Deferred Annuity not what I expected

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bertilak
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Deferred Annuity not what I expected

Post by bertilak »

I thought an annuity (deferred or immediate) established a guaranteed income stream. From what I can now tell, that is NOT true for deferred annuities. They guarantee a growth of principle over the guarantee period. Once that period is up, you get the accumulated value as cash, which you can do with as you please, just like any other chunk of cash.

With a deferred annuity, what you are deferring is access to the accumulated value, not to a guaranteed income stream. Do I have this right?

I bought a 5-year deferred annuity from state farm. Well, I will have bought it in the next 10 days or so. When I get the contract, I have 10 days to look it over and accept or reject it.

I noticed that the annuity's guaranteed growth is 3.6%, exactly the same as a 5-year treasury bond's yield so I am not sure what I am getting, as I can buy bonds like this without going through State Farm. Both the bond and the annuity are promising the same return over the same period.
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Re: Deferred Annuity not what I expected

Post by alex_686 »

It is tax advantaged space. A minor advantage.
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Re: Deferred Annuity not what I expected

Post by sailaway »

What you are describing sounds like a Multi Year Guaranteed Annuity (MYGA), rather than a deferred annuity.
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Re: Deferred Annuity not what I expected

Post by bertilak »

sailaway wrote: Tue Jan 24, 2023 2:20 pm What you are describing sounds like a Multi Year Guaranteed Annuity (MYGA), rather than a deferred annuity.
Can you please summarize the differences? What I described (If I have done so properly) is called a SPDA (Single Premium Deferred Annuity) by State Farm.
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Re: Deferred Annuity not what I expected

Post by ResearchMed »

bertilak wrote: Tue Jan 24, 2023 2:11 pm I thought an annuity (deferred or immediate) established a guaranteed income stream. From what I can now tell, that is NOT true for deferred annuities. They guarantee a growth of principle over the guarantee period. Once that period is up, you get the accumulated value as cash, which you can do with as you please, just like any other chunk of cash.

With a deferred annuity, what you are deferring is access to the accumulated value, not to a guaranteed income stream. Do I have this right?

I bought a 5-year deferred annuity from state farm. Well, I will have bought it in the next 10 days or so. When I get the contract, I have 10 days to look it over and accept or reject it.

I noticed that the annuity's guaranteed growth is 3.6%, exactly the same as a 5-year treasury bond's yield so I am not sure what I am getting, as I can buy bonds like this without going through State Farm. Both the bond and the annuity are promising the same return over the same period.

Wrong type of annuity! Yup, it's crazy complicated.

You want to look into Deferred LIFE annuities.
You probably have a multiyear guaranteed annuity, or something like that, which is, in my naive opinion, like a special bond (??).

The REAL problem is the multi-purposing of the word "annuity"!
A life annuite (SPIA for example) is not necessarily intuitive for some. Add to that the crazy concept that I first encountered years ago at TIAA... an unannuitized annuity... say what!??
We needed to consider "annuitizing the annuity". Huh? :annoyed

See if that's what you are looking for, a deferred life annuity.

RM
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petulant
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Re: Deferred Annuity not what I expected

Post by petulant »

Technically a deferred annuity is any annuity product where annuitization is deferred from the date of purchase (contra an immediate annuity). Annuitization is the event where annual or monthly periodic payments begin for a certain period of years or for the life of the annuitant. Hence, if you asked for a "deferred annuity," you might be given a MYGA (which is analogous to a CD issued by an insurance company), a deferred life annuity (like a SPIA with a delay from purchase to payout, and a time value of money difference to account for the delay), or technically even a variable annuity with investment features (it's technically deferred!).

What you want to do is get quoted for a deferred life annuity from, say, immediateannuities.com, stating your current age and the payout beginning in 5 years.
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Re: Deferred Annuity not what I expected

Post by Northern Flicker »

Different types of annuities can be deferred. A Deferred Income Annuity or DIA is a lifetime income annuity that is deferred, essentially the same as a SPIA, except deferred instead of immediate.

