How to determine income deferral time period


#1

If I purchase a deferred income annuity what should be my considerations when selecting the length of the deferral period? Should it be staggered if I purchase multiple DIAs?


#2

You can think about the deferral period in a few ways: (1) as a way to get you more/less income for every dollar of premium; (2) as a way to get your income and spending to match; or (3) as longevity insurance. Let me explain each:

(1) More/Less Income
The longer the deferral period, the more income you’ll be able to get for every dollar of premium you put in. That’s because (a) the insurer has longer to invest your premium on your behalf and (b) the later you start income, the fewer the number of payments the insurer expects to pay.

(2) Matching Income & Spending
If you want to use the DIA to cover your everyday spending such that you don’t have to worry about market portfolio withdrawals or how much you’re spending, then you want the DIA income to match your spending, both in size and time. For example, if you’re retiring in 2020 and want to spend $2,000 per month but will only have $1,500 coming in, then a DIA producing $500 of monthly income starting at 2020 would accomplish that goal for you.

(3) Longevity Insurance
Others don’t use the DIA to cover their day to day spending but instead want it for longevity protection – i.e. to cover the possibility they live a very long time. In this case, it make sense to start the DIA as late as possible, such as at age 85, to get the most pure insurance coverage from the product. If you wind up making it to 85, you’ll have a significant source of income coming in, just when maybe you would have started to run out.

If you were purchasing multiple DIAs (which many do for interest rate and insurer diversification anyway), you might decide to stagger the income start date to account for inflation. Because DIA payments are flat (unless purchased with an inflation rider), their purchasing power diminishes over time. Some people will then create a ladder such as the following:

$1,000 monthly DIA income starting at 70
$500 monthly DIA income starting at 75 ($1,500 total)
$500 monthly DIA income starting at 80 ($2,000 total)
etc…


#3

Thanks. This is very helpful.