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Deferred Income Annuities Improve Retirement Readiness: EBRI

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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.

There are decreases on RRR for those dying before benefits begin, in the age 65 to 84 age group, for the DIA or soon after benefits begin, in the 85-to-89 age group.

However, for those reaching age 90, the RRR went up along with the percentage of the 401(k) used to buy a DIA.

Retirement success measures rose significantly in the RRR by adding a “pre-commencement death benefit” for those who die before benefits kick in. But the RRR will go down for those dying between the ages of 85 and 89, the research found.

The wage bracket of households also had a sizable bearing on the percentage of a retirement plan used to fund a DIA.

Households with higher wages fared better in their RRR for all DIA purchases through 20% of 401(k) values, the research found. The highest age-specific wage quartile households registered an RRR improvement for all DIA purchases through the 30% level of the 401(k), the research found.

However, households in the lowest age-specific wage quartiles generally experienced a decrease in RRR from the purchase of a DIA without a pre-commencement death benefit, the report found.

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