Annuities have long had a shady reputation—too complicated, too many fees. But a flood of retiring baby boomers who worry about outliving their assets are giving one particular type, called a deferred income annuity (DIA), another chance. Sales of DIAs soared to $2.2 billion in 2017, up from $200 million in 2011.
In exchange for a lump sum up front, these insurance contracts, which carry no annual fees, promise monthly pensionlike payments that the buyer can choose to start getting as soon as 13 months or as late as 40 years after the policy is issued. Payments continue for the rest of the buyer’s life. The older you are when you start receiving the payments, the higher the payments are.
Another reason these annuities are popular now: Since 2014, IRS rules have permitted a special type of DIA called a qualified longevity annuity contract (QLAC) inside some 401(k)s and other tax-deferred retirement accounts. Buyers can postpone the start of payments up to age 85 and, until then, exclude the QLAC in calculating their required minimum distributions (RMDs) that start at age 70½, allowing those taxable distributions to be smaller.
Mistakes to avoid if you consider buying a deferred income annuity…
Getting too few price quotes. Ask your insurance agent for five to 10 quotes. Major underwriters such as Lincoln National Life Insurance, MassMutual and New York Life Insurance all offer similar DIA and QLAC products, but payouts can vary because carriers often adjust their guarantees based on how much business they want to attract during a given period.
Waiting for interest rates to rise to get a better deal. Although higher interest rates affect the level of payouts, postponing purchase of a DIA may mean less time until you start to draw on it, which tends to reduce your payments.