![]() ![]() In other words, a client can set aside a portion of retirement savings today to buy a guaranteed retirement income in the near future. The primary advantage of a short deferral annuity is the ability to establish a defined minimum level of retirement spending. ![]() Unlike long-term deferral period annuities that are meant to provide late-life income primarily to protect against longevity risk, a shorter deferral period annuity (hereafter called a short deferral annuity) is purchased to provide a steady income to fund retirement spending over the entire retirement life cycle.įixed short deferral DIAs may more easily be viewed as a portfolio whose return is guaranteed for a period of time after which a single premium immediate annuity is purchased. This suggests that DIAs are particularly appealing to clients nearing retirement who value the ability to plan on a fixed, nominal income stream after retirement. The significant majority of deferred income annuities (DIAs) purchased today have a relatively short deferral period before annuity payments begin. This study uses a methodology proposed by Milevsky (2006) to evaluate the impact of guaranteed income products on the cost of funding retirement and shows when, and for which clients, a deferred income strategy makes sense. Buying a guaranteed income also reduces risk at a time when a bear market can derail a retirement income plan. Taking assets out of a portfolio to buy a product that has a pre-defined return has important portfolio implications that should be considered by financial planners when constructing a retirement income strategy with the remaining wealth. Findings suggest that short deferral period annuities can reduce the cost of funding retirement, provide longevity protection, and offer behavioral benefits to clients concerned about near-retirement market performance.Ĭlients nearing retirement have increasingly been attracted to products that allow them to buy future income with recent portfolio gains.Retirees would have been better off without a DIA in simulations where portfolio returns are very high or when retirees die early. The purchase of a DIA before retirement is particularly valuable for clients who would have maintained a stock allocation lower than 70 percent.Unlike long-term deferral period annuities (longevity insurance) that are primarily meant to protect against longevity risk, a short-term deferral period annuity can provide a steady income to pre-fund retirement spending over the entire retirement life cycle.Most deferred income annuities (DIAs) have a relatively short deferral period, making them particularly appealing to clients nearing retirement who value the ability to plan on a fixed, nominal income stream after retirement. ![]() He hosts the Retirement Researcher website ( and is a two-time recipient of the Journal’s Montgomery-Warschauer Award.Īcknowledgements: The authors thank Northwestern Mutual for sponsoring this research, as well as the constructive feedback from Gregory Jaeck, Ron Nelson, and Ed McGill. Pfau, Ph.D., CFA, is a professor of retirement income at The American College and a principal at McLean Asset Management. He is also a two-time recipient of the Journal’s Montgomery-Warschauer Award. He is director of the retirement planning and living cluster at Texas Tech University. coordinator in the Department of Personal Financial Planning at Texas Tech University. Michael Finke, Ph.D., CFP ®, is a professor and Ph.D. ![]()
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