Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Deferred Fixed Income Annuity on Steroids?

Deferred income annuities (DIAs) have been getting a lot of attention since the Treasury and IRS finalized a regulation in July, 2014 blessing the use of qualified longevity annuity contracts, or “QLACs.” A QLAC is a DIA that’s held in a qualified retirement plan such as a traditional IRA with a lifetime income start date that can begin up to age 85. It’s subject to an investment limitation of the lesser of $125,000 or 25% of one’s retirement plan balance.

Fixed Income Annuity Hierarchy

For individuals concerned about longevity who are looking for a sustainable source of income they can’t outlive, fixed income annuities are an appropriate solution for a portion of a retirement income plan. There are three types to choose from:

  1. Immediate annuities
  2. Deferred income annuities (DIAs)
  3. Fixed index annuities (FIAs) with income riders

The overriding goal when choosing fixed income annuities is to match after-tax income payouts to periodic amounts needed to pay for specified projected expenses using the least amount of funds. Immediate annuities, with a payout that begins one month after purchase date, are appropriate for individuals on the cusp of retirement or who are already retired. DIAs and FIAs with income riders, with their built-in deferred income start dates, are suitable whenever income can be deferred for at least five years, preferably longer.

Assuming there isn’t an immediate need for income, a deferred income strategy is generally the way to go when it comes to fixed income annuities. This includes one or more DIAs or FIAs with income riders. Which should you choose?

DIA Considerations

As a general rule, DIAs and FIAs are both qualified to fulfill the overriding income/expense matching goal. Both offer lifetime income payouts. If your objective is deferred lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare income payouts.

DIAs can also be purchased for a specified term of months or years. This can be important when there are projected spikes in expenses for a limited period of time.

DIAs may also be favored when used in a nonretirement account since a portion of their income is treated as a nontaxable return of principal. Finally, if you’re looking to defer the income start date beyond the mandatory age of 70-1/2 for a limited portion of a traditional IRA, a QLAC, which is a specialized DIA, may be an appropriate solution.

Let’s suppose that you’re a number of years away from retirement and you’re not sure when you want to retire or how much income you will need each year. A DIA may not be your best choice since you lock in a specified income start date and income payout at the time of investment with most DIAs.

FIA with Income Rider Features

FIAs with income riders hold a distinct advantage over DIAs when it comes to income start date flexibility. Unlike a DIA, there’s no requirement to specify the date that you will begin receiving income when you purchase a FIA.

The longer you hold off on taking income, the larger the periodic payment you will receive. Furthermore, there’s no stipulation that you ever need to take income withdrawals. This is ideal when planning for retirement income needs ten or more years down the road.

For individuals not comfortable with exchanging a lump sum for the promise of a future income stream beginning at a specified date, i.e., a DIA, a FIA with its defined accumulation value and death benefit, offers an attractive alternative assuming similar income payouts. While an optional death benefit feature can be purchased with a DIA to provide a return of premium to one or more beneficiaries prior to the income start date, this will reduce the ongoing income payout amount.

A FIA also has a defined investment, or accumulation, value that equates to a death benefit. Unlike with most DIAs, flexible-premium FIAs offer the ability to make additional investments that will increase income withdrawal amounts in addition to the investment value.

Some FIAs offer a premium bonus that matches a limited percentage, e.g., 5%, of your initial, as well as subsequent, investments for a specified period of time. The accumulation value is also increased by contractually-defined periodic interest credits tied to the performance of selected stock indices.

Finally, a FIA’s accumulation value is reduced by withdrawals and surrender and income rider charges. Any remaining accumulation value is paid to beneficiaries upon the death of the owner(s).


A comprehensive retirement income plan is a prerequisite for determining the type(s), investment and income payout timing, and investment amounts of fixed income annuities to match after-tax income payouts with projected expense needs assuming that longevity is a concern. If you don’t have an immediate need for income and your objective is lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare potential income payouts.

