Annuity FYI Blog

So-called “longevity” annuities—contracts that you might buy at age 65 but wouldn’t receive payments from until and unless you reach, say, age 85—are perhaps the cheapest way for people to insure themselves against the risk of living to age 90 or 95 and running out of money along the way.

That hasn’t made them popular, however. One reason for low sales is that the tax rules have discouraged them. The rules say that at age 70½, owners of qualified accounts—tax-deferred 401(k)s and IRAs, for instance—must move a certain amount of the qualified money out of the accounts each year and pay ordinary income tax on the withdrawal. These are called “required minimum distributions.” In the past, if people put qualified money into a longevity annuity, they wouldn’t be able to comply because the money is locked up until they reach, for instance, age 85.

In February, the U.S. Treasury Department issued proposed regulations to remove that obstacle. Under the new rules, as long as a person puts no more than 25% of their qualified money (up to $100,000) in a longevity annuity, then the money won’t count toward the base on which requirement minimum distributions are calculated. The income payments must also start no later than age 85.

The annuity would have to be a pure “longevity” annuity, the government stipulated. In other words, the contract could not feature a cash-out option or death benefit that would give the buyer (or his beneficiaries) part of the money back if the buyer died before age 85.

The new regulations will allow employers to begin offering longevity annuities as an investment option in retirement plans, thus allowing them to contribute gradually to a longevity annuity during their working years instead of paying a lump sum at retirement.

At current rates, a 60-year-old man might pay about $32,000 for a longevity annuity that pays an income of $24,000 a year starting if and when he reaches age 85.

If your health is poor or you truly don’t think you’ll live well past age 85, a longevity annuity might be a terrible bet. But if you think there’s a strong chance that you will live 90 or 100, a longevity annuity can be a sensible alternative to hoarding money against the possibility that you might live that long.

Written by Kerry Pechter

A recent article on Cincinnati. com by insurance agent J. Brendan Ryan gives some added insight into the importance of using annuities with longevity insurance.  In “Longevity insurance may be for you,” we are reminded of all of the risks associated with retirement, not the least of which is longevity risk.  While many people don’t worry about living too long, there is a real danger of living longer than your money will last.  Annuities are a great way to grow money tax-deferred and a lot of people use them for that purpose.  But they are also an important way to receive retirement income that you cannot outlive.

Whether you purchase an immediate annuity to receive income right away or defer your annuity until some point in the future, you have the option of receiving income over the rest of your lifetime.  Your payout is based on a number of factors like age and life expectancy.  For those who live longer than their life expectancy, they have gotten a “mortality gain.”  If you die sooner than expected, it is a “mortality loss.”  There is a lot of focus given to the worry that one will die suddenly and “lose” the money put into their annuity.  Thinking of annuities as longevity insurance is a good way to remember why they are so important.  You use insurance to protect you in case you total your car or your house burns down.  If those things don’t happen, you aren”t upset that you protected yourself just in case.  Think of annuities the same way; if you don’t live longer than your life expectancy, you at least were protected just in case you had.

Longevity insurance is a new product and not many annuity suppliers know much about it.  It is, in essence, an annuity.  You make a lump sum payment and your money is held for a specified period of time.  If you are alive at that point in the future, you will receive annuity payments for the rest of your life.  In the riskiest form, you would not receive any refund if you died before the specified date.  But by taking smaller payments in the future, you could add death benefits or make your annuity joint with a spouse.  It’s up to you to decide what type of annuity you want with your longevity insurance.

Written by Rachel Summit

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I just read an interesting article about annuity fees that included a detailed comment with added information.  In the article, “The skinny on fat annuity fees,” Sheryl J. Moore of Life Health Pro talked about the fees associated with variable annuities.  She talks about a common complaint about annuities being “expensive.”  She says that the average annuity fees for a variable annuity are around 4.5%.  These fees include an administrative service charge, a contract maintenance charge, a mortality and expense risk charge, and an underlying funds expense.  You also have fees associated with any additional rider guarantees to your variable annuity, such as GLWBs, GMABs, GMDBs, and GMIBs.  Now because of these fees, the author recommends fixed equity indexed annuities.  These indexed annuities don’t have any fees unless you add on riders like a GLWB.  They also protect all of your money in down markets and offer you the potential to earn some interest.

