A deferred annuity is a long-term investment tool that helps you grow your savings with the goal of generating a steady income later in life. Unlike an immediate annuity, where payouts begin shortly after you make your investment, a deferred annuity delays those payments until a future date. This allows your money to grow over time, tax-deferred, until you’re ready to tap into it, often during retirement when you may be in a lower tax bracket.
Many Americans are approaching retirement with significant savings shortfalls. Roughly 32% of Generation X and 26% of baby boomer workers have saved less than $50,000 for retirement. Even more concerning, about 8% of the workforce doesn’t have any kind of retirement savings. These realities highlight the growing need for structured income solutions later in life.
Let’s take a closer look at how a deferred annuity functions and what it can offer as you prepare for the years ahead.
Summary
- Deferred annuities offer tax-deferred growth, guaranteed income payments and flexible payout options.
- Investors should weigh potential benefits against associated risks such as fees, liquidity concerns and inflation risk.
- Choosing the right deferred annuity requires assessing financial goals, understanding one’s risk tolerance & investment preferences, and consulting an annuity expert.
There are lots of annuity options available. To get help with choosing the right annuity it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!).
How Deferred Annuities Work
When you purchase a deferred annuity, you enter into two distinct phases: accumulation and distribution.
During the accumulation phase, your money grows based on the type of annuity you choose. You don’t pay taxes on your gains while your money is growing. This phase can last for years or even decades, depending on when you start your contract.
Eventually, you reach the distribution phase. This is when you begin receiving payouts. You can set the start date or decide to convert your annuity into a stream of guaranteed income for life or a set number of years. The flexibility of deferred annuities is one reason they’re such a popular option among long-term investors.
Types of Deferred Annuities
Different people have different comfort levels with risk, and the variety of deferred annuity types reflects that. Choosing the right type depends on your financial goals, your timeline, and how much market fluctuation you’re willing to accept.
Fixed Deferred Annuities
A fixed annuity offers predictable growth. Your principal earns a guaranteed interest rate for a specific period. This is a good fit if you want low risk and stable returns without market volatility.
Variable Deferred Annuities
Variable annuities are tied to market performance. Your money is invested in a portfolio of subaccounts, similar to mutual funds. These annuities come with higher risk but also the potential for greater returns. They may also include optional income guarantees.
Indexed Deferred Annuities
Indexed annuities sit between fixed and variable options. Your returns are linked to a market index, such as the S&P 500. Though you won’t lose money if the market drops, your gains are typically capped. This appeals to people who want growth potential with a safety net.
Benefits of Deferred Annuities
Deferred annuities come with several advantages that make them attractive for long-term savers. Whether you’re planning decades ahead or just a few years before retirement, these benefits can have a significant impact on your financial strategy.
Tax-Deferred Growth
Your earnings within the annuity grow without being taxed until you begin taking withdrawals. This can help your investment compound faster than in a taxable account.
Long-Term Income Planning
Deferred annuities are built for predictable income. You can turn a lump sum into monthly payments tailored to your needs, helping to cover living expenses when other income sources slow down.
Flexible Contribution Options
Depending on your preferences and financial situation, you can fund your annuity with a lump sum or make periodic payments.
For example, a $300,000 annuity can provide a reliable monthly income based on your age and the timeline you choose for withdrawals. If you’re looking for higher or more flexible payouts, a $500,000 annuity may better suit your needs. For those planning to base most of their retirement income on a single investment, a million dollar annuity can offer substantial and consistent monthly returns that support long-term financial stability.
Choosing the right investment amount and timeline allows you to align your annuity with your future lifestyle.
What Is a Deferred Income Annuity?
A deferred income annuity (DIA) is a specific type of deferred annuity focused solely on income. Unlike other deferred annuities that may accumulate cash value or offer investment options, DIAs are designed for future payouts. You pay a lump sum upfront, and after a set deferment period — often 5, 10, or even 20 years — you start receiving guaranteed income for life.
Deferred income annuities are often used by people nearing retirement who want to lock in future income while continuing to let other investments grow. It’s a disciplined way to ensure you won’t outlive your savings.
How Much Can You Earn from a Deferred Annuity?
The income from a deferred annuity depends on several variables: how much you invest, your age when you begin withdrawals, how long you wait to start collecting, and the type of annuity you choose.
To get a clearer picture, use annuity calculators to run scenarios based on your actual numbers. These tools let you see how adjusting your investment or deferral period impacts your future income. The longer you wait to take payments, the more you may receive each month.
Considerations Before Buying a Deferred Annuity
Deferred annuities can be a smart addition to your retirement plan, but they’re not for everyone. Before you commit, take time to evaluate a few key factors.
Understand any fees associated with the annuity. These could include administrative fees, mortality and expense risk charges, and investment management fees if you choose a variable annuity. Also, surrender charges may apply if you withdraw funds early, which could reduce your payout.
Liquidity is another consideration. Deferred annuities are built for long-term savings, so they’re not ideal if you anticipate needing access to your funds before retirement.
Think about your timeline and retirement goals. Are you looking to retire in 10 years? 20? If your annuity has more time to grow, your income potential will also grow stronger.
Using Income Riders with Deferred Fixed Index Annuities
An income rider is an optional add-on that guarantees a specific income stream, often for life, regardless of how your investments perform. This feature can add peace of mind, especially with variable or indexed annuities. This option also allows you the flexibility to take income earlier or later without locking in a specific date when you purchase it.
If you’re considering an income rider, explore how it could change your potential payouts with tools like this income rider annuity calculator. Income riders can be useful if you want to add predictability and security without giving up the potential for growth.
Is a Deferred Annuity Right for You?
Deferred annuities work well for people who have time to let their money grow and want guaranteed income down the road. If you’re already maxing out your retirement accounts and still want to save more money from taxes, this could be a good option.
However, they’re less ideal if you need flexibility or fast access to your funds. If you’re unsure whether a deferred annuity fits into your broader financial plan, talk to a licensed advisor who can walk you through the advantages and drawbacks based on your unique situation.
