insurance

Deferred Annuity

An insurance contract where you make payments now but delay receiving income payments until a future date, typically during retirement. The money grows tax-deferred during the accumulation phase, then provides regular income payments during the distribution phase.

Example

“Susan invested $50,000 in a deferred annuity at age 45, allowing it to grow tax-deferred for 20 years before beginning monthly income payments at retirement.”

Memory Tip

Think 'Deferred = Delayed Dollars for retirement' - you're delaying income now to get more dollars later in retirement.

Why It Matters

Deferred annuities provide a way to save for retirement with tax advantages, potentially growing your money faster than taxable investments during your peak earning years. They can also provide guaranteed income in retirement, helping protect against the risk of outliving your savings in an era of longer life expectancies.

Common Misconception

Many people believe deferred annuities are completely risk-free investments, but variable annuities can lose money if underlying investments perform poorly, and even fixed annuities carry inflation and insurance company credit risk. Another misconception is that the tax deferral benefit applies to money already in tax-advantaged accounts like 401(k)s, when in fact annuities provide no additional tax benefit in these situations.

In Practice

At age 40, David put $100,000 into a deferred annuity earning 5% annually. After 25 years of tax-deferred growth, his account was worth approximately $338,600. When he annuitized at age 65, the insurance company converted this into guaranteed monthly payments of $1,894 for life. If he lives to age 85, he'll receive about $455,000 in total payments - significantly more than his initial $100,000 investment, providing inflation-adjusted income security throughout retirement.

Etymology

From Latin 'differre' (to delay) and 'annuus' (yearly). The concept combines deferring or postponing payments with annuus, referring to regular yearly payments, though modern annuities can pay monthly or quarterly.

Common Misspellings

defered annuitydeferred anuitydefferred annuitydeferred annuety

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