If you go to an annuity quote site you may find that the start date is one of the input parameters, which would control whether the product would be described as a SPIA or DIA, but they may be implemented as the same product with different income start dates.
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Re: Deferred Annuity not what I expected

Post by bertilak »

ResearchMed wrote: Tue Jan 24, 2023 2:23 pm Wrong type of annuity! Yup, it's crazy complicated.

You want to look into Deferred LIFE annuities.
You probably have a multiyear guaranteed annuity, or something like that, which is, in my naive opinion, like a special bond (??).

The REAL problem is the multi-purposing of the word "annuity"!
A life annuite (SPIA for example) is not necessarily intuitive for some. Add to that the crazy concept that I first encountered years ago at TIAA... an unannuitized annuity... say what!??
We needed to consider "annuitizing the annuity". Huh? :annoyed

See if that's what you are looking for, a deferred life annuity.

RM
Yeah, I ran into the concept of "annuitizing the annuity" and it should have raised a flag when I thought the terminology was weird.

I will check with the State Farm agent to see if they have a deferred LIFE annuity. I think they do, and I think I was pushed in the direction I went because (by making the annuitization step optional -- use the cash out to buy an SPIA) there is more flexibility. To me I see that flexibility as RISK because the market conditions may be very different at the time. It id the vey risk I was trying to avoid in the first place!
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Re: Deferred Annuity not what I expected

Post by GaryA505 »

There are different kinds of deferred annuities, if one is considering "deferred" to mean tax-deferred. These are the most common:
DIA - Deferred Income Annuity (taxes are deferred until you start receiving income, on the date you specify at purchase)
MYGA - Multi-Year Guaranteed Annuity (taxes are deferred until you take the money out)
FIA - Fixed Income Annuity (taxes are deferred until you take the money out, or start receiving income from the optional income rider)

Note that a MYGA or FIA can be annuitized (turned into a stream of lifetime payments).

A SPIA (Single Payment Immediate Annuity) isn't really tax-deferred because taxes start when the payments do, which can be 1 to 13 months from purchase date.

This thread is an example of why the annuity business is such a mess, and why some people hate all annuities. People are being sold stuff they don't really understand. Then, later when they figure out what they actually bought is not what they thought they were buying, they are upset (and rightfully so).
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: Deferred Annuity not what I expected

Post by GaryA505 »

bertilak wrote: Tue Jan 24, 2023 2:36 pm
ResearchMed wrote: Tue Jan 24, 2023 2:23 pm Wrong type of annuity! Yup, it's crazy complicated.

You want to look into Deferred LIFE annuities.
You probably have a multiyear guaranteed annuity, or something like that, which is, in my naive opinion, like a special bond (??).

The REAL problem is the multi-purposing of the word "annuity"!
A life annuite (SPIA for example) is not necessarily intuitive for some. Add to that the crazy concept that I first encountered years ago at TIAA... an unannuitized annuity... say what!??
We needed to consider "annuitizing the annuity". Huh? :annoyed

See if that's what you are looking for, a deferred life annuity.

RM
Yeah, I ran into the concept of "annuitizing the annuity" and it should have raised a flag when I thought the terminology was weird.

I will check with the State Farm agent to see if they have a deferred LIFE annuity. I think they do, and I think I was pushed in the direction I went because (by making the annuitization step optional -- use the cash out to buy an SPIA) there is more flexibility. To me I see that flexibility as RISK because the market conditions may be very different at the time. It id the vey risk I was trying to avoid in the first place!
You can roll a MYGA into a SPIA with no tax consequences, except that the deferred taxes on the MYGA interest may reduce your exclusion ratio a little bit.

The least work is a DIA, because you just pick the date for the income payments to start. However, it's irrevocable once you buy it.
You can do a MYGA-to-SPIA strategy, but as you noted, you may or may not win the interest rate bet. If you change your mind at the end of the MYGA, you can just take the cash and pay the taxes or roll it into another MYGA, so there's more flexibility. Life happens.
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Re: Deferred Annuity not what I expected

Post by ResearchMed »

GaryA505 wrote: Tue Jan 24, 2023 2:39 pm There are different kinds of deferred annuities, if one is considering "deferred" to mean tax-deferred. These are the most common:
DIA - Deferred Income Annuity (taxes are deferred until you start receiving income, on the date you specify at purchase)
MYGA - Multi-Year Guaranteed Annuity (taxes are deferred until you take the money out)
FIA - Fixed Income Annuity (taxes are deferred until you take the money out, or start receiving income from the optional income rider)

Note that a MYGA or FIA can be annuitized (turned into a stream of lifetime payments).

