fleshes out the contractual benefits Jim mentioned in his article.

DIAs aren't the only Longevity Annuity. Read QLAC: A Different Type of Longevity Annuity. You want to cover all the bases! Knowing what is available leads to strong decisions.