THE BLOG

Don't Run Out of Money in Old Age

04/17/2015 05:43 pm ET | Updated Jun 17, 2015

What if you live too long -- and run out of money? That's every retiree's worst nightmare. Not the living longer part, but the impoverishment part. And since few people earn lifetime pensions these days, Social Security is the only income you can count on to last as long as you do
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That's true -- unless you buy a deferred income annuity, often called a longevity annuity. It provides a stream of income that starts paying out at a later age, perhaps at age 75, or 80, or even at 85. If you make that commitment now, in your sixties, the insurance company has a lot of time to make the money grow, and can offer a surprisingly large monthly check in your old age.

For example, a 60 year old man might invest $100,000 in one of these policies, and at age 70 he will receive a check for $ 1,001 per month. But if he waits even longer to take his monthly lifetime check, the amount grows significantly larger. At age 75, he would get $1596 per month. Waiting until age 80 gives him $2930 per month. And if he defers payments until age 85, the amount grows to $5880 per month! But that's quite a bet on your longevity!

(Payouts for women are less on the same investment, because women live longer than men.)

What to Consider When Buying a Deferred Income Annuity

First, if you're making the annuity investment in your 60s -- the optimal age -- then you are accepting a very long term promise from an insurance company. So you'll want to make sure you are dealing with a top-rated insurer that will be around to make the payments.

You might also be concerned about the impact of inflation on those delayed payments. There are two ways to deal with that problem. Most of these deferred income annuities allow you to buy a 3 percent (or larger) cost-of-living rider. That protection will lower your monthly payout, however. The 60 year old man investing $100,000 would receive only $873 per month, instead of the $1,001 noted above.

Or there is another solution -- often used by annuity expert Stan Haithcock, best known as Stan The Annuity Man, is one of the great proponents of this product. He suggests laddering -- buying several contracts, staggering them to start several years apart, bringing additional income over the later years.

Another great concern might be about what happens to your money if you die before collecting those future payments, or collect only a small amount of money by the time you die. You can purchase a "life with cash refund" deferred income annuity. If, when you die, the insurer hasn't paid out all of your initial premium, the balance will go to your heirs.

Of course, you pay for this protection, as well. In the example above, a 60 year old male who puts $100,000 into a deferred income annuity with a cash refund guarantee deferred to age 80, would receive only $2455 per month compared to $2930 per month without the guarantee.

And finally, if you're part of a couple and worried that a surviving spouse will outlive your retirement savings , you can set up a joint income stream over two lives, although the payout obviously will be lower.

Longevity Annuities and Retirement Plans

You may never have heard about longevity or deferred income annuities. They're a relatively new product -- and quite frankly, there is no great incentive for agents to sell them, because they carry a very low commission stream! But they are growing in popularity, and Stan The Annuity Man predicts "they will be the #1 owned annuity by 2020" as people realize the importance of this protection. (Currently they represent less than 2 percent of all annuities sold annually.)

In fact, these annuities are such a good idea that the government is encouraging their use in Individual Retirement Accounts and 40l(k) plans by offering some interesting inducements for these "Qualified Longevity Annuity Contracts (QLACs). The money you set aside in a QLAC (up to 25 percent of your retirement account or $125,000, whichever is less) will not be counted as an asset for your Minimum Required Distributions (MRD) after age 70-1/2.

Soon you can expect corporate 40l(k) plans to help those planning for retirement to guarantee income for their later years. Retirees need the growth that stock investments can provide for the long run. But they also need a greater certainty that they can pay for the basic essentials of life. With a deferred income annuity, you're essentially buying peace of mind.

We don't know how long we will live. It's the greatest uncertainty about life! But you can go to www.livingto100.com and take the online quiz to get an idea of your expected longevity.

On a personal note, we're planning my father's 94th birthday this spring. And his older brother is 97 and still travels to Florida in the winter. That's making me take this subject very seriously!
And that's The Savage Truth.

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