In The Garden City News section “The View From Here,” Bob Morgan, Jr. wrote an informative article about “Longevity annuities and retirement security.” He said that while longevity annuities are not the perfect solution to the American pension crisis, they solve many of the dilemmas that have come about since defined contribution plans replaced most company pensions. Most retirement benefits are now saved in defined contribution plans like 401ks. These plans do offer a few benefits over traditional pensions. They are portable from job to job and they also give employees a lot of control over their retirement savings. There are some drawbacks with 401k plans in comparison to defined contribution plans though.
The biggest drawback with 401k plans and the IRAs they are typically rolled into is that employees have to shoulder the longevity and investment risk inherent in retirement. Traditional pensions transfer that risk to the employer. Many people are living close to 100 years which increases the risk of running out of money during retirement. There is always a risk of stock market losses when your money remains in there for a long time, especially if you are handling your own investing and might have an unsuccessful strategy. There is another drawback to 401k plans that affects those participants with the most wealth. At age 70 1/2, you are required to take taxable minimum distributions based on the total value of your plan, even if you don’t yet need that money.
This is where longevity annuities shine. They were introduced to help Americans with the concerns of their retirement and the overall system. New Treasury Department regulations allow 401k and IRA funds to purchase a longevity annuity worth either $125,000 or 25% of the total plan value. Payments can be deferred as long as you wish, up to age 85. Deferring your payments allows for a larger monthly paycheck later in life, one that will also pay you income for as long as you live. This takes longevity risk off of the table. You can also add on benefits for a spouse after your death, but that does increase your cost.
In addition to the lifetime income benefit, using a portion of your 401k or IRA to purchase a longevity annuity also shields that money from the required minimum distribution that you have to take starting at age 70 1/2. This helps lower your tax liability when taking those distributions. Many Americans also like the added “return of premium” feature. Though there is an added cost, the return of premium feature pays back any money left from what you’ve paid in to your heirs if you die sooner than expected. Longevity annuities are certainly not best for people in poor health. It is also important to do careful research on the issuing insurance company to ensure their future stability. Increasing government support for longevity annuities will likely increase their availability and the benefits they can offer retirees in the future.