The dread fear of retirement is living so long that you run out of money. Of course, there will be Social Security, but as many seniors are finding out, that's not enough to live on. Unless you also have a lifetime pension, the greatest retirement challenge is managing your assets so they last as long as you do. And with low interest rates forcing many retirees to dig into their investments to maintain their lifestyle, the concept of "running out" becomes a distinct possibility.
Dealing with that challenge is the centerpiece of retirement planning -- an inexact science, but far better than guesswork or averages. If only we knew exactly how long we might live, much of the uncertainty would disappear. And, in fact, you can get an educated guess at your longevity by going to www.Livingto100.com and using their calculator.
But even having a timeframe doesn't eliminate a lot of the uncertainty about future investment returns and potential withdrawal rates. We could all breathe a bit easier if we knew we had an income that would last as long as we do!
But most planning is designed around the average life expectancy of age 83 -- the expectation for a person who has lived to age 65. What if you live longer? That's where Longevity Annuities kick in.
The concept is simple. You give the insurance company a lump sum of money now, as you retire at age 65. But you tell them you don't really need any more current income. Instead, you would like to get a regular monthly check starting at age 83 - a check that would last for the remaining years of your life.
The insurance company figures it out. They have the statistics on average longevity. They know they can keep your money and invest it for another 18 years -- until they have to start paying you that monthly check. That allows them to promise you a much larger check than if you contract for immediate payments.
Do you want to make that bet on your longevity? Two weeks ago I helped my father celebrate his 93rd birthday, and his older brother just turned 96! So the concept definitely has me thinking!
Facts to Consider
When to Buy: If you buy at age 50 you'll receive substantially more income than if you buy at age 65, assuming you live to start collecting. For example, according to an analysis at Bankrate.com, a male who pays $50,000 for MetLife's longevity insurance product at age 50 would receive annual income of $42,997 once he reaches age 85.
He would receive about half that amount -- $21,741 per year -- if he purchased the same contract at age 60, and $15,439 if he bought it at 65. Assuming 2.5 percent annual inflation, that's equivalent in today's dollars to annual payments of $18,118, $11,727 and $9,422, respectively, in today's dollars. Since women tend to live longer, they receive slightly smaller amounts.
Yes, you could get a much larger check if you buy a longevity annuity at a younger age - but you won't have a good feel for your retirement income planning until you approach age 65 and know how much you have saved for retirement. That's when you can do the planning that lets you know how long your assets are likely to hold out at various investment and withdrawal rates. And that's probably the best age at which to purchase this type of annuity.
Insurance Company Stability: Also, keep in mind that this is a very long-term contract -- even starting at age 65. You're anticipating payouts that won't start for years, and that you hope will continue many years longer. So you'll want to deal with a sound insurance company that will be around to keep its promise of future payments starting 20 years or more in the future.
Inflation and Death: Then there are the twin drawbacks of inflation and death. With the former, you have the concern that if inflation soars, your deferred payout won't be worth much. Some policies offer inflation protection -- but at a steep cost. You might be better off diversifying your remaining investments to include more equities which historically keep up with inflation.
Death protection is also costly. And remember the purpose of this investment is to enhance your life -- not to provide for your heirs. If that's your goal, simply buy more life insurance.
Investing Inside Your Retirement Plan: These longevity annuities are such an interesting tool for retirement income planning, that as of July 1, 2014, the Treasury Department has said they are not only legal investments for 40l(k) plans and IRAs, but that the amount invested in these longevity annuities will not be considered an asset when it comes to calculating minimum required withdrawals each year.
So you may start to see these products offered inside your company retirement plan. But there will be limits. The Treasury rules plan participants can use up to 25 percent of their account balance or $125,000 (whichever is less), to buy a longevity annuity without concerns about non-compliance with the age 70.5 minimum distribution requirements. Those purchase amounts will be adjusted for inflation in the future.
Finding Longevity Annuities: If you're looking to buy a longevity annuity outside your IRA or 40l(k), most insurers are now offering this product. It pays to compare the promises as well as the company ratings. (For the most stringent rating service go to www.WeissRatings.com.)
Of note, Northwestern Mutual offers a unique product in this category - the Select Portfolio Deferred Income Annuity, which has the unique upside potential of dividends to increase your (although the payout cannot be lower than initially promised), thus offsetting the impact of inflation. This policy is expected to be available for IRAs later in the year.
Retirement planning expert Michael Falk. Partner at Focus Consulting Group and Chief Investment Strategist and Mauka Capital, puts the concept of longevity annuities into perspective. He acknowledges that these longevity annuities are tempting, but also knows that people worry about their "fairness." People have a sense that the insurance companies must have figured out a way to "win" in the pricing of these products. On the other hand, Falk notes, we won't think it is at all "unfair" if we live far longer than the insurance company mortality tables predict - and take the insurer for a lot of money!
Essentially, that's the bet on, and of, your life when you buy a longevity annuity. You're buying peace of mind. And that's The Savage Truth.