Purchasing a deferred annuity can be an effective strategy to protect against retirement “longevity risk”—the possibility of running out of savings over a lengthy life in retirement—a study by the Employee Benefit Research Institute has said.
“The prospect of outliving retirement savings is a very real risk for many Baby Boomers and Gen Xers. Yet, only a very small percentage of defined contribution and individual retirement account balances are annuitized — and a significant percentage of defined benefit accruals have been taken as lump-sum distributions when the option was available,” it said.
In a deferred annuity, rather than an immediate payout starting at retirement, the payout begins much later, for example 20 years from purchase. The report said that people can be reluctant to purchase such annuities because they are giving up control of part of their retirement savings for a long period. However, it stressed that because of the delay in the payout, such annuities can cost much less than annuities designed to pay out immediately.
Based on an analysis involving four age groups, it said that purchases using less than 20 percent of retirement savings improved the retirement finances after payouts begin for each, versus keeping them in IRAs or other retirement savings vehicles during that time. That was not necessarily true of using larger percentages, it added, because of factors including the higher potential for needing to finance long-term care before the annuity would begin payouts.
See also, Calculating a Deferred Annuity at ask.FEDweek.com