A deferred annuity is a type of annuity where income starts later instead of right away. Many people use deferred annuities as part of a long-term retirement income plan. The idea is simple. Money is placed into the annuity now, and income can start in the future. If you want to learn more about retirement and annuity basics, you can visit the Life Income Path blog to read more educational articles.
What Makes an Annuity “Deferred”?
The word deferred means delayed or later. A deferred annuity delays income until a future date.
This type of annuity has two main phases. The first phase is when the money grows. The second phase is when income begins.
Because income is delayed, the money has time to grow before payments start.
The Growth Phase
The first part of a deferred annuity is often called the growth phase. During this time, the money in the annuity grows based on the terms of the contract.
Depending on the annuity, the growth may be based on:
- A fixed interest rate
- An index
- Investment performance
This phase can last for several years.
The Income Phase
After the growth phase, the annuity can be turned into income. This is called the income phase.
At that point, the annuity can begin making regular payments. These payments may last for a certain number of years or for the rest of a person’s life.
This is why deferred annuities are often used for retirement income planning.
Why People Use Deferred Annuities
Some people use deferred annuities because they want income later in retirement, not right away.
For example, someone may plan to retire at age 67 but does not want annuity income to start until age 75. A deferred annuity can be set up to start income at that later age.
This can be one way to plan for income later in retirement.
Tax-Deferred Growth
Deferred annuities are often described as tax-deferred. This means the money inside the annuity grows without being taxed each year. Taxes may apply when money is withdrawn, depending on the situation.
This is one reason some people look at deferred annuities as long-term planning tools.
Flexible Income Start Dates
Many deferred annuities allow the owner to choose when income starts. Some people choose 5 years later, 10 years later, or even longer.
This flexibility is one reason deferred annuities are used in retirement planning.
Monthly Income in Retirement
When the income phase begins, the annuity can provide monthly income. Many retirees like the idea of monthly income because it can help with budgeting and monthly expenses.
The payments can be set up in different ways depending on the contract.
Simple Example
Here is a simple example.
A person is age 55 and plans to retire at 67. They put money into a deferred annuity at age 55. The money grows for 12 years. At age 67, the annuity begins paying monthly income.
This is just an example, but it shows how a deferred annuity can be used for future income.
How Deferred Annuities Fit Into Retirement Planning
Deferred annuities are often just one part of a retirement income plan. People may also have Social Security, savings, pensions, and other income sources.
The goal for many people is to create income that lasts throughout retirement.
Final Thoughts
A deferred annuity is designed to provide income later in the future instead of right away. It includes a growth phase and an income phase, and it is often used as part of retirement income planning.
If you want to learn more about how deferred annuities work and how they are used in retirement planning, you can learn more here.
This article is for educational purposes only and is not financial, tax, or legal advice.
