What Is a Contingent Deferred Annuity (CDA)?

As you approach retirement, one of the biggest questions you’ll face is how to secure steady income without sacrificing flexibility. A contingent deferred annuity (CDA) offers a modern solution, letting you keep your money invested while guaranteeing income if your portfolio takes a hit. However, it’s not the only option. Whether you want predictable payouts, market participation or full control over your assets, there are several alternatives that can help you build a reliable retirement income plan.

Consider working with a financial advisor if you need help with your own retirement options.

What Is a Contingent Deferred Annuity?

A contingent deferred annuity, abbreviated as CDA, is a type of insurance product. It establishes a contract between a life insurance company and the purchaser of the CDA. With it, the insurer must meet an obligation to make scheduled payments over the course of the annuitant’s lifetime. CDAs only release these payments once designated investments (not owned or held by the insurance company) are depleted. The contract specifics what level of depletion is necessary, either due to market performance, fees, charges, or contractually permitted withdrawals.

Breaking that down, CDAs are a lifetime benefit. However, the benefit is contingent on the customer’s associated investment account balance dropping below a predetermined threshold. As long as the balance remains above that lower limit, the CDA cannot pay out its benefit.

The insurer regularly tracks the approved investment account and adjusts its annual withdrawal limit according to it. The main factors the insurer uses are the asset balance and risk. If the customer contributes more to the account, the insurer adjusts the withdrawal limit upwards. Likewise, if the withdrawal is too great, the insurer adjusts the limit downwards.

Contingent Deferred Annuity Example

Consider an individual who obtains an initial CDA coverage amount worth $1,000,000. Their contract states that they begin receiving their benefit once the account drops below $1,000. At that time, they may withdraw the approved annual amount of $5,000.

Their payout starting age is 60 years old. However, their account eventually drops down to $987. As a result, they hit their benefit trigger amount and start receiving their CDA benefit. This lasts until they die.

Benefits of Contingent Deferred Annuity

There are a couple of risks each retiree should account for while planning. One, in particular, is known as longevity risk. Essentially, this risk refers to the possibility that you outlive your retirement savings. As a result, you are forced to rely solely on Social Security and either Medicare or Medicaid. A CDA provides some protection against this risk through its guaranteed lifetime income payments.

In addition, the account tied to the CDA falls under the responsibility of the purchaser or their agent. They don’t need to transfer any of the funds or securities to the insurance company. This allows the customer to stay invested in the market and potentially earn higher investment returns.

The way CDAs work creates a lifetime income floor for any purchasers near or at retirement. At the same time, the purchaser can still take advantage of possible market returns.

Risks of Contingent Deferred Annuity

CDAs are essentially stand-alone guaranteed living withdrawal benefits. And while they offer certain benefits, they are not exempt from risks. In particular, their pricing can be a potential problem.

CDAs are complicated products, making their fee structure equally complex. As a result, the benefits and drawbacks of the product may not be fully transparent to the customer. However, due to the potential advantages, you can expect the cost to be high.

In addition, CDAs’ similarity to variable annuity contracts means there may be shared risks between the two. In particular, there may be issues regarding the guaranteed living benefits. Since the responsibility for your investments remains with you, there is also the standard market risk.

Is a Contingent Deferred Annuity Right for Me?

A CDA can be an attractive option for investors who want lifetime income protection without locking all their assets into a traditional annuity. It’s designed for people who prefer to keep their money invested, often in mutual funds or managed accounts, while still having the security of guaranteed income if their portfolio value falls below a certain level. If you value flexibility, control and protection from outliving your savings, a CDA could be worth considering.

Unlike standard annuities, CDAs let you maintain ownership of your investments, meaning you can adjust your portfolio and access funds when needed. However, that flexibility comes with shared risk: if markets perform well, you may never need the income guarantee, but if they drop sharply, the insurer steps in to provide payments. This makes CDAs a middle ground between full-risk investing and the security of a traditional annuity.

A contingent deferred annuity can be especially useful for pre-retirees or early retirees who want to stay invested but need protection against market downturns late in life. It can serve as a safeguard for your retirement income plan, ensuring that even in volatile markets, you won’t run out of money. Working with a financial advisor can help you determine whether the balance of flexibility, cost and security offered by a CDA aligns with your long-term retirement goals.

Alternatives to a Deferred Annuity

While a contingent deferred annuity (CDA) offers a unique blend of investment flexibility and income protection, it’s not the only way to secure guaranteed income in retirement. Depending on your goals, risk tolerance and liquidity needs, several other financial products can serve similar purposes. Here are some common alternatives to a deferred annuity — each with its own advantages and trade-offs.

Traditional fixed annuity: A fixed annuity provides guaranteed interest and predictable income, making it a straightforward alternative for those who prioritize stability over growth. Your returns don’t depend on market performance, which can help protect your principal during volatile periods. However, because of that security, fixed annuities generally offer lower long-term returns than variable or market-linked options.
Variable annuity: Variable annuities invest in subaccounts tied to market performance, offering higher growth potential than fixed products. They also often include optional income riders that can mimic some of the guarantees offered by a CDA. The trade-off is increased exposure to market risk and typically higher fees, so they’re best suited for investors comfortable with market fluctuations.
Indexed annuity: An indexed annuity offers returns linked to a specific market index, such as the S&P 500, with built-in downside protection. You can benefit from partial market gains while being shielded from losses, up to a limit. This makes indexed annuities appealing to those who want moderate growth potential without the full risk of variable investing.
Target-date or managed portfolios: For investors who prefer to keep assets outside an insurance product, a professionally managed portfolio or target-date fund can provide a disciplined path toward retirement income. While these lack the guarantees of a CDA or annuity, they offer flexibility, transparency and potentially lower costs. Pairing these with other income sources, such as Social Security or pensions, can help create a balanced retirement strategy.
Guaranteed income funds or payout ETFs: Some newer investment products, like guaranteed income funds or payout-focused ETFs, aim to generate steady income through dividends and structured distributions. These can be appealing for investors who want simplicity and liquidity while still drawing consistent cash flow. However, unlike annuities, they don’t provide lifetime guarantees and may fluctuate with market performance.

Choosing the right retirement income product depends on your comfort with risk, desire for flexibility and need for guaranteed income. A CDA can be an excellent option for those who want to stay invested while protecting against longevity risk, but other annuities and managed portfolios may achieve similar goals. Consulting with a financial advisor can help you compare these alternatives and find the strategy that best supports your long-term financial security.

Bottom Line

Nowadays, there are multiple retirement income gaps that each worker needs to fill. CDAs are one way to fill that gap. However, it is not the only way. If you see a need to improve your retirement income, consider all of your options. You may want to opt for low-stakes investments through a brokerage account. Or, you might think about renting out a property as a potential source of passive income.

Tips For Retirement Planning

Planning for retirement comes with its fair share of hurdles. If you want to avoid potential pitfalls, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A lot of retirement planning relies on projections. You need to guess how much you’ll need in the future to save enough in the present. SmartAsset’s retirement calculator is another free tool that can help. It provides you with an estimate, showing you if you’re currently on the right savings track.