When planning for retirement, the time horizon—the number of years you have until retirement—is one of the most critical factors to consider. This timeframe affects your strategies, the amount you contribute, and the types of financial products you may include in your overall plan. One such product is a deferred annuity, which can play a unique role in helping you prepare for the long term.
What Is a Deferred Annuity?
A deferred annuity is a contract with an insurance company designed to help you accumulate funds over time, with payouts starting at a future date. Unlike immediate annuities, which begin payouts immediately, deferred annuities have a “growth” phase before shifting into a payout phase. This makes them ideal for those who have time on their side and want to let their contributions grow until retirement.
Deferred annuities can be either fixed or indexed.
- Fixed Deferred Annuities offer a guaranteed interest rate for a set period.
- Fixed Indexed Deferred Annuities tie your returns to a market index, such as the S&P 500, offering growth potential with some protection against loss.
All guarantees are subject to the insurer’s claims-paying ability, which should always be a consideration when evaluating options.
Time Horizon and Deferred Annuities
Your time horizon significantly impacts whether a deferred annuity is a good fit for your retirement strategy. The longer your time horizon, the more flexibility you have to take advantage of deferred annuities’ benefits.
Long Time Horizon: 10 Years or More
If you have a decade or more until retirement, a deferred annuity can provide a valuable opportunity for growth. With this extended time frame, you can allow the account to benefit from compounding, especially if you choose a variable or indexed annuity. The deferred nature also means you won’t access the funds right away, which can help enforce long-term saving discipline.
Additionally, the tax-deferred status of these products means you won’t pay taxes on any growth until you begin withdrawals. This allows your account value to grow more efficiently over time.
Mid-Term Horizon: 5 to 10 Years
A deferred annuity may still offer benefits for those with a mid-range time horizon. A fixed deferred annuity, for example, might provide a predictable return that complements other parts of your retirement portfolio. Since you’re closer to retirement, you’ll want to focus on more conservative options that prioritize steady accumulation over market exposure.
Short Time Horizon: Less Than 5 Years
A deferred annuity may not be the most effective choice if your retirement is just around the corner. The early withdrawal penalties and potential surrender charges may not align with your liquidity needs. However, many annuities allow for penalty-free withdrawals up to a certain percentage—often 10% annually—of the account value. Additionally, some contracts offer waivers for emergencies such as terminal illness, long-term care needs, or disability, making it possible to access funds without penalties in specific situations.
Aligning Strategy with Goals
Selecting a deferred annuity should align with your broader retirement goals. It’s not just about the length of time but also about how the annuity fits into your overall strategy. If you’re looking for predictable income in the future and value the tax deferral, this option can be a valuable tool in your long-term planning.
Working with a licensed financial professional can help you determine the right balance of growth, protection, and income in your plan. Remember, the best approach is one that fits your personal goals, risk tolerance, and time horizon.
Many people have learned about the power of the Safe Money approach to reducing volatility. Our Safe Money Guide, now in its 20th edition, is available for free.
It is an Instant Download. Here is a link to download our guide:
