MASSMutual Employees:Immediate vs. Deferred Annuities

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For MASSMutual employees, knowing the difference between immediate and deferred annuities can affect retirement planning - immediate annuities provide quick, predictable income while deferred annuities provide growth over a long period of time - both are valuable depending on your financial goals, says Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement Group.

'As a MASSMutual employee, the best choice is between an immediate or deferred annuity - immediate annuities offer earlier payouts whereas deferred annuities offer greater financial flexibility and larger future distributions,' says Wesley Boudreaux, a representative of The Retirement Group, a division of Wealth Enhancement Group.

In this article, we will discuss:

1. Understanding Immediate Annuities: How immediate annuities work - benefits & common applications.

2. Understanding Deferred Annuities: Deferred annuities, their accumulation period and how they complement retirement plans.

3. Differences Among Immediate vs Deferred Annuities: Compare the two options and their impact on retirement planning.

Most MASSMutual customers have inquired about immediate and deferred annuities. First, the terms immediate annuity and deferred annuity only indicate when the annuity begins to distribute. Both allow unrestricted contributions and both may, at election, make lifetime payments. But what is the difference anyway?

Immediate Annuities

I want MASSMutual customers to understand immediate annuities first. Immediate annuities change a lump sum of currency into income. Their feature is that they lack a period of accumulation, like deferred annuities do. They are funded instead by one lump-sum payment rather than a series of premium payments. The annuity option is selected, and payout begins twelve months after purchase.

MASSMutual clients wanting an investment return they cannot outlive may want immediate annuities. The distributions are partly regarded as a return of the initial investment and partly as earnings. Only earnings are taxable.

Benefits from a terminated defined benefit pension plan are also provided in immediate annuities. Here, the benefits accrued through the plan are determined for each participant and one premium annuity can be purchased for each participant starting at age 65 on average.

An additional common use is in structured settlements for litigation. There, the parties agree to pay a lump sum of money in installments - often for the life of the injured party. The parties set a monthly payment amount and purchase an annuity for that amount.

Deferred Annuities

We want to next educate our MASSMutual customers about deferred annuities. Typically with a deferred annuity, you pay a lump sum or a series of premiums and put the payout off until later in life. This is called the accretion period. The proceeds of an annuity are not taxable until they are distributed.

Deferred annuities can supplement IRAs and qualified pension plans such as 401(k)s.

Note: We want our MASSMutual clients to know that annuity guarantees are contingent on the claims-paying ability of the issuer. If an exception applies, distributions from annuities made before age 59½ could be subject to a 10% federal tax penalty.

Added Fact:

As noted in a 2019 study from the Society of Actuaries, immediate annuities may have higher first payouts than deferred annuities. That means if you take an immediate annuity at age 60, you could get more income early in retirement. But be realistic about your long-term goals and changes in expenses. Deferred annuities, in turn, allow your investment to grow over the accretion period—potentially creating a larger income stream when you start getting payouts. Consider whether immediate or deferred annuities are right for your situation and retirement goals. (Source: Lifetime Income Solutions - a Qualified Default Investment Alternative in Retirement Plans (Society of Actuaries, 2019)).

Added Analogy:

Imagine yourself at a crossroads considering two paths to retirement security. On one route, you have the immediate expressway - pay a lump-sum up front - and jump right into the distribution phase - instant income - no waiting around. Take a high-speed train to your retirement dreams.

And then there is the deferred scenic route. Here you contribute regularly over time so your money grows and appreciates. This is like taking a road trip with friends - seeing the sights and making stops to boost savings. At your chosen future date, the distribution phase begins and you can start receiving the rewards of your patient investment.

Both paths have merits, just as the expressway and scenic route do. This gives you immediate gratification and security while the deferred annuity allows for gradual growth and larger payouts in the future. Finally, the choice between immediate and deferred annuities comes down to speed of arrival and income stability versus long-term rewards.

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Sources:

1. Thrivent. 'The Benefits & Drawbacks of Immediate Annuities.'   Thrivent Financial , 15 Oct. 2023,  https://www.thrivent.com/insights/annuities/the-benefits-drawbacks-of-immediate-annuities .

2. Guardian Life. 'Deferred Annuities: What It Is, How It Works.'   Guardian Life Insurance Company of America , 10 Sept. 2023,  https://www.guardianlife.com/annuities/deferred .

3. Charles Schwab. 'Single Premium Immediate Annuities.'   Charles Schwab , 5 Nov. 2023,  https://www.schwab.com/annuities/income-annuity .

4. SmartAsset. 'Pros and Cons of Tax-Deferred Annuities.'   SmartAsset , 20 Sept. 2023,  https://smartasset.com/retirement/tax-deferred-annuity .

5. AARP. 'Get Retirement Income With Immediate Annuities.'   AARP , 1 Dec. 2023,  https://www.aarp.org/money/personal-finance/what-are-immediate-annuities .