With their ability to match a spike in expenses for a limited period of time, term DIAs offer a unique solution. When it comes to lifetime income payouts, FIAs with income riders, with their flexible income start date and accumulation value and associated built-in death benefit, are, in effect, a DIA on steroids.

Given the foregoing advantages and assuming similar income payouts, FIAs with income riders generally offer a more comprehensive solution for fulfilling sustainable lifetime income needs, with the possibility of a larger death benefit. A potential exception would be when investing in a nonretirement account for higher tax bracket individuals subject to one’s preference for a flexible income start date and accumulation value/death benefit in a particular situation.

Last, but not least, all proposed annuity solutions should be subjected to a thorough due diligence review and analysis of individual life insurance companies and products before purchasing any annuity contracts.

Annuities Fixed Index Annuities Retirement Income Planning

How Flexible are Flexible Premium Deferred Annuities?

When planning for retirement, you need to generate sustainable income that will meet your projected inflation-adjusted financial needs during various stages. This often requires multiple income-generating sources that ideally start, and potentially stop, to match your projected needs at different stages of retirement.

A diversified portfolio of fixed income investments that’s part of your overall portfolio generally needs to be designed to provide the desired after-tax income amounts and timing of same. The planning is complicated, should begin well in advance of retirement, and needs to be monitored and updated on a regular basis.

One popular investment that’s designed for the fixed income portion of a retirement income plan is a fixed index annuity (“FIA”) with an income rider. When you invest in a FIA, you’re purchasing a deferred annuity. As defined in the Glossary, a deferred annuity is an annuity that doesn’t mature or begin making payments until some future date.

Deferred Annuity Types

There are two types of deferred annuities, both of which are suitable for inclusion in a retirement income plan: (a) single premium deferred annuity (“SPDA”) and (b) flexible premium deferred annuity (“FPDA”). The basic difference between the two is the allowable investment frequency. A SPDA is a one-time investment whereas a FPDA provides for multiple investments in the same annuity.

The key to understanding FPDA’s, including how they will fit into a particular retirement income plan, is that flexibility is in the eye of the beholder, or, in this case, the insurance carrier that issues a particular product. While a FPDA by definition allows for multiple premiums, the number of years the additional premiums may be added and/or the premium amounts are often limited by the terms of an annuity contract. This can be problematic where ongoing investments of specific amounts are required to achieve a targeted level of retirement income.

Types of Flexibility Restrictions

While many FPDA’s provide for indefinite additional investments, several have a limited defined window of opportunity. To give you an idea of the possibilities, let’s take a look at the FIA offerings available through the life insurance agency with which I’m associated.

Of the 52 FIA’s currently offered by 14 carriers, all of which are highly rated, 25 are SPDA’s and 27, or 52%, are FPDA’s. 16 of the 27, or 59%, of the FPDA’s have no restrictions regarding the number of years additional premiums may be added or the amounts of same.

That leaves 11 FPDA’s with restrictions, seven of which limit the number of years that additional premiums may be added and four limit the additional premium amount. The seven FPDA’s that limit the number of years uses either one or three years as the limitation. The four that limit the premium amount are all offered by the same carrier which limits additional premiums to $25,000 per year.

Retirement income planning requires flexibility. The ability to make unlimited additional investments after the first contract year without restriction as to dollar amount is an important consideration in many cases when evaluating FIA’s with income riders. In summary, the type of fixed income annuity and product that you’re evaluating needs to dovetail with your projected financial needs to increase your opportunity for success.

Annuities Fixed Index Annuities

What is the Real Value of Your Fixed Index Annuity?

If you own a fixed index annuity (“FIA”), you can generally visit the website of the life insurance company from which you purchased your FIA to see the current value of your investment. In addition, your life insurance company will send you an annual statement shortly after the anniversary date of the issue of your contract showing you the accumulation value of your FIA on your anniversary date.

