Longevity annuities can be a great deal for seniors. But few people buy them

0

MoMo Productions | Digital vision | Getty Images

Life expectancy in the United States tends to increase – and that creates more financial risk for retirees, who must make their nest egg last longer.

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

Seniors can take steps to reduce this “longevity risk”, such as working longer and delaying Social Security.

More from Personal Finance:
Older Americans Face Double Debt Dilemma with 401 (k) Student Loans
Debt Cancellation and Free University Aim to Solve Student Loan Crisis
Avoid mistakes when switching from Medicare to a public health exchange

They also have at their disposal a type of annuity – a longevity annuity – which is among the best financial deals for seniors who fear their money will not last, according to retirement experts. However, they have been little used to date.

“It depends on living long,” said Wade Pfau, professor of retirement income at the American College of Financial Services. “If you live long, you will get your money’s worth this way.”

How they work

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

Here’s the rule of thumb: A retiree today hands over a large sum of money to an insurance company and begins receiving monthly payments many years later, typically between the ages of 75 and 85.

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

But deferred payments offer a unique advantage: Insurers pay more on a monthly basis than with other annuities that start earlier in life. (Morbidly, that’s because there’s a greater chance that buyers will die before their income begins – thus spreading the pot of money over fewer people left.)

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

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 City who purchases a no-frills annuity with a lump sum of $ 100,000. This person would get about $ 500 per month ($ 6,000 per year) for life if they started receiving immediate payment; the same buyer would get around $ 2,800 per month ($ 33,600 per year) by waiting 20 years to start payments.

This level of income can help cover worries of outliving 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 finite horizon for planning.

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

One type – a qualified longevity annuity contract, or QLAC – can also reduce the minimum distributions required of a retiree from individual retirement accounts and 401 (k) plans.

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

Unpopular

However, despite their advantages, these annuities are not popular among the elderly.

Deferred income annuities accounted for $ 1.7 billion (or 0.7%) of the $ 219 billion in total annuity sales in 2020, according to LIMRA, an insurance industry group. (Since longevity annuities are a subset of deferred income annuities, their share would be even smaller. LIMRA does not break this down.)

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

The mismatch is largely due to the psychological barrier of handing over a large sum of money that will yield no benefit if one does not survive for another 20 years, Blanchett said.

And they’re not for everyone – a retiree who wants to retain control and flexibility over their money may find it difficult to hand over money to an insurer. They may prefer to invest the funds instead.

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

Perhaps the easiest way to incorporate a longevity annuity into your financial plan is to assess a desired level of guaranteed future monthly income and use the annuity to fill in the gaps, after factoring in others. sources of income like Social Security and pensions, Blanchett said.

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

Other factors

However, this is a more difficult financial planning proposition than with other annuities – precisely because it is difficult to determine how much money to live on in two decades, according to Tamiko Toland, director of markets. pension for CANNEX, which provides pension data. This is all the more difficult when trying to assess how inflation will affect the future cost of living.

An insurer’s credit rating is also becoming much more important, experts say. A higher financial rating usually means a higher probability that the company will be present to make payments in the future.

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

Consumers can buy longevity annuities with certain characteristics that can make them more palatable, but they will forgo substantial monthly income for those characteristics, experts said.

For example, consumers can buy them with a cash back option. If the buyer dies before the income begins, the beneficiaries get a refund of the premium; if the buyer dies after the start of the income, the beneficiaries receive the premium less any payments made.


Source link

Leave A Reply

Your email address will not be published.