Annuity Products Transfer Longevity Risk to an Insurer

One of the most difficult parts of retirement planning is that no one knows exactly how long they will live.  So even with excellent planning, you run into longevity risk, or the risk of outliving your savings.  In the Forbes article, “Planning For An Uncertain Life Expectancy In Retirement,” Jamie Hopkins gives us some advice for managing longevity risk.  We all know that we need to save for our retirement, but we don’t know exactly how much.  If you save enough money to last you until you are 85, but live longer than that, then what?  The Social Security Commission has tables where you can find your average life expectancy.  Since half of us live longer than life expectancy though, we need to plan for that.  Keep in mind that the longer you live, the longer your life expectancy.  That number goes up each year you are alive.  After taking averages into account, you must then account for personal factors.  Are you healthy?  How long did your relatives live?  What is your lifestyle?

Out of every four people living, one of them will be alive at age 90.  It’s not a bad idea to at least plan for that long of a life.  Transfer the risk of outliving your savings to a third party and you ease the stress in your life.  Not only can you find ways to guarantee income until at least age 90, you can also find annuities that will guarantee you income for life and transfer your longevity risk to an insurance company.  The first thing you can do to increase your lifetime income is to wait until you are 70 to start receiving Social Security payments.  If you do this, you will receive the highest possible amount.  Next, if you have an employer sponsored retirement plan, choose an annuity option instead of a lump sum payment or transfer your 401k into an outside annuity.

In addition to these lifetime income options, you can buy an annuity from an insurance company in multiple forms that will guarantee you lifetime income.  An immediate life annuity can pay both you and a spouse income payments over both of your lifetimes.  Deferred income annuities offer you the option to plan ahead and buy a lifetime income stream that will start sometime in the future.  Deferred annuities offer the option of lifetime income once they are annuitized at some point in the future.  Life insurance payouts can be exchanged for an annuity using a 1035 exchange if you receive a life insurance payment upon someone’s death.  A few other ways to add to the lifetime income from your annuity are by having rental property with rental income coming in, reverse mortgages, dividend paying stocks, and payouts from owning part or all of a business.

Some people choose to use the drawdown method to finance their retirement while others finance using a contingency fund.  A lot of research has to go into using either of these financing options.  The best method to financing retirement is often a combination plan with Social Security, annuities paying lifetime income, and some other form of financing.  As you live longer, there are other risks that increase as well.  You have to account for inflation risk, long term care needs, and other risks.  There is simply no way to know how long you will end up living.  Do your best to estimate a realistic time frame and finance your longevity accordingly.  Annuities are one of the only ways to guarantee a stream of income that you cannot outlive.  Speak with an expert about using annuities to transfer your longevity risk to an insurance company and ease your retirement concerns.

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