Understanding Deferred Annuities

Investing in annuities are a way for you to plan for the future by making sure you have money for your retirement by engaging in a contract between you and the annuity insurance. Annuities have been around for a long time but today you have several different options of annuities available for you to choose from such as the immediate annuity, index annuity, variable annuities and the deferred annuities.

Each one has their own unique features that make them appealing to different people depending on their financial needs. For instance, the immediate annuity is normally used by investors that have suddenly received a large amount of money they that they now need to manage. The deferred annuity is often the choice used when planning for your future retirement. So exactly what are deferred annuities? A deferred annuity will delay the date when your income installments begin. The money you invest will build in value over time so it can be converted into income later.

When you invest in a deferred annuity it will be set-up so that your income payments will start at a later date. This date is called the maturity date and will be determined when you first set-up the annuity. The deferred annuity can be set up for regular monthly payments or one lump sun of money, whichever you choose.

How Deferred Annuities Work

The deferred annuity has two periods to go through to complete the agreement. They are as follows:

1.Accumulation Period

2.Payout Period

During the accumulation period you will be making scheduled payments or make a one lump sun payment to the annuity account. When the annuity matures or when you reach age 65 the payout period will start where you will be receiving the income in the way it was prearranged with the annuity company.

Each annuity has it own unique features that make them more appealing to different people. For example, the fixed annuity offers you some nice guarantees while the variable annuity has more growth potential but is a higher risk level because it fluctuates as the economy changes.

The deferred annuity will accumulate with time and is great for a retirement plan. Some deferred annuities will even allow you to take out money during the accumulation period, with limitations of course.

Deferred Annuity Options

The deferred annuity has two options to choose from, they are the variable and the fixed annuity. There is a big difference between the two. Both offer the tax deferred option where the money that is invested will not be subject to taxes until you begin receiving the income payments. However, the fixed deferred annuity is more stable and therefore safer than the variable deferred annuity.

The deferred annuity is the best option for anyone that is mainly interested in creating a retirement plan they can depend on. This type of annuity will become payable after a few years at the specified time in your contract. To make sure you get the best annuity rates you should always take the time to get annuity quotes from different companies. This way you can have the best future possible for you and your family.

Looking for the highest deferred annuity rates? Search and compare annuity rates with licensed financial retirement planners.

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Tax Deferred Compounding - Understanding Why Its Important

Growing your investments depends on the compounding rate. Einstein said, "The most powerful force in the universe is compound interest." The higher the rate, the faster your investment grows. But that's only half the story because you don't need to double the rate to earn twice as much. Increasing the rate from 6% to 8% will produce more than that 33% increase in your investment over the years as the table below indicates. That's the magic that amazed Einstein! And that's why tax-deferred investments are such an advantage. Let's take a look at some results...

Per Cent Greater Accumulation for 8% over 6% Compound Rates of $10,000


Year 6% 8% % more


5 13,382 14,693 10%

10 17,908 21,589 21%
15 23,966 31,722 32%
20 32,071 46,610 45%
25 42,919 68,485 60%

30 57,435 100,627 75%



Most investment choices generate interest or dividend earnings that are taxed annually. If your investment return is 10% and your income tax bracket is 28%, then 28% of that 10% (i.e. 2.8%) of that investment return goes to taxes. But what if we could defer the yearly taxation and give even more horsepower to Einstein's most powerful force? The ability to eliminate or defer taxes is critical for any investor.

This is critically important to retirees who may be interested in accumulating a larger next egg aside to purchase an immediate annuity in later years in case they live longer than the expected. The table shows the taxable earnings rate you must receive to achieve a compounding rate equal to the tax-deferred compounding rate based on various tax brackets.

Taxable Earning Need to Compound Equally to Tax-Deferred Earning


Federal Income Tax Brackets 10% 15% 25% 28% 33% 35%


Equivalent Taxable Earnings


Tax-Deferred Earnings 8% 8.89% 9.41% 10.67% 11.11% 11.94% 12.31%

7% 7.78% 8.24% 9.33% 9.72% 10.45% 10.77%

6% 6.67% 7.06% 8.00% 8.33% 8.96% 9.23%

5% 5.56% 5.88% 6.67% 6.94% 7.46% 7.69%

Want to put the power of tax deferred compounding to work in your portfolio? Just use the deferred annuity calculatorto see what can be accomplished.

Note that annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.

See more articles on maximizing your retirement income and retirement investing choices.

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