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January 04, 2019 at 02:30 PM
Deferred income annuities held within a 401(k) could hold the key to a more secure retirement.
New research by the Employee Benefit Research Institute found that purchases of deferred income annuities (DIAs) at age 65 with no death benefits improved retirement readiness no matter the age of death if the purchases reflected retirement account percentages on the lower end of the spectrum.
The report, released Thursday and titled “Deferred Income Annuity Purchases: Optimal Levels for Retirement Income Adequacy,” looked at simulated retirement savings outcomes based on the percentage of the 401(k) balance used to purchase a DIA, while also looking at a simulated age of death and household income.
As the research explains, DIAs are designed to reduce the probability of outliving savings by providing monthly benefits in the later stages of retirement. “Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement,” the research, authored by EBRI Director of Research Jack VanDerhei, states.
VanDerhei found that, at current annuity rates, a 65-year-old who purchased a DIA deferring 20 years improved retirement readiness — but specifically when those purchases were 5%, 10%, 15% and 20% of a 401(k) balance. This holds true for DIAs with no death benefits.
VanDerhei used EBRI’s own “Retirement Readiness Rating” or RRR to score the results.
It found the RRR fell overall for these purchases when they were equal to 25% and 30% of a 401(k) balance. This is partially a result of long-term care costs, the report notes.