A SPIA (Single Payment Immediate Annuity) isn't really tax-deferred because taxes start when the payments do, which can be 1 to 13 months from purchase date.

This thread is an example of why the annuity business is such a mess, and why some people hate all annuities. People are being sold stuff they don't really understand. Then, later when they figure out what they actually bought is not what they thought they were buying, they are upset (and rightfully so).

Ah, another complication: "Deferred WHAT"? :annoyed
Deferring taxes? Or deferring the start of the income stream?

I've considered a "deferred life annuity" to mean one sets aside the money with the vendor, and "defers" the income stream to start in X years or at Y age, etc.
.... compared with an SPIA, Single Premium IMMEDIATE Annuity, where the income starts... "now" (or as soon as can be arranged).

I *think* either of those can be had in a tax-deferred account or in a taxable flavor.

Yes indeedy, the terminology is not conducive to understanding, leading to more "opportunities" for the sleazy sales rep...

RM
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Re: Deferred Annuity not what I expected

Post by GaryA505 »

ResearchMed wrote: Tue Jan 24, 2023 2:53 pm
GaryA505 wrote: Tue Jan 24, 2023 2:39 pm There are different kinds of deferred annuities, if one is considering "deferred" to mean tax-deferred. These are the most common:
DIA - Deferred Income Annuity (taxes are deferred until you start receiving income, on the date you specify at purchase)
MYGA - Multi-Year Guaranteed Annuity (taxes are deferred until you take the money out)
FIA - Fixed Income Annuity (taxes are deferred until you take the money out, or start receiving income from the optional income rider)

Note that a MYGA or FIA can be annuitized (turned into a stream of lifetime payments).

A SPIA (Single Payment Immediate Annuity) isn't really tax-deferred because taxes start when the payments do, which can be 1 to 13 months from purchase date.

This thread is an example of why the annuity business is such a mess, and why some people hate all annuities. People are being sold stuff they don't really understand. Then, later when they figure out what they actually bought is not what they thought they were buying, they are upset (and rightfully so).

Ah, another complication: "Deferred WHAT"? :annoyed
Deferring taxes? Or deferring the start of the income stream?

I've considered a "deferred life annuity" to mean one sets aside the money with the vendor, and "defers" the income stream to start in X years or at Y age, etc.
.... compared with an SPIA, Single Premium IMMEDIATE Annuity, where the income starts... "now" (or as soon as can be arranged).

I *think* either of those can be had in a tax-deferred account or in a taxable flavor.

Yes indeedy, the terminology is not conducive to understanding, leading to more "opportunities" for the sleazy sales rep...

RM
Yup, I had to study this stuff for a couple of months to more-or-less get it.
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Re: Deferred Annuity not what I expected

Post by bertilak »

So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
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Re: Deferred Annuity not what I expected

Post by exodusNH »

bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
Since you mention inflation, you could buy TIPS that mature over the course of next 10-30 years. If bought in a taxable account, you'll pay tax on the inflation adjustments each year. On the upside, by the time they mature, you'll owe very little tax.

There are SPIAs that offer a fixed increase each year, at the expense of lower payments initially. There's no guarantee the increase will match inflation.

There are no actual inflation-tracking products currently available, based on other discussions here. They're very difficult for the insurance company to model. The resulting payouts are not attractive.
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Re: Deferred Annuity not what I expected

Post by retireIn2020 »

Go here to get all the info you need on annuities.

https://www.stantheannuityman.com/
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Re: Deferred Annuity not what I expected

Post by GaryA505 »

bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
I am in almost exactly the same situation.

DIA or MYGA-to-SPIA

A DIA would work, but you need to know exactly when you want the income stream to start. And it's irrevocable, so once you buy it "it is what it is". If your plans change or you want the income start date to change, sorry you can't change it.

If you're not sure when you want the income to start, you can buy a MYGA and then transfer into a SPIA when you're ready. Until you're ready, you can transfer it into another MYGA. Meanwhile taxes on the interest are deferred. See Stan's video on this on YouTube.

