New York Times
June 6, 2014
I've read about deferred annuities before. Maybe from William Bernstein?NY Times wrote:Many workers long for the sense of security that only an old-fashioned pension can provide. The big insurers are well aware of this, and that’s why many of them are offering new ways for investors to buy and build a pension on their own.
More than a dozen companies have recently begun pitching products, known as deferred-income annuities, that allow individuals to buy the income themselves: They pay a lump sum to an insurer — or make a series of payments over time — in exchange for a guaranteed paycheck for life that begins several years later....
An interesting concept. You buy the annuity but don't even begin collecting for years, even a decade or more, later. Cheaper (obviously) than getting an annuity that pays immediately; the insurers can save money knowing that some people will never make it to the payout stage, and those who do are older and won't live as long. But, as the article explains, a difficult product to purchase from a psychological perspective. It's hard to plunk down a lot of money that you might never collect, should you die early. This is like the opposite of life insurance -- with life insurance, you pay the premiums and hope you never collect. With deferred-income annuities, you buy it hoping you will collect.
It seems that where this can work is in a scenario like this. Suppose you have $1M at age 65. Take around $100K and buy one of these that starts at age 80. Now you're down to $900K. As a result, your retirement income is a little lower because you have a smaller portfolio. But now you have some fallback in case you run low on money over the next 15 years. It won't be a lot, but it's better than poverty.