In addition to your anniversary date value, a typical annual statement will provide you with a list of the various transactions during the previous contract year, including investments, interest crediting, withdrawals, surrender charges, and premium bonuses and income and other rider charges if applicable.

How about if you purchased an optional income rider with your FIA? Will your annual statement show any information about the current value of your future income withdrawals? The answer to this question is generally no.

When you purchased your FIA, your financial advisor probably prepared an illustration for you that included the amount of annual lifetime income withdrawals that you will receive beginning at various dates depending upon when you begin your withdrawals. While the accumulation value of your FIA will change over time, unless you make additional investments or take non-income withdrawals, the amount of your lifetime income withdrawals are predetermined and are contractually guaranteed.

Assuming that your FIA includes an income rider, there’s a value that can be calculated and attached to the future income stream that you, and if married, your spouse will receive. Furthermore, the value of your income withdrawals may be greater than the accumulation value that’s shown on your annual statement.

If the value of your income withdrawals can be determined, why don’t life insurance companies include this information on annual FIA statements? The reason is because it can vary depending upon a number of assumptions.

Even though the amount of your income withdrawals beginning at various ages assuming you don’t make additional investments or take any non-income withdrawals can be predetermined when you purchase your FIA, there are other unknowns. Stay tuned to next week’s post to learn more.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 3 of 5

I hope that you’re enjoying this series so far comparing two innovative retirement income planning tools – fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). Of the 12 features offered by FIAs with income riders that are listed in Part 1, we’ve looked at three features that are also offered by DIAs, and five that aren’t applicable to DIAs.

This post will discuss the remaining four features that are applicable to DIAs on a limited basis. They are as follows:

  1. Known future income amount at time of initial and ongoing investments
  2. Flexible income start date
  3. Greater income amount the longer you defer your income start date
  4. Death benefit

Known Future Income Amount at Time of Initial and Ongoing Investments

One of the really cool things about fixed income annuities from a retirement income planning perspective is the ability to structure a guaranteed (subject to the claims paying ability of individual life insurance companies) income stream to match one’s income needs. In the case of both FIA’s with income riders and DIA’s, the amount of the future income stream is known at the time of initial and ongoing investments.

When you purchase a DIA, a known amount of income, with or without an annual inflation factor, will be paid to you as an annuity beginning at a specified future date for either a specified number of months or for life, either single or joint as applicable. With traditional DIA’s, you make a one-time investment; however, there are a handful of products that offer you the ability to make ongoing investments.

Unlike traditional DIA’s where you generally make a single investment and you receive a specified amount of income beginning at a specified date, FIA’s with income riders have more variations. For one thing, assuming you’re working with a flexible– vs. a single-premium FIA, you have the ability to make ongoing investments in a single FIA. In addition, the income start date, which will be discussed in the next section, is flexible. While the future income amount is known at the time of initial and ongoing investments, both of these variables combine to offer a much broader range of possibilities than a traditional DIA when it comes to the income withdrawal amount.

Flexible Income Start Date

All FIAs with income riders have a flexible income start date with the ability to begin income withdrawals either in the year of purchase or one year from the date of purchase assuming you’ve reached a specified age, generally 50. There’s no requirement with FIA income riders to commit to the income start date at the time of purchase, and, furthermore, you don’t have to ever start taking income withdrawals if you choose not to do so.

Per the previous section, traditional DIAs begin their income payouts at a specified future date. There are some nontraditional DIAs that provide for a flexible income start date similar to FIAs with income riders.

Greater Income Amount the Longer You Defer Your Income Start Date

With all fixed income annuities where the income isn’t payable during the first year, i.e., single premium immediate annuities, or “SPIAs,” the longer you defer your income start date, the greater the amount of income you will receive. This is true whether the income payment is for a fixed term, as it is with some DIAs, or if it’s for life.

FIAs with income riders, with their built-in flexible income start date, include this feature. In order to obtain this benefit with a traditional DIA, you need to choose a later income start date at the time of purchase.

