# Examples Of Deferred Annuities

Shawn Plummer

CEO, The Annuity Expert

As a relentless tide of future uncertainty nudges us towards securing our financial footing, many people are turning towards annuities as a reliable means of income generation during retirement. Among these, deferred annuities have gained considerable traction. However, the technicality surrounding them often breeds confusion. This guide cuts through the complexity, shedding light on deferred annuities, their calculation, and their types.

## Understanding the Basics of Deferred Annuities

Deferred annuities are long-term investments that you purchase from an insurance company. They are designed to help accumulate savings over time and provide a steady stream of income in the future, typically during retirement. The ‘deferred’ part means the payout is postponed later, often several years after the initial investment.

### Deferred Annuity Calculation and Examples

Deferred annuity calculations primarily revolve around the amount you invest, the time until payouts begin, and the rate of return.

Suppose, for instance, you invest \$50,000 into a deferred annuity and let it sit for 20 years. If the annuity grows at a fixed interest rate of 3% annually, using the deferred annuity formula, the future value of this investment will be approximately \$90,306.

## Types of Deferred Annuities

Different kinds of deferred annuities cater to various investment needs and risk profiles.

### Fixed Annuity

In a fixed annuity, your money grows at a guaranteed interest rate over a specified period. Multi-year guaranteed annuities (MYGA) are an example of fixed annuities. Here, the insurer guarantees a fixed rate of return for several years. These are great for conservative investors seeking guaranteed returns.

Example: Suppose you invest in a 5-year MYGA with a fixed rate of 3%. If you put in \$75,000, you’ll know that by the end of the term, your investment will have grown to about \$87,226, guaranteed.

### Fixed Indexed Annuities

Fixed-indexed annuities offer a unique blend of safety and potential for higher returns. Your returns are tied to a market index, like the S&P 500, allowing you to participate in market gains while protected from downturns.

Example: If you had a fixed indexed annuity linked to the S&P 500 and the index increased by 7% in a given year, your annuity would also see growth corresponding to that increase, subject to a cap. If your annuity had a cap rate of 5%, your investment would grow by that 5%, not the complete 7%. On the other hand, if the index fell by 10%, your annuity value would not decrease.

### Variable Annuities

Variable annuities provide the potential for higher returns – and higher risk. Your money is invested in sub-accounts (similar to mutual funds). The future payouts can vary based on the performance of these investments.

Example: Let’s say you invested \$200,000 into a variable annuity. Your investment is divided into sub-accounts, each invested in assets like bonds, stocks, or mutual funds. If your portfolio does well, your annuity could grow significantly. However, you could see your annuity’s value decrease in a down market.

### Long-term Care Annuities

Long-term care annuities are hybrid products designed to cover long-term care costs. If you need long-term care, the annuity can help pay for it. If not, it acts like a regular deferred annuity, paying out an income stream during retirement.

## Deferred vs. Immediate Annuities

A critical point of differentiation between a deferred and an immediate annuity lies in the payout timings. Payouts start at a future date with a deferred annuity, often years after the initial investment. This delay allows the principal to accumulate a higher total return. On the other hand, an immediate annuity begins paying out almost immediately after the investment is made. This is particularly beneficial for those already in retirement seeking immediate income.

• Example: Suppose you have \$300,000 to invest at retirement. If you chose an immediate annuity, you could start receiving monthly payments, say, \$1,800 per month, based on your life expectancy and current interest rates.
• Example: If you chose a deferred annuity, your \$300,000 could grow for another ten years before you start withdrawals. If your deferred annuity grew at an average rate of 4% annually, you’d have about \$444,000 when you start withdrawals at age 75. Your monthly payouts would then be higher due to the growth of your investment and a shorter expected payout period.

## Next Steps

Deferred annuities are a valuable tool to grow your savings and ensure a steady income flow during retirement. They offer various choices suitable for different risk profiles and needs. Remember, understanding the fine print and seeking professional advice is critical to making the right choice. Choose wisely, and let your golden years be truly golden.

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### What fees are associated with deferred annuities?

Deferred annuities typically come with various fees, including mortality and expense risk fees, surrender charges, administrative fees, and more. It is essential to carefully review the fine print in your contract to understand all the fees associated with your deferred annuity before investing. Additionally, you should consult a financial professional who can help.

### How long should I let my deferred annuities sit?

The time you should let a deferred annuity sit depends on your situation and objectives. Generally, you should hold a deferred annuity for at least five years to achieve maximum growth potential. It would be best to speak with a financial advisor who can help evaluate your options and determine the best approach given your goals.

### Are Fixed Indexed Annuities Safe?

Fixed Indexed Annuities (FIAs) are considered safe investments because they have principal and credited interest guarantees. However, like with any investment, there is still the potential for loss due to market risk. It would be best to always speak with a financial advisor to ensure that an FIA is right for you before investing.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you.

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