By: Jeff Affronti

April 10,2015

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Does it pay to delay lifetime immediate annuity income?  To the risk adverse "future" retiree guarantees and timing can be a big part of their lifetime income planning. Common sense would tell us the longer one waits the more income one can take at the end. That is a good thing right? Well, it really depends on how it is presented. Knowing when a retiree is planning to start their lifetime income allows for some fun math. 

Setting two variables, start date and premium amount are all that is needed to breakdown the numbers for guaranteed lifetime income. Looking at just the math, the actual income that will wind up in the retirees pocket, here is a real case.

The retiree is asking for an income to begin in 3 years using a Deferred Immediate Annuity (DIA). He would like a joint income for him and his wife.

Male: 76 and 5 months | Female: 68 and 8 months | Premium: $100,000 NQ

The DIA Starting In 3 Years:

  • $618.85 monthly - 100% Joint & Survivor (J&S) (80% Exclusion)
  • $605.34 monthly - 100% J&S with a 10 Year Certain (79% Exclusion)
  • $540.75 monthly - 100% J&S with a 20 Year Certain (70% Exclusion)
  • $586.86 monthly - 100% J&S with Installment Refund (75% Exclusion)

The SPIA Starting In One Year:

  • $572.90 monthly - 100% Joint & Survivor (J&S) (79% Exclusion)
  • $568.17 monthly - 100% J&S with a 10 Year Certain (77% Exclusion)
  • $525.45 monthly - 100% J&S with a 20 Year Certain (71% Exclusion)
  • $553.95 monthly - 100% J&S with Installment Refund (74% Exclusion)

The DIA does kick off more income, but what was lost? Below is a comparison on the "break even" points between the DIA and the SPIA. Looking at the difference in income starting in 3 years compared to 1 year, we can calculate how long it would take to equal the amount that could have been taken in that 2 year spread. 

The 100% J&S comparison DIA vs. SPIA: 

  • $618.85 - $572.90 = $45.68 higher income on DIA
    $572.90 X 24 Months = $13,749.60 missed SPIA income
    $13,749.60  $45.68 = 300.99 months to = lost SPIA income
    300.99 12 = 25.08 YEARS 

The 100% J&S With 20 Year Certain comparison DIA vs. SPIA: 

  • $540.75 - $525.45 = $15.30 higher income on DIA
    $525.45 X 24 Months = $12,610.80 missed SPIA income
    $12,610.80 $15.30 = 824.23 months to =  lost SPIA income
    824.23  12 = 68.68 YEARS 

Below are the amounts the retirees would have received in 23 years. Keep in mind the male would now be age 99 and the female is 91!

  • (J&S With 20) 
    SPIA =  $145,024 returned 
    DIA = $129,780 returned
  • (J&S Only) 
    SPIA =  $158,120 returned
    DIA = $148,524 returned

In this situation it will take a substantial amount of time to see the advantage of the deferral period. Of course, other variables such as current income, tax bracket, social security, timing and whatever a specific retiree may reveal could change the benefit of this income timing. Looking at just the income numbers though, this retiree has a choice to make and may like the idea of taking the income sooner than later.

When is the premium fully returned?

  • Return Of Premium on SPIA is 15.54 Years After Issue Date
  • Return Of Premium on DIA is 16.46 Years After Issue Date

Getting this option in front of the retiree could help them understand the cost of waiting in actual dollars and time.  

The idea is to not outlive your money. Maximizing it at the same time does not hurt.

 
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Last modified: 04/01/15