It’s well known that many retirees and pre-retirees are concerned about the possibility of eventually running short of money, and it’s a legitimate concern. According to the Insured Retirement Institute, a 65-year-old married couple has a 50 percent chance that one spouse will live to age 93 (and a 25 percent chance that one will live to 97).*
You can help cope with this conundrum, however, by buying a longevity annuity – also known as a deferred annuity with longevity features. This type of annuity is designed so that payments are deferred for a number of years, usually until age 80 or 85, when a retiree’s retirement nest egg may be running low.
You could call this a “super-deferred annuity” because annuity distributions are deferred for a greater number of years than many annuities. At age 80 or 85, recipients know they will get a guaranteed** income for the rest of their lives. Coupled with Social Security and the likelihood that 80-plus-year-olds will have relatively modest lifestyles, the upshot is that older people with this annuity typically won’t have to fret about running short of money.
Bear in mind that you may have to proactively ask your advisor or agent about longevity annuities. Not all agents or broker/dealers sell them. If yours does not and the product interests you, check in with other firms that do offer longevity annuity options and see if this type of product may be right for you.
Many retirement income professionals say longevity contracts make sense for people, usually in their 60s, who are relatively healthy and have reason to expect to live beyond normal life expectancy. Their parents, for example, may have lived into their late 80s or early 90s.
As an example, if a 65-year-old man purchases a longevity annuity with an initial premium of $50,000 at a prominent insurance company, he’ll get back more than $35,000 a year starting at age 85 for the rest of his life. If he purchases one for $125,000, but turns on payments at age 80, he will get about $33,000 a year for life. As you can tell, the longer you wait to turn on income payments, the higher the annual income payments will be.
Not so long ago, of course, pensions provided the major source of guaranteed lifetime income. But as companies have moved away from offering pensions, fewer and fewer people are retiring with them, according to the IRI. This has forced people to more proactively manage their finances in their waning years.
Unlike many annuities, longevity contracts have no surrender fees because there is no liquidity. The premium is locked in once the contract is purchased, excluding the owner from access to money now under the control of the insurance company. That said, longevity annuities have started to become more flexible. Buyers can change their minds about when they turn on the income and can also subsequently add additional funds to the contract. In addition, some longevity annuity contracts offer a death benefit or return of premium option if the policy owner dies before the income payments are scheduled to begin.
In addition, rule changes last year by the Treasury Department and Internal Revenue Service allow people to buy a Qualified Longevity Annuity Contract (QLAC) – a new type of longevity annuity contract that is purchased with pre-tax (qualified) dollars. This allows buyers to exclude from Required Minimum Distributions (RMDs) 25% (up to $125,000) of all traditional IRA or 401(k) plans until age 85, making QLACs more tax-friendly. In the past, traditional IRA and 401 (k) plan owners had to start taking distributions from their qualified accounts at age 70 ½, but under the new rules, all funds in the QLAC will not count toward RMD calculations.
Longevity annuities are not for everybody. They don’t make sense if you’re not in good health. They also may not appeal to people who prefer more hands-on control over their retirement assets. Also, if the contract owner dies before he or she starts to receive payments, the account value could be lost because many longevity contracts do not offer a death benefit as part of the base benefits.
Finally, there is this inevitable question: Will you live long enough to get any money? If may be best to think about a longevity annuity as insurance against the financial drain of living too long.
For many healthy retirees and pre-retirees who wisely embrace the idea of maintaining sufficient liquidity, the best option may be to buy a more conventional annuity and a longevity annuity – and to also stay invested in mutual funds. It may seem overkill, but the longevity annuity does have a place in the mix for many folks. “As more and more people learn about longevity annuities, they like what they see,” says Scott Sadar, an executive at Somerset Wealth Strategies.
* Insured Retirement Institute Fact Book 2015, Fourteenth Edition – A Guide to Information, Trends, and Data in the Retirement Income Industry (Page 1).
** Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurance company.
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