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Are Income Annuities Really the “Perfect” Retirement Product?

For all intents and purposes, income annuities appear to be the perfect retirement product.  They combat longevity risk and because of mortality credits, offer relatively high payouts.  So a couple of economists recently pondered why more people are not using these annuities in their retirement planning.  What they found as their reasoning seems to open up a new and fresh idea in the realm of annuities.  In “The income annuity puzzle: Why don’t more people use them?,” Reuters’ Mark Miller discussed the economists’ results and the possibility of a new income annuity and long term care insurance hybrid that might work for those who aren’t buying annuities now.

Single premium immediate annuities offer you lifetime payments after purchasing them with a lump sum of cash from an insurance company.  There is no risk of living longer than your money will last because these income payments will continue for the rest of your life.  Mortality credits allow for higher payouts because essentially, insurance companies use the money from people who die prematurely to pay those who live a long life.  But there it is, the reason that more people may not be buying income annuities.  What if you are the person who dies prematurely and doesn’t get your long lifetime of income payments?  Some people are not willing to pay for the insurance against outliving their savings on the off chance that they don’t get their money back.  Another reason the economists found for people not purchasing more annuities is their fear of losing the liquidity of their money.

These fears likely explain why immediate annuity sales of $3.4 billion in the first half of this year pale in comparison to the $5.3 trillion invested last year in employer retirement plans and IRAs.  Fear over getting sick and needing your money or experiencing some type of catastrophe requiring financial support keeps some people away from certain annuities.  Retirees who experience a health crisis not only may have a shorter life expectancy, but also may need money from an annuity sooner rather than waiting for their payouts.  The thing is that the industry is already well aware of consumers’ desire for liquidity.  That is why many new deferred income annuities come with far greater options for liquidity than some income annuity predecessors.

Something interesting from this article that I hadn’t heard much about before was the fact that income annuities help protect people against under-spending in retirement in the same that they can help prevent overspending.  Retirees who have used some of their savings to buy an annuity don’t have to worry about outliving their savings, so they are able to spend more freely in the beginning of their retirement.  They know that they have guaranteed income to last them throughout their life and meet their daily expenses, so they can spend and enjoy life with their other money.

A combination product offering an annuity with long term care insurance is not a far-fetched idea and could be a solution to those people who fear that buying an annuity will hurt them if they have a health crisis.  A few options are available that tie these two together, but economists think insurers should take note and look into a single premium immediate annuity with some long term care insurance benefits.

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