Planning a deferred income annuity start date from 65 to 85

A deferred income annuity asks you to pick a date, often years away, when the checks will begin, and the later that date, the larger each check will be. The tension is easy to state: a later start buys more income per dollar, and it makes you wait for it, with no guarantee you will be around when it arrives. Choosing the start date is the most important decision in the contract, and it is made on the day you buy.

This post lays out a timeline for one hypothetical buyer who puts $100,000 into a deferred income annuity at 65. It compares start ages of 70, 75, 80 and 85, shows what has been collected by various ages, explains the break-even logic, and covers what happens if the buyer dies during the waiting period. The monthly payments are invented for tidy arithmetic. They are not quotes; real payments depend on the insurer, the buyer's age and sex where state law allows, and interest rates on the purchase date. For the product basics, read the guide to Deferred income annuities (DIAs): longevity insurance explained first.

What a start date does to the check

A deferred income annuity (DIA) has no account value you can spend. You pay a premium, choose a start date and a payout form, and the insurer fixes the future payment. Each added year of deferral makes the check bigger for three reasons: the insurer earns interest on your money for another year, it expects to pay for one year fewer after you start, and some buyers die during the wait, leaving their unpaid value to help fund payments to those who live. The guide on how annuity rates are set and why they move explains the interest part.

Say, for illustration, that $100,000 paid at 65 buys these life-only monthly payments, depending on when they begin:

The yearly figure is the monthly figure times 12. Notice how the check grows. Moving the start from 70 to 75 raises it by about 41% ($13,200 ÷ $9,360 = 1.41). Moving from 80 to 85 raises it by 58% ($31,200 ÷ $19,800 = 1.58). The longer the wait, the faster the check grows per added year, because the waiting period is long enough that survival odds and compounding both work harder.

An important detail: in most DIAs the start date is part of the purchase. It is not a switch you flip later. Some contracts offer flexibility, such as the right to start earlier at a reduced payment or to push back the start date, but the terms differ and are often limited. Ask before buying.

A timeline of the waiting years

Here is how the years might look for the buyer, in order.

Age 65: the purchase. The buyer pays $100,000 and chooses the start age. From that day, the money is out of reach. The only way back is the free-look window, which is commonly at least 10 days and longer in some states. The buyer keeps the rest of the savings invested or in safe assets, and spends from them in the meantime.

Ages 65 to 70: the quiet years. Little happens in the contract, and there is no account to manage. The buyer may be working part time, drawing Social Security or both.

Age 70: first possible start. If the buyer chose 70, checks of $780 a month begin. The rest of the plan can now rely on a modest guaranteed floor.

Ages 70 to 75: the second window. If the start is later, the buyer is now 5 years deeper into waiting. This is also the point at which some people begin to doubt the decision, particularly if their health or finances have changed. The contract may allow a change in some cases, but it may not.

Age 75: second possible start. Checks of $1,100 a month begin.

Age 80: third possible start. Checks of $1,650 a month begin. The buyer has spent 15 years living on other money.

Age 85: fourth possible start. Checks of $2,600 a month begin. This is also the latest date allowed for a qualified longevity annuity contract (qualified longevity annuity contracts) bought with retirement-account money, which is why many DIAs offer 85 as an upper start.

What you have collected by each age

The most useful way to compare start dates is to add up what each would have paid by the time you reach a given age. The figures below count the whole years of payments from the start age to the age shown, using the yearly payments in the first table.

Each entry is the yearly payment times the number of years from the start age to the age shown. For example, the 80-start by age 95 is 15 years × $19,800 = $297,000, and the 70-start by age 85 is 15 × $9,360 = $140,400.

Four things show up in the table.

1. The early starts lead for a long time. At 80, the 70-start has collected $93,600 and the 85-start has collected nothing.
2. The middle starts catch up around 90. At 90, the 75-start and the 80-start have each collected $198,000, ahead of the 70-start at $187,200 and ahead of the 85-start at $156,000.
3. The latest start wins only if you live long. The 85-start overtakes the 70-start between 90 and 95, and by 100 it has collected $187,200 more than the 70-start ($468,000 − $280,800).
4. Dying in the waiting period is expensive for the late starts. A buyer who dies at 84 under the 85-start has collected nothing from a $100,000 premium.

Break-even logic

A break-even age is the age at which a later start has collected as much as an earlier one. You can calculate it with two numbers, the dollars the earlier start collected before the later one began and the difference in yearly payments.

70 versus 80. The 70-start collects $9,360 a year for ten years before the 80-start begins, which is $93,600. After 80, the later start pays $19,800 against $9,360, a difference of $10,440 a year. Break-even is $93,600 ÷ $10,440 = 8.97 years after 80, so around age 89.

80 versus 85. The 80-start collects $19,800 a year for five years, or $99,000, before the 85-start begins. The 85-start pays $31,200, a difference of $11,400 a year. Break-even is $99,000 ÷ $11,400 = 8.68 years after 85, so about 93 and a half.

75 versus 85. The 75-start collects $13,200 a year for ten years, or $132,000. The difference after 85 is $31,200 − $13,200 = $18,000 a year. Break-even is $132,000 ÷ $18,000 = 7.33 years after 85, around age 92.

The break-evens fall between 89 and 94. That is the age range the buyer needs to reach for the extra wait to have paid off in total dollars. The calculation ignores two things that matter. First, it ignores that dollars received earlier can be saved or spent, so the early starter has the use of money sooner. Second, it ignores that the money used to buy the DIA could have earned interest somewhere else, which the insurer's price already includes. The break-even is a rough guide, not a verdict.

