As we discuss in other parts of this site, fixed annuities, when used for growth can certainly grow someone’s principal balance.  However, that growth, while guaranteed against downside risk, will generally only produce returns in the 2-6% range – barely enough to keep up with inflation.  

Variable annuities do have the highest fees of any annuity type on the market (typically ranging from 2-4% annually). These high fees are significant disadvantages, coupled with the fact that variable annuities can and do risk considerable loss of principal during turbulent market downturns.  Most dislike for annuities comes from the variable annuity world. 
 
Equity indexed annuities can produce a decent return in a given year, but due to the insurance companies ability to lower caps and participation rates throughout the life of the contract, most never achieve the overall growth someone wants.

Therefore, in continuing with the same thought process we outlined in the Our Philosophy page of this website, whenever annuities are used more for a “growth-of-capital” intent vs. a “creating-a-lifetime-pension-style-income” intent, that is commonly where the disappointments and frustrations with annuities occur. 

So, if we are establishing the logical conclusion that annuities are best when used for income, not growth, we can quickly and easily eliminate a large portion of the annuity marketplace (and all the marketing noise that goes along with it) and focus instead on perhaps the best version of an annuity design that has ever existed in its 2,000-year evolutionary cycle.

 

Meet The Deferred Income Annuity (DIA)
 

Deferred income annuities are what you get when you take a base fixed indexed annuity and attach an additional lifetime income rider to the contract that creates a very powerful mechanism for generating multiple streams of lifetime income sometime in the future.

The easiest way to grasp how a deferred income annuity works, mechanically speaking, is to think for a moment about how Social Security income works.   When you consider the effect of turning on Social Security early (at age 62) vs. turning it on at full retirement (age 66/67) or even turning it on delayed (age 70) what is readily noticeable is that for every year you wait (defer) taking Social Security income, that future income payout amount grows by about 7-8% per year. 

At the time of this writing, deferred income annuities (DIA’s) are available that offer 7-10% annual interest credits for each year you choose to defer.  Whenever you are ready (down the road) to receive income, you can activate a guaranteed lifetime income stream or you could even elect a joint lifetime income for you and your spouse.

What makes this such a great income planning tool?  And why should you be interested in incorporating a DIA (or several DIA’s for that matter) as a portion of your overall retirement longevity plan?

 

Well for one, there are no other vehicles within the financial universe capable of providing a higher future guaranteed lifetime income stream than a properly designed DIA.