With that said, a comment from reader Michael Ham offers some additional insight to both products.  He points out that the spread of fixed equity indexed annuities is kind of like a fee.  One insurance company has a spread right now of close to 9%; Ham says that is essentially their fee for the indexed annuity product.  He says that the average variable annuity fees are lower than the article mentions.  With complete coverage and protection for the client’s lifetime and even added death benefits, fees would be closer to 3%.  He believes that variable annuities are best for investment purposes and long term portfolio growth.  Fixed equity indexed annuities are better for offering income and protection of your savings in his opinion.  While the author and commenter seem to have differing opinions on the two annuity products, I would argue that they have made strong cases for both.  That is the beauty of annuities; each version is best for a different kind of client.  Someone looking for the benefits of variable annuities has a different plan than the person using fixed equity indexed annuities for their retirement.

Written by Rachel Summit

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While you get a larger annuity payout when interest rates are higher, they are still a good investment choice even in this low annuity rate environment.  In “An annuity can still make sense,” Andrea Coombes of The Wall Street Journal says that this is still a good time for annuity purchases.  An immediate annuity helps to protect you against two major retirement concerns.  The first is that a drop in the stock market will cause you to lose all of your savings and the second is that you will run out of money during your lifetime.

If you haven’t saved enough money to carry you through retirement, an annuity is not going fix that problem.  But an annuity will ensure that the money you have saved, especially that money in your 401k, will last over your lifetime.  The monthly payments you receive will depend on the amount you use to purchase the annuity and many other factors, but it’s like a budget so that you know how much you will have to spend on expenses each month.  Some people choose to add an annuity rider to adjust for inflation or continue death benefits to their heirs in case they die sooner than anticipated.

Variable annuities with guaranteed income might be a better choice for people who want to maintain some control over their money.  With a variable annuity, you get to choose the sub-accounts in which you invest your money through the insurance company.  Make sure to find a lower fee variable annuity because there are some products that charge high fees.  State guaranty associations cover annuities in the case that an insurance company is unable to fulfill their obligations, so make sure that your state covers the entire amount of your annuity purchase.

Written by Rachel Summit

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While 77% of people are happier in retirement than they were when they were working, retirement does face challenges that may be unexpected.  Milwaukee’s Journal Sentinel works on “Addressing the four most common post-retirement challenges.”  Longevity, or the fear of running out of money during your lifetime, is one of the biggest risks in retirement.  As many people live to age 90 and beyond, retirement savings need to stretch farther than ever before.  Health care costs are rising fast and the fact that you need more health care as you age makes this added cost a stressor for many retirees.

Becoming a widow is one retirement challenge that no one wants to think about.  But the reality of the situation is that 75% of married couples have a spouse who spends at least five years as a widow or widower.  The need for long term care of some sort is becoming a bigger challenge for retirees.  Four out of five women and three out of five men will need some type of long term care for a chronic health condition during their lifetime.

There are some solutions to these four major retirement challenges.  Annuity products help to make sure that you do not run out of money in retirement.  The guaranteed income from an annuity can last over a retiree’s lifetime and even include death benefits to last over a spouse’s lifetime.  Purchasing Medicare supplement insurance helps retirees face the increasing health care costs by covering whatever Medicare does not.  Some life insurance policies work in terms to cover long term care.  This long term care insurance is important to help cover the cost of extended care and the life insurance policy helps ensure that a widow is cared for in the tragic death of a spouse.  Insurance against financial doom will help relieve retirement challenges.

Written by Rachel Summit

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