Me? I'm stalling it off. I don't like the DIA for the reasons I stated above. I need some flexibility because I don't know when I want the income to start. I'm holding the funds in MUNI, treasury and money market funds until I have a clearer plan.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: Deferred Annuity not what I expected

Post by petulant »

bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
There are multiple reasonable things to do.

First, spend down your money to delay SS in a way that maximizes survivor benefits.

Second, buy an annuity that is "joint life" with a 2% annual COLA that provides the same payment to either you and your wife as survivor. You can get quotes on immediateannuities.com with payments starting at any point you choose, say in 5 years. This can get rough parity with expected inflation but will not protect against large surprise shocks.

Third, Another thing you can do is to put about half your money in a deferred annuity with no COLA to cover your expected basic expenses at retirement, then invest the remainder of the portfolio in stocks and TIPS to give inflation bonuses each year. This can protect against large surprise shocks with some longevity protection.

Fourth, buy a smaller annuity with maybe 20% or so of the money with payouts that don't start for 15-20 years. This will have a large payout due to the mortality credits and reduces the risk of portfolio depletion. The portfolio could be designed with more inflation hedging, again focused on TIPS and stocks. This can maximize the mortality credits while leaving more of the main portfolio with inflation protection. Note, however, that sustained inflation shocks will erode the value of the mortality protection.
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Re: Deferred Annuity not what I expected

Post by rule of law guy »

I read this thread with interest and learned that I dont want ANY annuities (other than perhaps from Powerball). I will keep my money in my accounts and make my own returns. simplicity and optionality
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Re: Deferred Annuity not what I expected

Post by TravelforFun »

bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
Because you want this annuity for your wife after you're gone but since you don't know when you're going to die, you can't really set an accurate payment start date for your single premium deferred annuity. Your wife could buy an SPIA for herself after you passed to pad her guaranteed income stream if that's the goal.

Or you could buy a joint life SPIA now and you two can enjoy that income which will continue after one of you has passed.

TravelforFun
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Re: Deferred Annuity not what I expected

Post by bertilak »

TravelforFun wrote: Tue Jan 24, 2023 3:56 pm
bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
Because you want this annuity for your wife after you're gone but since you don't know when you're going to die, you can't really set an accurate payment start date for your single premium deferred annuity. Your wife could buy an SPIA for herself after you passed to pad her guaranteed income stream if that's the goal.

Or you could buy a joint life SPIA now and you two can enjoy that income which will continue after one of you has passed.

TravelforFun
That's something I have been thinking. If I start the income immediately (or perhaps delayed for a reasonable time) even if it's not needed, the income can be reinvested until it is needed. Don't defer the annuity; defer spending it.

First, I need to look into a deferred life annuity as mentioned above.
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Re: Deferred Annuity not what I expected

Post by Stinky »

State Farm’s rate of 3.6% on a 5 year MYGA, which is what you are getting, is not at all competitive.

Many MYGAs pay 5% or more for 5 years. Guaranteed.

Check out Stan the Annuity Man’s website (link above) or Blueprintincome.com for much more competitive MYGA rates.

You will have the right to surrender your State Farm annuity at no cost if you act within 14-30 days of when you get it. Or you could start the surrender process now.
Last edited by Stinky on Tue Jan 24, 2023 6:07 pm, edited 1 time in total.
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Re: Deferred Annuity not what I expected

Post by Wrench »

GaryA505 wrote: Tue Jan 24, 2023 3:39 pm
bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
I am in almost exactly the same situation.

DIA or MYGA-to-SPIA

A DIA would work, but you need to know exactly when you want the income stream to start. And it's irrevocable, so once you buy it "it is what it is". If your plans change or you want the income start date to change, sorry you can't change it.

If you're not sure when you want the income to start, you can buy a MYGA and then transfer into a SPIA when you're ready. Until you're ready, you can transfer it into another MYGA. Meanwhile taxes on the interest are deferred. See Stan's video on this on YouTube.

