Delayed Income Annuities: The Ultimate Marshmallow Experiment
"Deferred gratification and delayed gratification denote a person’s ability to wait in order to obtain something that he or she wants. This intellectual attribute is also called impulse control, will power, self control, and “low” time preference, in economics. Hence, in formal accounting terms, an investor should calculate the net present value of future rewards, and defer near-term rewards of lesser value.” (Wikipedia)
So it appears, if one extrapolates the results and thesis of this experiment, that only those fortunate few who are born with an extra does of impulse control will ever see the value in what is perhaps the most extreme example of a delayed gratification product – the delayed income annuity. After all, the delayed income annuity really provides the most economic benefit by having the purchaser wait 25 or 30 years after their premium payment to collect the benefits of a significant lifetime income, starting perhaps at age 85.
Delayed Income = Current Satisfaction
Ironically, the actual benefits payable under a delayed income annuity, i.e. the income stream that is promised far in the future, are not the only factor in an overall retirement income portfolio strategy. The delayed benefits themselves may not even be the primary factor. After all, it’s a real stretch to expect an enthusiastic reception from a 55-year-old preretiree about how much income he’ll collect in 20 or 30 years’ time. It’s akin to telling a teenager that hard work and diligence over the next several years may result in the kind of career that will afford him that Ferrari on the poster that he has plastered on his bedroom wall.
More to the point as to the value of this product, the incorporation of a delayed income annuity within a comprehensive retirement income portfolio creates what amounts to a finite and relatively short period over which a retiree’s remaining liquid retirement accumulation assets (401k, IRAs, non qualified accounts, etc.) need to be managed. Let’s take the case of our 55-year-old preretiree. Without the backstop of a delayed income annuity, prudence may dictate that he assume he lives a very long time, perhaps 30 years or longer in retirement, necessitating extreme caution regarding how he draws down and spends his retirement assets. This may result in his living a lifestyle far more austere than might have been necessary. Trips may be forgone, dinners out eaten instead at home, even grandchildren visited less often. Assuming he dies 10 years into retirement yet spent his assets as if he’d live 35 years, his lifestyle was clearly not optimized.
In contrast, consider the 55-year-old who is in the final 10 years of his working career and decides to backfill his retirement income in the future. In other words, he is willing to pay a premium today to ensure that he can enjoy his retirement lifestyle in the earlier, healthier years of his retirement, spending with less worry (but not with impunity) since his assets don’t need to last for an indefinite period of time. If he knows, for example, that his liquid retirement assets only need to last to age from age 65 to age 80 or 85, he can more accurately plan what he can safely spend during that time, and thus have the peace of mind to enjoy his retirement with less worry. If he lives to age 80 or 85 and his retirement assets are depleted, the delayed income annuity kicks in and creates the lifetime income he still requires. If he doesn’t make it that long, his heirs may get back the premium if he chose that option, or get back nothing if he didn’t.
Whatever the case, don’t make the mistake of assuming the delayed income annuity only has value for those who live long enough to collect the payments. What may be the key value lies in the added confidence and spending opportunity during the go-go years of early and middle retirement, for those with the foresight to build this product into their retirement portfolio. In other words, there’s no need to wait for the second marshmallow when you own a delayed income annuity.
John Rafferty is vice president, marketing at American General Life Companies. American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including American General Life Insurance Company and The United States Life Insurance Company of New York. American General Life Companies insurers offer a full line of life insurance, annuities and accident & health products to serve the financial and estate planning needs of its customers throughout the United States.