Why Would Someone Buy A Deferred Annuity?

Shawn Plummer

CEO, The Annuity Expert

Welcome to our comprehensive guide on the benefits you receive when you buy a deferred annuity. This guide will explore why individuals invest in this financial product. A deferred annuity is a contract between you and an insurance company, providing a steady income stream during retirement. By adopting a people-first approach, we aim to demystify this concept and present you with clear, authoritative information to help you make informed decisions about your financial future.

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Securing a Reliable Retirement Income

A deferred annuity offers a compelling advantage by ensuring a reliable income stream during retirement. By investing in this financial product, you are essentially creating a retirement paycheck that you can count on. In addition, the annuity’s structure allows you to contribute funds during your working years and receive regular payments in the future. This feature is particularly beneficial for those concerned about outliving their savings or uncertain about market fluctuations.

Guaranteed Income

With a deferred annuity, you can choose a payout plan that guarantees an income for life or a specific period. In addition, this reliable income source can supplement your other retirement savings, such as Social Security or a pension.

Example: Let’s say you purchase a deferred annuity with a guaranteed lifetime income starting at age 65. You contribute a lump sum or make regular payments into the annuity during your working years. Once you reach 65, the annuity starts providing a fixed monthly income for as long as you live.

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Long-Term Financial Planning

A deferred annuity helps you plan for the future by offering a predictable income stream. This allows you to budget effectively, cover essential expenses, and maintain your desired lifestyle throughout retirement.

Example: Purchasing a deferred annuity ensures a monthly income of $2,500 during retirement. This gives you the peace of mind to cover essential expenses, travel, pursue hobbies, or spoil your grandchildren.

Deferring Taxes and Maximizing Growth Potential

Deferred annuities offer tax advantages, making them an attractive option for individuals looking to optimize their investment growth and manage their tax liability efficiently.

Tax-Deferred Growth

One of the primary benefits of a deferred annuity is that the earnings on your investment grow tax-deferred. This means you don’t pay taxes on the gains until you start receiving distributions, allowing your money to compound and potentially grow faster over time.

Example: Suppose you invest $100,000 in a deferred annuity, which grows at an average annual rate of 7%. Over 20 years, your investment would grow to approximately $387,000. If you had invested the same amount in a taxable account and paid taxes annually on the gains, the final value would be significantly lower due to the impact of taxes.

Control Over Timing and Taxation

Another advantage is the flexibility to choose when to receive distributions and how they are taxed. By strategically planning your withdrawals, you can reduce your retirement tax liability.

Example: Let’s assume you plan to retire at age 65 but delay receiving annuity distributions until age 70. This deferral period allows your investment to grow further while potentially placing you in a lower tax bracket due to reduced income from other sources.

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Flexibility and Customization

Deferred annuities offer various customization options for individual financial goals and preferences. These features allow you to tailor the annuity to your specific needs and

Contribution Options

Deferred annuities provide flexibility in terms of how you fund your account. For example, depending on your financial circumstances and investment strategy, you can make a lump sum payment or contribute regularly over time.

Example: Let’s say you have significant money from selling a property. Instead of investing it all at once, you can opt for a deferred annuity and make regular contributions over several years to potentially benefit from dollar-cost averaging.

Optional Riders and Features

Deferred annuities often come with optional riders or features that can be added to the base contract. These riders provide additional benefits and address specific concerns or needs.

Example: One common optional rider is a “guaranteed minimum withdrawal benefit.” This rider ensures that you can withdraw a minimum percentage of your initial investment each year, regardless of market performance, safeguarding against potential market downturns.

Protection Against Market Volatility

One of the primary reasons individuals consider purchasing a deferred annuity is to shield themselves from the unpredictability of the financial markets. An annuity can provide stability and protection regardless of market conditions.

Principal Protection

With a deferred annuity, your principal investment is protected from market losses. Even if the underlying investments within the annuity fluctuate, you are guaranteed to receive at least the amount you initially invested.

Example: Suppose you invest $200,000 in a deferred annuity, and due to market downturns, the value decreases to $180,000. Despite the market performance, you can still receive your original $200,000 investment.

Hedge Against Inflation

Some deferred annuities offer the option to include an inflation protection feature. This feature adjusts your income payments to account for inflation, ensuring your purchasing power is maintained throughout retirement.

Example: If you opt for an annuity with a 3% inflation protection feature and receive an initial income of $3,000 per month, your payments will increase annually by 3% to counter the effects of inflation.

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Peace of Mind and Long-Term Financial Security

Beyond the financial benefits, a deferred annuity provides security and peace of mind. Knowing that you have a reliable source of income and a financial plan can alleviate concerns about the future.

Risk Mitigation

Annuities act as a risk management tool, reducing the risk of running out of money during retirement. In addition, the guaranteed income stream and protection against market volatility provide a stable foundation for long-term financial security.

Example: By purchasing a deferred annuity, you mitigate the risk of depleting your retirement savings too soon, allowing you to maintain your desired lifestyle and protect against unexpected expenses.

Legacy Planning

Deferred annuities can also be used as part of your legacy planning strategy. If you don’t exhaust the annuity during your lifetime, the remaining funds can be passed on to your beneficiaries, providing them with financial support after your passing.

Example: Let’s say you have a deferred annuity with a remaining balance of $300,000 at the time of your passing. This amount can be distributed to your children, grandchildren, or any designated beneficiaries as part of your estate plan.

Next Steps

A deferred annuity offers numerous benefits, making it an appealing option for individuals looking to secure a reliable retirement income, maximize growth potential, and protect against market volatility. In addition, the flexibility and customization options allow you to tailor the annuity to your specific needs, providing peace of mind and long-term financial security.

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Frequently Asked Questions

What is the difference between an annuity and a deferred annuity?

An annuity is an investment product that pays out a fixed or variable stream of payments over a predetermined period of time. The payments are based on a lump sum deposited into the annuity. In contrast, a deferred annuity allows the investor to defer payments until some point, such as upon retirement. A deferred annuity can provide an investor with a source of income during their later years, when they may no longer be able to work. Deferred annuities can also offer advantages such as tax-deferred growth and protection from market volatility.

Who is a deferred annuity suitable for?

A deferred annuity is a way to save for retirement by making contributions to an investment account that grows without being taxed until you withdraw the money. When you reach retirement age, you can take out all the money at once or receive regular payments over time.

Is a deferred annuity considered a retirement account?

A deferred annuity is a type of retirement insurance analogous to how life insurance protects death. An individual retirement annuity is a personalized retirement account intended to amass a person’s retirement savings, which can either be tax-deferred or tax-free, to fund their future income after they retire.

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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