Me? I'm stalling it off. I don't like the DIA for the reasons I stated above. I need some flexibility because I don't know when I want the income to start. I'm holding the funds in MUNI, treasury and money market funds until I have a clearer plan.
The bolded part may not be completely correct. I purchased a DIA ~3 years ago (one of the last inflation adjusted annuities sold I think!). My contract allows me to make one change in the start date, either sooner or later as long as I make that decision 13 months before the original start date. If I move the start date to earlier, my payout will go down. If I move it to later, it will go up. Since I purchased it with dollars from a tIRA, I need to start it before RMDs are due, which for me used to be age 72, but is now age 73. Additionally, at any time up to 13 months before the start date, I can add additional funds to the annuity, which will also increase the payout. I may choose to do that since I can that make up for inflation that has occurred since I originally purchased it.
I don't know whether these contract terms are standard, or whether they are only in my DIA. So, as always when purchasing any product from an insurance company, read and fully understand the contract. If there is anything you don't like, you always have the 30-day free look period to get all your money back.

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Re: Deferred Annuity not what I expected

Post by GaryA505 »

Wrench wrote: Tue Jan 24, 2023 5:46 pm
GaryA505 wrote: Tue Jan 24, 2023 3:39 pm
bertilak wrote: Tue Jan 24, 2023 3:11 pm So, let me put it this way. What annuity product do I need given the following?

I am trying to account for two things, based on the starting point of already having guaranteed income to cover ALL basic expenses:
  1. Future inflation.
  2. Upon my death, the guaranteed income stream will be significantly reduced. My wife will lose her social security (she will keep mine) and lose half of the pension.
I want whatever I do to produce guaranteed income. She will already have a big enough nest egg to produce all the extra income she might need but that would require careful management. By creating an additional, guaranteed, income stream, that level of attention to the nest egg will not be needed. A deferred annuity, especially one that could delay annuitization, seemed like the answer.
I am in almost exactly the same situation.

DIA or MYGA-to-SPIA

A DIA would work, but you need to know exactly when you want the income stream to start. And it's irrevocable, so once you buy it "it is what it is". If your plans change or you want the income start date to change, sorry you can't change it.

If you're not sure when you want the income to start, you can buy a MYGA and then transfer into a SPIA when you're ready. Until you're ready, you can transfer it into another MYGA. Meanwhile taxes on the interest are deferred. See Stan's video on this on YouTube.

Me? I'm stalling it off. I don't like the DIA for the reasons I stated above. I need some flexibility because I don't know when I want the income to start. I'm holding the funds in MUNI, treasury and money market funds until I have a clearer plan.
The bolded part may not be completely correct. I purchased a DIA ~3 years ago (one of the last inflation adjusted annuities sold I think!). My contract allows me to make one change in the start date, either sooner or later as long as I make that decision 13 months before the original start date. If I move the start date to earlier, my payout will go down. If I move it to later, it will go up. Since I purchased it with dollars from a tIRA, I need to start it before RMDs are due, which for me used to be age 72, but is now age 73. Additionally, at any time up to 13 months before the start date, I can add additional funds to the annuity, which will also increase the payout. I may choose to do that since I can that make up for inflation that has occurred since I originally purchased it.
I don't know whether these contract terms are standard, or whether they are only in my DIA. So, as always when purchasing any product from an insurance company, read and fully understand the contract. If there is anything you don't like, you always have the 30-day free look period to get all your money back.

Wrench
That's good to know. I haven't heard of that before.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
GibsonL6s
Posts: 528
Joined: Tue Aug 29, 2017 12:17 pm

Re: Deferred Annuity not what I expected

Post by GibsonL6s »

If the goal is to give her a lump sum she can annuitize, it seems you can,

1. Buy a MYGA and make her the beneficiary and she can annuitize it at the company you buy it at or roll it to another life co.
2. Buy a SPIA on both of you now so the income continues for either of you.
3. Keep a lump sum in Treasuries and she can use it to buy an annuity if she needs it.
4. Buy a single premium life policy and she can use the benefit to annuitize at the life company you buy it from or any other company as the benefit is tax free.

Good luck.
BitTooAggressive
Posts: 548
Joined: Tue Jul 13, 2021 3:15 pm

Re: Deferred Annuity not what I expected

Post by BitTooAggressive »

Like a CD but with penalties.
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