What is a Deferred Annuity?

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Procrastination delay and urgency concept with word later on green sticky paper over white alarm clock and crumpled paper ball, bad time management. This illustration is also being used to symbolize a deferred annuity. — _{Image Credit: https://www.shutterstock.com/g/ntkris}

Ever worry about running out of money in retirement? Deferred annuities offer a way to protect yourself from that risk. Think of them as a promise between you and an insurance company. You put in money today, and they guarantee to give you a stream of income later in life. This way, you have a reliable source of cash even if you live a long and healthy retirement.

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With deferred annuities, you wait to receive your money until a specific date you choose. Let’s talk about how exactly they work and what to consider before buying one.

What is a Deferred Annuity?

explaining how a deferred annuity works with three piggy banks on a green background, sizes small, medium, and large, with a hand giving the first piggy bank money, the principal — _{Image Credit: Canva Pro}

Imagine a piggy bank that grows over time and lets you decide when to open it. A deferred annuity is kind of like that. You put money in (your principal), but you wait to take it out (payouts) for a while, as decided in the contract. You can choose to put the money in all at once (lump sum) or add bits of money over time.

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Accumulation Phase (Grow Time!)

growing piggy bank, representing an annuity that you put your money into and watch it grow before it comes out. Three piggy banks, small, medium, and large, on a green background — _{Image Credit: Canva Pro}

This is when your piggy bank fills up. After you put money in, it sits and earns interest for several years (usually 5 or more). The benefit of this is you can get larger payouts later, even with a smaller starting investment than an immediate annuity (which starts paying out right away).

Payout Phase (Get Your Money Time!)

broken piggy bank on a green background, coins on the inside of the piggy bank — _{Image Credit: Canva Pro}

This is when you get to open your piggy bank! The annuity contract decides when this starts. You choose how often you get money (monthly, quarterly, yearly), and you can also pick options like making it a joint account with a spouse, getting some money back if you pass away early, or guaranteeing payments to loved ones for a while.

Pros

Here’s why a deferred annuity might be a good choice:

Save More Now, Get More Later: They cost less to start than other annuities so you can save more money now. Plus, you decide when to get payouts.
Grow Bigger, Get Bigger Checks: Your money sits and grows! It earns interest while you wait, making your pile of money bigger. This means bigger checks when you finally decide to take them out.
Grow Without Paying Taxes Now: It’s like a magic piggy bank that doesn’t get taxed on the money it earns while it grows! This lets your money grow even faster.

Cons

There are a few things to keep in mind about deferred annuities:

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Wait for Your Money: You can’t get your money out easily. There’s a waiting period before you can start taking out checks.
Early Withdrawal Fee: If you really need your money before the waiting period ends, you might have to pay a fee.

Imagine Sarah!

an african american woman with long curly hair, her name is Sarah, putting money in a piggy bank representing putting money into an annuity — _{Image Credit: Canva Pro}

Sarah is 30 years old and wants to save money for retirement. Since she won’t need the money for a long time, she chooses a deferred annuity.

Every year, Sarah puts $5,000 into her annuity.

The money in Sarah’s annuity isn’t just sitting there. It grows at a rate of 3.5% interest each year. This means the pile of money in her piggy bank gets bigger and bigger over time.

Sarah decides to wait until she’s 67 to start taking payouts.

Because Sarah waited and her money grew with interest, she’ll have a much larger amount of money in her annuity when she turns 67. This means she’ll get bigger checks every month when she finally starts taking out money in retirement.

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Remember: This is just an example. How much you save and when you take out money will depend on your own goals!

Here’s a Super Simple Breakdown of How a Deferred Annuity Works!

deferred annuity infographic from seniorresource

You make deposits to an insurance company, like putting money in a piggy bank. This can be a one-time lump sum or smaller amounts over time.
The insurance company invests your money, aiming to grow it over time.
You choose a future date to start receiving payments, like choosing when to break open your piggy bank.
Once that date arrives, the insurance company pays you back your money plus interest in installments. There are a few ways to receive these installments:
- Regular payments for life
- Payments over a set number of years
- A lump sum

Is It Right for You?

thinking — _{Image Credit: Shutterstock}

A deferred annuity can be a valuable tool for building a secure retirement, but it’s not a one-size-fits-all solution! Consider your financial goals, risk tolerance, and desired income stream before making a decision. If you’re unsure if a deferred annuity (or any other annuity) is right for you, then consult with a financial advisor to explore all your options.

Cash is trash, but many investors are afraid of bonds because interest rates are likely to rise. You have alternatives. Other vehicles offer higher yields than cash (and many bonds) and provide diversification and safety of principal. Even better, they won’t lose value when interest rates rise. Cash is trash these days because yields are too low.

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