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How to buy a pension

By Jennie L. Phipps · Bankrate.com
Thursday, June 13, 2013
Posted: 7 am ET

Boomers looking for guaranteed income in retirement are making deferred income annuities increasingly popular.

These are similar to immediate income annuities. You put money in and you get back a predetermined monthly payout for the rest of your life. The difference is that instead of the payout starting immediately, it begins 10 or 20 years down the road after the money has had time to grow. So, the payout is considerably higher than it is with an immediate annuity.

Insurance research firm Limra says more than $1 billion worth of these plans were sold in 2012 with New York Life Insurance offering the biggest variety and selling the most. Other companies offering them include Guardian Life, Mass Mutual, Principal Financial Group, MetLife and Northwestern Mutual.

Here, according to New York Life, is how one of these plans might work. If you invested $100,000 when you were age 60 and began taking the money at age 70, you'd get $1,115 per month for the rest of your life -- a return of interest and principal equaling 13.38 percent. By comparison, if you put $100,000 in an immediate annuity at age 70, you'd get $650 a month for the remainder of your life.

You can invest qualified funds directly from a retirement account like a 401(k) or an individual retirement account, but you must start taking the money -- and pay taxes on it -- by the time you reach age 70 1/2. If you intend to defer taking the money until you are older, then you only can invest money on which you've already paid taxes, which could include assets from a Roth IRA or 401(k).

Deferred income annuities used to be known as longevity annuities and they weren't especially popular. Changes in the pension landscape as well as more flexible plan design is what changed that, according Mark Paracer, senior research analyst for Limra Retirement Research. Paracer says that in 2010, 57 percent of the households headed by someone living in retirement had access to a pension plan. Today, only 29 percent of people between the ages of 45 to 54 can include income from a pension in their retirement planning.

Newly added features that make these plans more attractive include:

  • The ability to make multiple contributions over a period of time, instead of having to invest the whole amount at once.
  • The option to change the date that you start taking out money by either pushing it back or accelerating it.
  • The possibility of taking out a lump sum if you need it.
  • Periodic cost-of-living adjustments.

But the biggest factor is retirement income that people can count on. "The younger you are and the longer you defer income, the more you get back. That's what is creating interest among consumers," says Jafor Iqbal, associate managing director, Limra Retirement Research.

How are you saving for retirement?

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