Longevity annuities can be a good deal for seniors. But not many people buy them

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Life expectancy in America is trending – this creates more financial risk for retirees, who have to make their nest eggs last longer.

The median age of 65 today is another 20 years, about six years more than in 1950, according to the Centers for Disease Control and Prevention.

Older people can take measures to reduce their “longevity risk,” such as working longer and delaying Social Security.

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They also have a type of annuity at their disposal — a long-life annuity — which is among the best financial deals for seniors who fear their money won’t last, according to retirement experts. However, it has not been used much yet.

“It just depends on living long,” said Wade Pfau, professor of retirement income at the American College of Financial Services. “If you live a long time, you will get the most out of your profit that way.”

How do these work?

Annual longevity is like a form of old-age insurance. There are many different types, but these annuities are a form of “deferred annual income.”

Here’s the basic premise: A retiree hands a good chunk of money to an insurance company today and starts getting monthly payments after several years, generally starting between ages 75 and 85.

As with other annuities, this stream of income is guaranteed for the rest of your life.

But deferred payments offer a unique advantage: insurers pay more on a monthly basis than they would with other annuities that start early in life. (This is because there is a greater chance that buyers will die before their income begins – thus distributing the amount of money to fewer people left.)

The idea is to create a more limited horizon to plan for.

David Blanchett

Head of Retirement Research at PGIM

Here’s a rough example, using a quote for a 65-year-old man in New York who buys a no-frills annuity for a total of $100,000. This person will get $500 per month ($6000 annually) for life if they start receiving immediate compensation; The same buyer would get about $2,800 per month ($33,600 per year) by waiting 20 years for payments to start.

This level of income can help dispel fears of exceeding one’s investments and other savings, according to retirement experts.

“You don’t know how long you’re going to live,” said David Blanchett, head of retirement research at PGIM, the investment management arm of Prudential. “The idea is to create a more limited horizon to plan for.

“You know that when you reach that age, you will be taken care of.”

A specific type — a qualified long-life annuity contract, or QLAC — can also reduce required minimum distributions to retirees from IRAs and 401(k) plans.

Consumers can use up to $135,000 or 25% (whichever is less) of their retirement funds to purchase QLAC. Someone with $500,000 in retirement savings would calculate the required distribution on $365,000 instead of the entire $500,000.

Unpopular

However, despite their benefits, such pensions are not common among the elderly.

Deferred income annuities amounted to $1.7 billion (or 0.7%) of total annuity sales of $219 billion in 2020, according to LIMRA Group, an insurance industry group. (Because long-life annuities are a subset of deferred income annuities, their share will be smaller. LIMRA doesn’t break this data.)

By comparison, variable annuities accounted for nearly $99 billion in sales last year.

The mismatch, Blanchett said, is largely due to the psychological hurdle of handing over a large sum of money that won’t do any good if one doesn’t survive another 20 years or so.

And it’s not for everyone – a retiree who wants to maintain control and flexibility over their money may be hard pressed to hand cash to the insurance company. They may prefer investing the money instead.

“[Longevity annuities] It’s potentially the most economically efficient pension, Blanchett said. They are undoubtedly the most difficult behaviorally.

Perhaps the easiest way to incorporate long-life annuities into your financial plan, Blanchett said, is to assess the required level of guaranteed future monthly income and use the annuities to fill in any gaps, after accounting for other sources of income such as Social Security and pensions.

(For example, a retiree who imagines he needs $50,000 a year to live comfortably at age 85 and actually gets $30,000 a year from Social Security would get insurance rates to determine the total amount needed to generate $20,000 a year in annuities.)

other factors

However, this is a tougher financial planning proposition than other annuities — precisely because it’s hard to say how much money one would need to live in two decades, according to Tamiko Toland, director of retirement markets at CANNEX, which provides annuity data. This is even more difficult when trying to assess how inflation will affect the cost of living in the future.

Experts said the insurance company’s credit rating is also becoming more important. A stronger financial rating generally means a greater likelihood that the company will be about to make payments in the future.

Blanchett said it would be wise to get quotes from several insurers, and perhaps even accept a discounted payment from a higher-rated company.

Experts said consumers could buy long-life pensions with certain features that might make them more palatable — but they would forgo a significant amount of monthly income for those features.

For example, consumers can purchase them through the money-back option. If the buyer dies before the income begins, the beneficiaries get the premium back; If the buyer dies after the income begins, the beneficiaries get the premium minus any payments.

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