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

on Oct23
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American life expectancy is trending up — and that creates more financial risk for retirees, who must make their nest eggs last a longer time.

An average 65-year-old today will live another 20 years, about six years more than in 1950, according to the Centers for Disease Control and Prevention.

Seniors can take measures to reduce this “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 longevity annuity — that is among the best financial deals for seniors who worry their money won’t last, according to retirement experts. However, they’ve been little used to date.

“It’s contingent on living a long time,” said Wade Pfau, a professor of retirement income at The American College of Financial Services. “If you live a long time, you’ll get the most bang for your buck that way.”

How they work

A longevity annuity is like a form of old-age insurance. There are many different types, but such annuities are a form of “deferred income annuity.”

Here’s the basic premise: A retiree hands over a chunk of money to an insurance company today and begins getting monthly payments many years later, generally starting between age 75 and 85.

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

But the deferred payments offer a unique benefit: Insurers pay more on a monthly basis than with other annuities that start earlier in life. (Morbidly, this is because there’s a greater chance that buyers will die before their income starts — thereby spreading the pot of money over fewer remaining people.)

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

David Blanchett

head of retirement research at PGIM

Unpopular

And they’re not for everyone — a retiree who wants to retain control and flexibility over their money may be hard-pressed to hand cash to an insurer. They may prefer investing the funds instead.

“[Longevity annuities] are potentially the most efficient annuity, economically speaking,” Blanchett said. “They’re without a doubt the hardest behaviorally.”

Perhaps the easiest way to integrate a longevity annuity into your financial plan is by assessing a desired level of guaranteed future monthly income and using the annuity to plug any gaps, after accounting for other income sources like Social Security and pensions, Blanchett said.

(For instance, a retiree who envisions needing $50,000 a year to live comfortably at age 85 and already gets $30,000 a year from Social Security would get insurance quotes to determine the lump sum needed to generate $20,000 a year from the annuity.)

Other factors

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

An insurer’s credit rating also becomes much more important, experts said. A stronger financial rating generally means a higher likelihood the company will be around to make payments in the future.

It would be wise to get quotes from multiple insurers, and perhaps even accept a little bit of a reduced payment from a higher-rated company, Blanchett said.

Consumers can buy longevity annuities with certain features that may make them more palatable — but they’ll give up a substantial amount of monthly income for those features, experts said.

For example, consumers can purchase them with a refund option. If the buyer dies before income starts, beneficiaries get a refund of the premium; if the buyer dies after income starts, beneficiaries get the premium minus any payments made.



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