Are Longevity Income Annuities The New Pension?
In a recent MarketWatch article, a relatively new annuity product idea is discussed in terms of replacing pension income in retirement. I believe we will see this product more and more in the coming years and it may even be added as an option within 401(k) plans. While there are a variety of product designs, and certainly more will come in the future, let’s look at the example given in the article.
A male age 65 invests $10,000 in an LIA for a guaranteed annual payment of $4,830 beginning at age 85. So, what the retiree is buying is a guarantee against living a very long time. As financial planners do, I put this in the context of an annualized rate of return assuming different life expectancies. A healthy male age 65 has a 50% chance of living to 87, 30% chance of living to age 91 and 10% chance of living to 97. The $4,830 payments received from age 85 to each of those life expectancies would result in the following rates of return:
- Age 87 – 1.8%
- Age 91 – 5.5%
- Age 97 – 7.5%
What you quickly see is this only really pays off if this investor lives beyond his “normal” life expectancy of 87. Most of these contracts have a return of principle if the investor doesn’t live long enough to get back the original investment, which of course means a 0% return, possibly over a number of years.
While I’m generally not a fan of annuities in most cases, they do have some application in certain situations. In this case, this product may make sense for the retiree who:
- Is healthy, has good family health history and has a good probability of living past normal life expectancy.
- Is “on the bubble” of meeting their long-term spending goals as they head into retirement.
- Funds the LIA with what would have otherwise been a fixed income investment in their retirement account.
As with any annuity, this contract is with an insurance company and is a long-term commitment. Therefore, the strength of the company will be important. The article even mentions checking how well your state insurance guarantee fund is being run and the maximum amount you’d recover should the insurer go bankrupt. I have to smile at this a little because finding that information is not at all easy and, like the current strength of the insurance company, the current strength of a guarantee fund may have little bearing 20 years from now.
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.
In a recent MarketWatch article, a relatively new annuity product idea is discussed in terms of replacing pension income in retirement. I believe we will see this product more and more in the coming years and it may even be added as an option within 401(k) plans. While there are a variety of product designs, and certainly more will come in the future, let’s look at the example given in the article.
A male age 65 invests $10,000 in an LIA for a guaranteed annual payment of $4,830 beginning at age 85. So, what the retiree is buying is a guarantee against living a very long time. As financial planners do, I put this in the context of an annualized rate of return assuming different life expectancies. A healthy male age 65 has a 50% chance of living to 87, 30% chance of living to age 91 and 10% chance of living to 97. The $4,830 payments received from age 85 to each of those life expectancies would result in the following rates of return:
- Age 87 – 1.8%
- Age 91 – 5.5%
- Age 97 – 7.5%
What you quickly see is this only really pays off if this investor lives beyond his “normal” life expectancy of 87. Most of these contracts have a return of principle if the investor doesn’t live long enough to get back the original investment, which of course means a 0% return, possibly over a number of years.
While I’m generally not a fan of annuities in most cases, they do have some application in certain situations. In this case, this product may make sense for the retiree who:
- Is healthy, has good family health history and has a good probability of living past normal life expectancy.
- Is “on the bubble” of meeting their long-term spending goals as they head into retirement.
- Funds the LIA with what would have otherwise been a fixed income investment in their retirement account.
As with any annuity, this contract is with an insurance company and is a long-term commitment. Therefore, the strength of the company will be important. The article even mentions checking how well your state insurance guarantee fund is being run and the maximum amount you’d recover should the insurer go bankrupt. I have to smile at this a little because finding that information is not at all easy and, like the current strength of the insurance company, the current strength of a guarantee fund may have little bearing 20 years from now.
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.