Sunday, September 14, 2014

Longevity Annuities - Are They Really Worth It?

As I noted in previous blog posts, immediate annuities are a financial device that many of us ought to seriously consider in order to ensure a life time stream of income so as not to outlive our money - say stashed in an IRA.  Recall also what the  AARP Bulletin reported in July of 2012. . According to A. Barry Rand ('Financial Capability', p. 38):

"Half of those working have no sense of how much savings they will need in retirement. According to the Center for Retirement Research at Boston College, almost 44% of working households, ages 36 to 62, are at risk of having insufficient savings for their retirement years. This puts even greater pressure on national retirement systems that already face insolvency challenges."

One answer proposed was immediate fixed annuities..

The problem is that getting such an annuity requires turning over a large stash of your money in one lump sum to obtain a monthly income. Right now, for example, checking at the website:

One learns that a 55 year old man paying out $100,000 can obtain an immediate fixed annuity for roughly $5,772 a year or $481 a month.

However, we have now learned "longevity policies" are being aggressively touted - that is annuities that don't pay immediately but much later. (Denver Post, Aug. 24, 'Insurance Against Outliving Your IRA'). Typically these start paying out at age 75, when one would receive $24,192 a year. Even better would be waiting until age 85 when you'd receive $81, 936 a year.

But before you begin considering the last, bear in mind the actuarial tables for Social Security which show the typical American at age 55 has only 28.65 years of life expectancy left - and even less for males (about 14.5 years.) So the odds are that despite all the financial hubbub about living to or past 90, the average male will have long since gone quietly into that good night by then. And what happens to the 100 grand you used to purchase the policy? Well, the insurance company keeps your money!

While longevity annuities sound like a terrific idea on the surface, one would be advised to think very carefully before any purchase. In particular, what exact chances do you put on living until 75 (or 85) to collect your big payout? What is your family health history and life expectancy of your parents? If you're not confident in living that long it may be better not to be so greedy and instead take the lesser yearly amounts in a standard immediate annuity. I mean, look, even the standard immediate annuity for the 55 year old will pile up a total of $173, 160 before he could make his first collection at 85 for a longevity version. To me, the odds warrant that choice instead of grabbing for the big $81- odd grand payout and croaking before you get it!

Of course, for normal annuities it is therefore wise to incorporate a death benefit - so if one spouse dies earlier than expected at least the other can get something. Ordinarily this means a drop in the inflation-adjusted income - in the article I cited (Denver Post, ibid.) a drop from 5.9% to 5.4% is cited. What can counterbalance this loss is at least deferring Social Security until age 70.

It also goes without saying, but I will, that to protect your annuity investment you should only go to an insurer with a triple A rating. (Some advisors say 'double A'  should be the limit - but call me cautious!)

As we learn more of how difficult it will be for people in retirement, and the numerous attacks being mounted on Social Security, Americans would be well advised to consider annuities in providing a stream of income in later years - even to supplement their Social Security.

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