Income Annuity Decision: Start Now or Wait Until Later?

But most DIA buyers aren’t using them that way. LIMRA found that the average DIA buyer start taking income at a relatively young age–between 65 and 70. Just 3% of buyers defer income to a date late enough to be considered longevity insurance, says Zaiken, and the average deferral period is just 7.7 years.

“It’s a very efficient way to buy, since few people will actually make a claim–but the idea of buying something now to protect yourself 30 years down the road is a tough proposition,” she says.

EBRI data backs that up. Among current workers, just 7% say they would be very interested in buying a longevity annuity, with 38% saying they are somewhat interested. Meanwhile, 52% are not too interested in the idea, or not interested at all.
The income start data backs up one of Carey’s key points–namely, that starting relatively young to build a pension at retirement age can be a very attractive option.

“There’s no inherent reason why the decision to buy retirement income shouldn’t be spread out over time, with some of it happening before retirement,” he says.

Tomlinson acknowledges that much of the recent buzz has been around DIAs — partly due to the rollout of QLACs, partly due to the build your own pension marketing push from insurers, and partly due to the attractiveness of lower upfront investment.

Still, he sees several reasons to prefer a SPIA. First, it’s difficult to predict exactly when you’ll retire, so SPIAs are more flexible. Second, the SPIA strategy allows more focus on pre-retirement savings accumulation. Finally, his analysis suggests that SPIAs lead to a higher payout than a DIA structured as longevity insurance. In an article last year for Advisor Perspectives, he compared a SPIA purchase at age 65 with a QLAC purchase at the same age that begins paying level income at 85. For the latter, the QLAC is paired with a bond ladder for the 20-year deferral period as a stand-in for the returns that insurance companies might generate on the DIA premiums paid.

The SPIA (with no refund feature) provided a 6.18% payout rate, compared with just 5.05% for the QLAC.

A QLAC seems to provide greater liquidity during the years of waiting for DIA income to begin, by retaining a larger investment portfolio. But some experts question that assertion. An excellent post at Oblivious Investor notes research finding that the portfolio is not really available to be spent any way you like; the liquidity is partially illusory, since assets must be matched to liabilities–in this case, the liability is living expense.

Tomlinson agrees.

“The liquidity is not necessarily real, if this is money you will need to pay for food and housing, or to pay to repair a roof if it start leaking,” he says. “It is phony liquidity, because you might have to liquidate the ladder, or part of it.”

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