A way to think about the break-even is as the price of insurance against being very old. The late start pays little or nothing if you die before the break-even, and a great deal if you live to 100. Someone who wants protection against living to 95 or beyond is buying the tail, and the table shows what the tail is worth.

Splitting the premium across two start ages

The choice does not have to be a single date. Using the same invented prices, the buyer could put $50,000 into a 75-start contract and $50,000 into an 85-start contract. Each half pays half of the table's figure for that start age.

The arithmetic is $13,200 ÷ 2 = $6,600 and $31,200 ÷ 2 = $15,600, and $6,600 + $15,600 = $22,200. The buyer gets some income in the middle years and a much larger total in the very old years, in exchange for a smaller early check than a full 75-start would pay and a smaller late check than a full 85-start would pay. That is the same idea as a ladder, applied to start dates, and it hedges the choice: if health fails early, the first half has begun to pay, and if the buyer lives to 95, the second half is working. The cost is two contracts and two insurers to track, and possibly two sets of minimum premiums.

What happens if you die before payments begin

This is the question most buyers ask last and should ask first. The answer depends on how the contract is written.

• Life only, no death benefit. If you die before the start date, nothing is paid. The premium is gone. This version pays the highest monthly check, which is why the table above shows life-only figures.
• Return of premium. If you die before the start, your beneficiary receives the premium you paid, sometimes less any payments made. This feature lowers the monthly check. Say the 80-start with a return of premium pays $1,450 instead of $1,650. That is $200 less, or 12.1% ($200 ÷ $1,650), and a smaller check for life. A buyer who dies in the waiting period costs the insurer only the premium, and a buyer who lives to 100 receives a lower check for 20 years.
• A death benefit with interest. Some contracts credit a stated rate of interest on the returned premium. Ask what the rate is and whether it is guaranteed.
• Period certain after the start. A period certain guarantee pays the beneficiary the remaining payments if you die soon after the start. It protects against an early death after the check begins, not before.
• Joint and survivor. If the contract covers two lives, it continues to the survivor after the first death, usually at a chosen percentage. A spouse who is younger or healthier can make that worth the lower starting payment.

The choice among these tracks the choice described in the post on single life or joint-and-survivor: choosing how an income annuity pays: the more you ask the contract to protect, the smaller the check.

The other costs of a late start

Inflation. A check fixed at purchase loses buying power during the wait and afterward. At an assumed 3% a year, $1,650 a month starting 15 years after purchase buys what about $1,059 buys today ($1,650 ÷ 1.558), and $2,600 a month starting 20 years out buys what about $1,440 buys today ($2,600 ÷ 1.806). These are arithmetic illustrations, not forecasts. The post on a flat annuity check and inflation: how purchasing power erodes shows the calculation.

Insurer risk. The promise runs for decades, and it may have to be kept for another 20 or 30 years after payments begin. Check the insurer's financial strength, and the guaranty association limits for your state, before putting a large sum into one contract. A buyer can split a large amount among insurers.

Opportunity cost and interest rates. The price locks in the interest rate on the purchase date. If rates rise later, a buyer who waited to buy would have received more. The guide on annuity ladders covers buying in stages to reduce the effect.

Mental accounting. A DIA can make it easier to spend other savings in the early years, because the later income is secured. It can also tie up money that the buyer might have wanted for other things.

Questions that point to an earlier or later start

Toward an earlier start (70 to 75):

• Health that makes living past the late 80s uncertain.
• A wish to see income sooner and to avoid a long period of reliance on other assets.
• Doubts about inflation or insurer risk over a longer horizon.
• No strong worry about running out of money at 95.

Toward a later start (80 to 85):

• Good health and a family with many members who live into their 90s.
• Enough other assets to cover the years until the start date.
• A QLAC purpose, where the aim is to lower required minimum distributions and to insure the tail. The post on How a QLAC changes required minimum distributions: a worked example works through the arithmetic.
• A plan to treat the DIA as insurance against very old age, not as the main source of income.

A planning sequence

1. List the money that will cover expenses until the earliest start date, and test whether it lasts.
2. Estimate how much monthly income you would want at 85 that other sources will not supply.
3. Get written quotes for several start ages from more than one insurer, using the same premium.
4. Make a table like the one above with your own quotes, and compute the break-even for each pair.
5. Compare life-only with a return of premium or a joint option, and see what each costs per month.
6. Check the insurer's financial strength and the guaranty limit for your state.
7. Confirm what flexibility exists to change the start date, and what it costs.
8. Review the plan with a fee-only planner if the amount is a large share of your savings.

The annuity payout calculator is useful for a first pass, and the life expectancy calculator gives a rough population-level picture of how often people reach 85, 90 and 95. Neither predicts your own life, which is why a table of outcomes is more useful than a single number.

Key takeaways

• A later start date raises the monthly check sharply, and in the example the check at 85 was more than three times the check at 70 for the same premium.
• Break-even ages for the later starts fell between about 89 and 94, so a late start pays off only for a long life.
• A life-only deferral pays nothing if you die before the start; a return of premium protects the premium and lowers the check.
• Inflation, insurer strength and locked-in interest rates all weigh more on a long deferral.
• Build your own table from written quotes, and treat a late-start DIA as insurance against a very long life, not as the whole retirement plan.