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What to consider in a deferred-income annuity

Deferred-income annuities, also known as longevity annuities, provide a guaranteed source of income when you reach a certain age. Say a 65-year-old man invests $100,000 in New York Life's Guaranteed Future Income Annuity and defers payouts for 15 years. He can expect to receive $28,695 in guaranteed annual income, beginning when he turns 80.

The downside is that if you die before you reach 80, you get nothing. But the chance that other buyers might die before collecting is one reason insurers offer a higher payout for this kind of annuity than for other products that offer guaranteed income.

A recent Treasury Department ruling offers another reason to consider a deferred-income annuity. You may now invest up to 25 percent of your IRA or 401(k) plan (or $125,000, whichever is less) in a deferred-income annuity without having to take required minimum distributions when you turn 70 1/2.

Before the Treasury ruling, some insurers only allowed investors to use money from taxable accounts to purchase deferred-income annuities. Others required purchasers who used money from tax-deferred accounts to start receiving payouts at age 70 1/2, reducing the size of the payments.

The Treasury ruling is expected to encourage more insurers to add deferred-income annuities to their lineups. So even if the idea sounds tempting, you may want to wait a few months before buying one because competition could lower prices, says David Blanchett, head of retirement research for Morningstar Investment Management.

A deferred-income annuity may allow you to invest over time, instead of parting with a large lump sum. For example, New York Life lets purchasers invest $5,000 initially and make periodic investments of as little as $100 until two years before the payout period begins, says Ross Goldstein, New York Life's managing director. Most deferred annuities offer a "return of premium" death benefit that kicks in if you die before you start receiving income. However, if you select this feature, your payments will be lower.

Some insurers will increase your annual payments each year by a set percentage or a percentage tied to the consumer price index. But that comes at a price. If the 65-year-old man above invests in New York Life's Guaranteed Future Income Annuity with a 3 percent annual increase, his first annual payout at age 80 would be $24,300 (15 percent less than his payment without the inflation rider).

The trade-off may not be worth it. Studies have found that retirees' expenses – with the exception of health care – decline as they age. By the time you start taking payouts from your annuity, Goldstein says, "inflation is not going to be your biggest problem."

Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.

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