Death Benefit

Income withdrawal is an optional rider with FIAs. The base product has an accumulation value that’s increased by initial and ongoing investments, premium bonuses, and interest credits and is decreased by withdrawals and surrender and income rider charges. To the extent that there’s accumulation value remaining upon the death of the owner(s), it’s paid to the contract’s beneficiaries as a death benefit.

Traditional DIAs may or may not include a death benefit prior to annuitization. Once annuitization occurs, there’s generally no death benefit payable. If you opt for a traditional DIA that includes a death benefit before annuitization, the amount of the benefit will generally be equal to your investment amount; however, the tradeoff will be a reduced income amount than would otherwise be payable by a similar product that doesn’t include a death benefit.

Annuities Fixed Index Annuities

When Should You Begin Investing in Income Rider Fixed Index Annuities?

The last two posts, When Should You Begin Your Lifetime Retirement Payout? – Parts 1 and 2, analyzed the different possibilities for timing of commencement of income withdrawals from a fixed index annuity (“FIA”), assuming that you purchase an income rider. As discussed, while the timing should be targeted when designing a retirement income plan before any FIA’s are purchased, the income withdrawal starting date is open-ended. As a matter of fact, as pointed out in Part 2, there’s no requirement to ever exercise your income rider.

Let’s take a look at the front end of the retirement income planning timing decision. Assuming that your primary reason for purchasing one or more FIA’s is to provide you, and your spouse or significant other if applicable, with guaranteed (subject to the claims-paying ability of individual life insurance companies) predictable lifetime income with a flexible starting date, and further assuming that you purchase an optional income rider, when should you begin investing in FIA’s?

Before answering this question, it should be emphasized that investment in a particular FIA doesn’t have to be a one-time transaction. There are two types of FIA’s – single premium deferred annuities, or “SPDA’s,” and flexible premium deferred annuities, or “FPDA’s,” with the latter permitting multiple investments. Of the 256 FIA’s on the market today, 171, or 66.8%, can be coupled with guaranteed minimum withdrawal benefits (“GMWB’s”), or income riders. Of the 171 GLWB FIA’s, 110, or 64.3%, are FPDA’s. How’s that for alphabet soup?

Whether making a one-time investment using a SPDA or FPDA, or multiple investments in a FPDA, in order to take advantage of the magic of FIA income riders, the one-time or initial investment, assuming it’s the largest investment, should be made a minimum of five years, and preferably ten to twenty years, before the income withdrawal starting date.

If you read the April 2, 2012 post, How is Your Fixed Index Annuity’s Income Account Value Calculated?, you know that there are six potential variables that are used in the calculation of the income account value that’s used to determine the amount of income that you will receive from a particular FIA. In addition to the initial and subsequent investment amounts, potential premium bonuses, interest rate and interest crediting method, i.e., simple or compound, one of the key variables is the interest period.

The interest period, or accumulation phase, as it’s otherwise known, is a finite period of time, with one, or a combination of, three possibilities: (a) until income is started, (b) specified number of years, or (c) specified age. The longer the interest period, the greater your income account value will be. For riders that use a specified number of years, ten is common, although it can be as long as twenty.

Assuming an investment of $100,000 in a FIA with an income rider that offers 6% compounding for 15 years, the income account value will grow to $126,248 in five years, or $226,090 in 15 years, or approximately $100,000 greater if the investment was made ten years sooner. Assuming the individual is 65 when both values are reached, he/she wants to begin income withdrawals, and the contract provides for a 5% withdrawal rate, the annual withdrawal, or lifetime retirement payments (“LRP”), will be $6,312 ($126,248 x 5%) in the first case, or $11,305 ($226,090 x 5%), or almost $5,000 greater, in the second case where the initial investment was made ten years sooner.

In summary, the earlier that you begin investing in fixed index annuities relative to the projected year that you will need to begin taking income withdrawals to meet the projected income shortfall in your retirement income plan, the more time your FIA income rider will have to work its magic, and the greater your lifetime income will be.