The push for guaranteed lifetime income has turned a former wallflower insurance product into a popular choice. Deferred fixed income annuity sales hit $1 billion last year, up from almost nothing a half-decade ago, and this is now the fastest growing corner of the $219 billion annuity world.
The appeal is obvious: for a large single payment today you get guaranteed income that starts at a later date and lasts as long as you live. A man who is 65 and plunks down $50,000 can expect monthly payments of around $2,500 at age 85 and lasting until he dies. Deferred fixed income annuities work like better-known immediate fixed income annuities, only the income stream is postponed and every year you wait the monthly payments increase.
This is exactly what many boomers are looking for. They are turning 65 at the rate of 10,000 a day, staring into a potentially lengthy future with no salary and, increasingly, no pension. The only income they can count on to never run out is Social Security, and even that source appears likely to diminish in the years ahead.
A deferred fixed annuity fills the potential income void for those who live a long life. With late-life income assured, you can then plan your assets to last for a certain period—exhausting them on the day that the deferred fixed annuity starts to pay knowing that if you are blessed with extra years they will be funded. For this reason, deferred fixed annuities are often called longevity insurance.
In recent years policymakers and retirement planners have stepped up efforts to solve the retirement-income problem. We have rules of thumb like the 4% safe withdrawal rate, a drawdown strategy that gives you a good chance of not running out of money. More recently, 401(k) plan sponsors and asset managers like BlackRock have been introducing options that allow plan participants to easily convert a portion of their savings to an immediate fixed annuity at retirement.
Deferred fixed annuities languished for a time before finally gaining traction a couple years ago. Most people just do not like the idea of spending a big chunk of their life savings for income that won’t start for many years and, if they pass, will never start. There is also a lot of confusion about annuities in general; they come in many flavors and have been criticized for high fees and low rates of return.
But today’s deferred fixed annuities have attractive options that include inflation adjustments, access to your money and guaranteed payouts to heirs should you pass before collecting a certain amount of income, says the Insured Retirement Institute, which projects continued strong sales through next year and probably well beyond.
You pay for these options in the form of lower monthly income. But the certain payout, in particular, has proved to be a popular selling point. For the most part, planners prefer the simple structure and low fee schedule of single-premium fixed annuities—either immediate or deferred—to variable annuities.
A dozen or so insurers offer deferred fixed annuities, also known as deferred income annuities, or DIAs, including The Hartford, MetLife, New York Life, MassMutual and Northwestern Mutual. Deferral periods can be as few as two years and as many as 40 years, but the most common range is five to 15, IRI reports. The average buyer is in their late 50s and chooses an income-start date eight years down the road, IRI says.
As much as it hurts to spend a big chunk of cash now for income you may never collect, or which won’t start for many years, in today’s increasingly pensionless world and expanding lifetimes, longevity insurance deserves a hard look.