We know that for years that planning for retirement was a three legged stool. Pension plans, social security, and then whatever personal savings and investment plans you could muster up over the course of your lifetime. With a great deal of uncertainty looming over social security and pension plans dwindling away from large corporations, I continue to stress to people that retirement planning feels more like a pogo stick than it does a stool.
Product companies understand that the greatest way to attract customer is figure out how to fill a void in the marketplace. As investors struggle to figure out the best way to plan for retirement, a fairly new type of fixed product has been gaining traction called a Deferred Income Annuity (DIA). A deferred income annuity is a newer type of annuity that is essentially a mixture of a single premium immediate annuity and a single premium deferred annuity.
With a DIA, the idea behind the vehicle is to commit a portion of your portfolio into an account that you know will guarantee you a pension for the rest of your life (and potentially your spouse) from an insurance company. Large companies including New York Life and Guardian as well as many other are in this arena today.
Let’s say, for example, you are 45 years old and have $500,000 of investible assets. You see your accounts go up and down and are considering whether or not you’ll have enough money for retirement. What you could do is take a certain percentage of your assets (10%, 20%, etc.) and put the money in a DIA. Generally, premiums are flexible meaning you can put in a lump sum to start and make ongoing flexible contributions. When you invest your money, you can select a date for getting distributions which can range on most products anywhere from 2 years to 30 or 40 years down the road. Remember, that your overall rate of return deals not just with interest rates, but also mortality & expense tables as well when you analyze overall return.
You can’t withdraw your lump sum from a deferred income annuity as you can with a variable annuity. However, there is still a death benefit feature should you prematurely die before the date you start receiving income.
Do you need a pension plan? If your company doesn’t offer one and you want to smooth out your overall long term retirement planning strategy perhaps a DIA is something you’ll want to look into for your future. E-mail me at [email protected] if you want to learn more.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®, is co-CEO of oXYGen Financial and is a top ranked personal finance blogger (www.yoursmartmoneymoves.com). He is a regular contributor to Investment News, The Wall Street Journal, and The Atlanta Journal Constitution. Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS.