Deferred Income Annuities Can Replace Pensions -- for Some People
NEW YORK (BankingMyWay) -- As a way to help retirees avoid outliving their money, longevity insurance sounded like a great idea, but it never really took off. Now, though, the basic idea is back with a few improvements, and sales are up as growing numbers of baby boomers approach and enter retirement. The stars are aligning.
LIMRA, the insurance industry research and consulting group, says sales of "deferred income annuities" doubled last year to $2 billion, as the number of insurers offering these products also doubled, to 10. Those sales are still pretty small, but investors, after seeing early retirees' suffering in the financial crisis, may now see the merits of ensuring a dependable fixed income for their later years.
Many find that DIAs can stand in for the traditional pension, which is becoming a dinosaur. Fidelity compares a number of them on its site.
DIAs basically work the same as longevity insurance, or longevity annuities, as they were officially called. You pay a premium as you would for car insurance, and a number of years later the insurer starts paying you a monthly income that is considerably higher than you could earn with bonds, bank savings or other fixed-income assets. Best of all, the income keeps flowing for life.An example offered by Morningstar, the investment-data firm, shows that a man who pays $100,000 for a DIA at age 65 could get as much as $56,000 a year starting at age 85. A 30-year Treasury bond that size would pay only $3,630. guaranteed income in retirement. They invest in their 50s or early 60s and start payments in their 60s or 70s. This provides a smaller payment that one would get with a longer delay, but still more than with standard fixed-income investments or "immediate income annuities," which start the income flow as soon as the premium is paid.
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