Yesterday’s blog post listed some of the reasons why annuities are not in many defined contribution plans and why they are likely to be offered in many more plans in the future. Jean Chatzky agrees with this and believes that longevity annuities are going to take off this year. In a recent Fortune Magazine article, she explained “Why 2015 is the year for longevity annuities.” The Employee Benefit Research Institute’s 2014 Retirement Confidence Survey found that only 18% of workers are very confident that they will have enough money to live a comfortable retirement. That’s a staggering figure, but one that has kicked the insurance industry in high gear to come up with a solution for retirees.
The insurance industry’s solution to this demand for a comfortable retirement is longevity annuities. These deferred annuities are fairly simple. You receive guaranteed income payments in the future after paying an insurance company a lump sum at purchase. Longevity annuities have been around for about ten years, but their increasing importance and popularity in 2015 can be attributed to recent government regulation changes. Retirees used to be required to take minimum distributions from their 401k and IRA plans starting at age 70 1/2. New Treasury Department regulations have increased this age to 85 when longevity annuities are purchased inside of 401k and IRA plans.
AIG was the first company to tweak their annuity product so that it meets the new regulations for use inside of defined contribution plans. The Forbes article says to expect new products from Mass Mutual, New York Life and Guardian this year as well. Although longevity annuities currently represent only about 2% of total annuity sales, annuities expert Stan Haithcock believes that longevity annuities will be the top annuity product in the next five years.
The new regulations, and longevity annuities in general, are simple to explain. This is partly because indexed and variable annuities, the more complex types, do not qualify for these regulations. You can use up to 25% of your 401k or IRA balance, or a maximum of $125,000, to purchase a longevity annuity. This money can be deferred much longer than the other money in the account that requires minimum distributions when you are 70 1/2. Your monthly payments are based off of when you start receiving income. The longer your defer payments, the higher those payments will be. There is always the possibility that you will die before receiving your income, so you can have the annuity set up to pay 100% of your premium to beneficiaries if that is a concern of yours.
Mr. Haithcock pointed out that the two major downsides to using these products are flexibility and liquidity. Once you make the decision to purchase a longevity annuity with some of your savings, the money stays there. That is why the government put the limit on how much you can use to purchase an annuity within your plan. Some people also wonder if you can create income better on your own than you can with an annuity. The problem with this is that nothing is guaranteed. There is certainly the possibility that you can get more income by taking your own withdrawals of income, but there is also a good chance that you might outlive your savings. If you have questions about using longevity annuities in your retirement planning, an expert financial advisor can help in your planning.